Choosing A Custodian

Monday, January 05, 2015 03:22
Choosing A Custodian

Tags: compliance | custodians | Due Diligence

How do you choose a custodian for your clients' portfolios? The SEC requires advisors to perform due diligence when choosing or retaining a custodian for their clients' accounts. In compliance terms, this is called "best execution." Best execution requires analysis of more than just how a custodian executes trades; advisors must consider other factors such as reputation, service, pricing, accuracy, etc. 

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Of course, the baseline for any custodian is accurate and efficient trade execution and reporting as well as fair pricing. Beyond that, a custodian has the ability to make interactions with its advisors (and clients) efficient and easy or difficult and complex. A custodian can also provide investment research, marketing advice and practice management resources as well as portfolio management tools. 
It is the advisor's job to weight the pros and cons of each custodian to arrive at an appropriate solution for clients. In my firm, we actually go through that detailed analysis on a yearly basis. I can remember only two times in my career that we decided to drop a custodian. In both cases, it was due to more-than-infrequent errors in trade execution and/or reporting. Other reasons for leaving a custodian relationship can include poor response time or service, damaged reputation, competition for clients, and unethical behavior.
So, how did I handle switching custodians? Luckily - actually, by design, I used two different custodians for my clients. This meant that I only had to transition part of my client base. The clients went along with our decision when we explained our concerns with their current custodian and the benefits of the new custodian. Of course, we negotiated for zero transition costs on behalf of the transferred accounts. 
In my opinion, having a relationship with more than one custodian is important. I must confess that, at the moment, we only use one custodian. Since dropping our secondary custodian about two years ago, we have been slow in choosing a new secondary custodian. But, we're close!

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