Generally, most newly registered investment adviser (RIA) firms require custodians. Following the enactment of the 1940 custody of rule of the Investment Adviser Act, every investment adviser is required to use a “qualified custodian” or be subjected to additional regulatory compliance requirements.
The process of identifying a custodian is a vital step in setting up the RIA firm as this is a key business partner that may, at times, interact directly with the firm’s clients. As already indicated, the clearing firm acting as the custodian for an RIA is responsible for holding client assets, processing securities transactions, deducting advisory fees and preparing and delivering client account statements.
Here are important considerations that you should keep in mind when evaluating a potential custodian for your RIA firm.
One of the key motivations for starting an RIA firm is to serve clients in a highly professional and tailor-made manner. Much like with any investment advisory firm, a high level of service should be an important differentiator when choosing a custodian. During the course of business, the custodian will be responsible for opening accounts and reconciling trades among other roles. It is important that you find out how they will handle these interactions from a service standpoint.
The need for reliable technology in today’s fast-paced financial services marketplace cannot be overstated. A custodian may offer in-house technology or access to a third-party provider. Either way, it is important that you evaluate the technology options to ensure that they align with your customers’ investment needs.
As the financial services industry continues to grow, more and more advisors exploring the path to starting their own independent registered investment advisory firms. This trend is expected to continue in an upward trajectory as the industry moves toward the fiduciary model. The many benefits attributed to independent IRA firms continue to be the driving force behind this fast-growing component of financial advisory.