Can I Join a Custodian's Client Referral Program?
If you start your own RIA, will you be able to participate in your custodian’s client referral program?
First starters, do you know what these programs are?
Or which custodians have them?
Or who is eligible, and likely to be able to participate in them?
In this episode of the Transition To RIA question & answer series I address these questions, and more!
I'm Brad Wales with Transition To RIA (TransitionToRIA.com). This is episode #113 of my question and answer series where I answer RIA related questions I get from advisors just like you.
What I do: At Transition To RIA I help financial advisors understand everything there is to know about WHY and HOW to transition their practice to the Registered Investment Advisor (RIA) model.
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🔹 Transcription of video:
Can I join a custodian's client referral program? That is today's question on the Transition To RIA question and answer series. It is episode #113.
Hi, I'm Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you're not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you understand the model.
Again, TransitionToRIA.com.
Today's episode will likely be a bit shorter than usual episodes, but it is a question I get asked from time to time. That is…. “If I were to start an RIA and choose a custodian, do you think I would be able to get on that custodian's client referral program?”
On this episode I’m going to discuss what are these programs, and what is your likelihood of getting on them.
Several of the large custodians that you might choose for your practice have a retail presence. A direct to client model, maybe retail offices throughout the country. Through those channels they can serve most of those clients without too many issues. A lot of those are possibly very small clients.
But as those clients become more sophisticated with their needs, as their wealth grows, oftentimes the needs of those clients will outgrow what those channels were meant to service.
Instead of trying to keep them jammed into something that's arguably maybe not a good solution any longer for that client, several of these custodians have come up with - and they have different names for them - but it's essentially a client referral program where with clients they feel might be better served by an RIA, they refer those clients to RIAs that use them as custodian.
And for the clients – if they choose to move their relationship to the RIA – they don’t have to move their assets. They stay right with the same custodian.
Obviously, you can understand why RIAs are excited to potentially be on the receiving end of such referrals. Because again, by nature of who's being referred, these are generally larger, more sophisticated clients.
Now, the custodians are not doing this out of the goodness of their heart. They are for-profit businesses. They are essentially giving up the direct relationship, although the assets would be staying with them as custodian.
In return for the referral, and these rates might have changed, but generally the receiving RIA pays a 25bps fee perpetually goes back to the custodian.
The RIA might charge the client, for example, a 100bps fee. And in return, they provide the client with various services. The RIA then pays 25bps of that to the custodian.
Now, by that math, if you charge 100bps, the 25bps is 25% of your revenue. That is a big chunk that needs to be considered whether that math would work for you.
But if that is a client you arguably might not have been able to get on your own, and here it is referred to you, it can be very lucrative for the RIA, and lucrative for the custodian. Because now, the custodian not only generates revenue as they traditionally do as a custodian, they now also make the 25bps as well.
As a prediction, I think we might see some of this coming out even in the independent broker-dealer world going forward. Con't....
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