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  • Writer's pictureRichard DeSalvo

Unexpected Challenges of Independence

Know what you’re getting into before you take the leap.

As you seek new opportunities with your hard-earned book of business, you should know what you’re agreeing to when working with custodians under their direct RIA service model.

When seeking to become an RIA, friction between advisors and custodians happen because of a fundamental misunderstanding. Although the custodian is not doing anything wrong, an advisor might not realize that the assumptions they have about the service they are receiving are incorrect. By choosing the wrong model, they may be unable to help clients in the manner that they anticipated and are most comfortable with.

I cannot stress enough, do your research!

Custodians are in the business of custody and clearing. They garner leads by talking with RIA firms, asset managers, and Investment Advisory Representatives (IARs). They perform essential functions and are a valuable resource when you require core and tangential services like security-based lending and bank or bank-like services.

Based on the needs of a firm, custodians will sometimes recommend an aggregator they work with such as F3Logic. At times, particularly with IARs that have less than ~$100 million in assets, custodians offer their RIA services directly. They tout the ease of becoming your own RIA and using their consolidated platform and technology stack.

You will hear a powerful narrative from a custodian about how you will have more freedom, control over your business, and the opportunity to keep more of what you earn. This is all true, provided you are willing to use their proprietary technology stack and software. For many, this is the perfect match but for some, there is an unexpected conflict that may arise.

You must make sure that your book of business matches that of your custodian’s. When you choose a custodian, you are making a bet that their commitment to technology, relevance, and flexibility will be as strong tomorrow as it is today. To put it plainly, you are a captive advisor and you must rely on your custodian’s ability to provide a strong middle and back office.

Here are some scenarios to consider before choosing a custodian:

  • What if one of your clients wants to use a different custodian?

  • Will you be able to use your preferred CRM for your books and records?

  • What do you do if you find the ticket charge of bonds at the Institutional desk appear high?

Please ask the important questions and do your due diligence.

Now that you’ve weighed your options and decided on a custodian, there are still more things to consider. When forming your own RIA, you take on additional regulatory risk. Your ADV will be your guiding principal and regulatory audits will be a way of life. Daily tasks will now include compliance and administration of your book and records.

These changes may be welcomed and embraced by some advisors, but others welcome them like rain at a wedding. When creating an RIA, these responsibilities become a part of daily business life and they are often underestimated. An advisor that simply wants to raise AUM and devote 100% of their time to clients should think twice.

As an RIA, you are now receiving the full payout for your efforts, but you will also incur new costs and managerial responsibilities. From hiring a Chief Compliance Officer to garnering Errors and Omissions, to paying for related expenses (e.g. rent, administration), the focus should be on net income, not gross income.

Please do your research, listen carefully, know what you’re agreeing to, and consider how it will impact your daily tasks, regulatory responsibilities, and the ability to grow your business. Understand all that a custodian has to offer and what they do not. If their service lines up with your needs, you are primed to enjoy the growing, successful business you’ve built.

Rich DeSalvo


F3 Logic, LLC

Where Fiduciary Freedom is First

Advisory services are offered through F3 Logic, LLC, a registered investment advisor. Securities offered through Independent Financial Group, LLC, a registered broker dealer. Member FINRA/SIPC. IFG is not affiliated with any of the entities listed. Additional advisory services may be offered by the respective entities listed as permissible by state law.


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