Published On: February 15, 2022

Written by: Ben Atwater and Matt Malick

One of our highest priorities is implementing a straightforward investment and financial planning process.

In the spirit of transparency, we are continuing our series of essays on “conflicts of interest” with our third and final installment.

At the end of 2021, we prepared our regulatory filings, including a conflict-of-interest evaluation. Although our transparent business model and our duty to you as fiduciaries eliminate most conflicts, we still register some.

In this series, we have explored how we invest the same way as our clients and why we recommend clients place their investments under our management. Today, in this last note, we will look at the relationship with our custodians.

It is important to remember that these conflicts are not prohibited, nor do clients need to formally waive them. However, we must disclose them in our ADV filings.

Regulators view receiving support services, tools, technology, software, research, etc. from a qualified custodian as a conflict of interest. In their minds, a custodian might tempt an advisor to nudge clients toward them because they provide the best benefits to the advisor, not necessarily to the client. At the same time, regulators view utilizing a third-party custodian as incredibly important.

We, of course, use third-party custodians and these custodians endeavor to provide us with certain value-added products, services and information.

We use independent, third-party custodians for the safekeeping of our clients’ assets. For our wealth management clients, we have two primary custody relationships, one with Fidelity Investments and one with Charles Schwab & Co.

The registered investment advisor (us), client (you) and custodian (Fidelity or Schwab) is the tripod that supports our business. It works like this.

We manage the assets and provide financial advice; you own the assets (the custodian titles the assets in your name, not the custodian’s name); and the custodian “holds” your assets, providing safekeeping, record-keeping and executing transactions.

The best way to illuminate this relationship is to use the Madoff pyramid scheme as a counterexample. In that case, Madoff’s firm served as its own custodian and commingled client assets under the firm’s name. This is exactly why an independent custodian is vital.

The four largest firms (and most of the market) for independent RIA custodians are Schwab, Fidelity, TD Ameritrade and Pershing Advisor Solutions (a subsidiary of Bank of New York Mellon, our former employer). Four, however, is about to become three. In 2020 regulators approved Schwab’s acquisition of TD Ameritrade and integrations are currently underway. Our primary custodians happen to be the two largest. We can bring the resources of these behemoths to our clients in a personal way.

Our custodians provide us benefits, for example: trading and custody platforms; wealth management services; financial products and solutions; investment research; operational and technology support; cybersecurity and fraud protection; digital tools and reporting; practice management insights; workshops, seminars, events and conferences, etc. These benefits, however, are most certainly shared benefits for us and our clients as the benefits combine to help make for a more seamless experience.

While we are happy to receive these “benefits” from our custodians, we do not engage in any revenue sharing of any kind with our custodians. Furthermore, our custodians have never offered and we have never accepted any gifts, travel expenses, lodging accommodations or anything related. We can say definitively that there is no quid pro quo between us and our custodians. Our custodians are independent. And we are fiercely independent.

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