With Charles Schwab Corp.’s pending acquisition of TD Ameritrade Holding Corp., which has the potential to create a custodian business that will overshadow the industry, Fidelity Investments finds itself in the unfamiliar position of becoming a distant second on the custodian stage.
On that note, we caught up with David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions, to ask how he sees the custody business unfolding in the months and years ahead.
Jeff Benjamin: How is Fidelity taking advantage of the market disruption created by the Schwab-TD combination?
David Canter: We are seeing primarily inbound inquiries since this all started from advisers who are concerned that if the merger goes through, there’ll be one less custodian in the business.
For us, a lot of it is business as usual. We think we have a unique view into the wealth management business and all models, and we have an open-architecture, flexible approach. So what we’re trying to do is emphasize all of the deep breadth and depth of our expertise from serving advisers day in and day out.
JB: Talk about the state of thein the wake of thewhen Fidelity’s custody business goes from being among the largest to a distant second.
DC: I am very bullish on the custody business, primarily because I still think there is a bull market for advice. And we’re seeing that play out both with the new entrants to the RIA channel – as you know and we’ve talked about, the number of RIAs continues to grow, but also investors are looking for that fee-based or fee-only fiduciary model.
So given how I feel about the demand side of the equation, it’s really good for our business and it’s our job to make sure we’re acting as consultants to our clients who just happen to be in the wealth management vertical.
JB: But how willto potentially being overshadowed by a much larger competitor?
DC: For us, you know, we draft off the depth and breadth of a larger, well-diversified financial services business within Fidelity, so as a total company we have a lot of resources that we bring to bear with our clients.
That said, we do see this as an opportunity to increase our share with either existing clients who have multicustodial relationships, but also with advisory firms [that are not currently clients] that want to make sure they have access to another custodian.
We’re going to keep doing what we’ve been doing. We’re a private company. We’re stable.
JB: Where does Fidelity stand when it comes to serving
DC: We have always been in the business of catering to small advisers, be it existing firms on our platform or new entrants. And as I like to say, there are no small advisers in terms of the issues and challenges that are affecting advisory firms with any levels of assets under management.
We’ve had special, what we call ‘Think Tank Days,’ where we talk to advisers that have all manner of assets on the spectrum and they all want to grow. They all have questions about achieving scale. They all have questions about how to build the best team, how they serve their clients inthe most efficient and delightful manner.
What we try to do with smaller firms, whether you’re judging it by the number of employees or number of assets managed, is try to help them with the best solutions and skill sets to help them build their businesses.
JB: Where are
DC: Custodians – Fidelity and others – make money by virtue of the investments advisers make in client accounts. In some cases, we charge platform fees, but not universally. In some cases, we do charge advisory firms’ end clients what we call custody fees. Platform fees are paid by the adviser. Custody fees are paid by the end client. But it’s all derived from what we call the power of choice. We relationship-price the business with our advisory firms so that we can have them elect what is the best way for their clients to access our services.
I would emphasize that the choice element is so important, and advisers I think appreciate being given the opportunity to choose how they want their clients and their business to work with us, done in a bespoke manner. We have very open dialogues. I hesitate to say one way of pricing is better than another.
JB: How are financial advisers adjusting to the fee pressures that are spreading across the financial services industry?
DC: Most advisers that I speak to are experiencing fee pressures because they’re having to add services. When you add services for existing clients or add services to attract new clients without a price increase, in my mind, that is fee compression.
At the same time, I also think that there are pockets where advisory firms are seeing fee pressure – and we actually have a purview into that. We see that advisers have to compete for new business. In many cases, they’re competing against RIA firms and they’re having to use price as a means of competition. And then we’re also seeing some firms that are unilaterally lowering their fees for existing clients who are older and most of the planning work or the complex work has already taken place, but they’re still paying a basis-point fee at the same level, so they’re lowering their fees.
JB: What are some of theyou’re seeing?
DC: Interestingly, at least two firms we work with have adopted subscription-based pricing models. So they charge a subscription fee or they’ll charge a flat fee for their services, and they’ll blend in all the planning and the asset allocation. Some of these firms are doing this with the stated intention of going after investors who have less in terms of overall net worth.
JB: Where does Fidelity stack up against the combined technology services that are likely to emerge from the Schwab-TD merger?
DC: I think we have a technology story that is probably under-told. We have more integrations than some of our cohorts in the space and we’re very excited about our technology platform that all begins with Wealthscape, which is our adviser-facing tool, and then we integrate with 175 providers through something called Integration Xchange.
I think it’s really around how can we interact with our clients in a more digital fashion, so we are very focused on our digitization efforts around onboarding new clients – new clients of advisory firms and new advisers. How we digitize the service experience, that’s of critical importance because it helps to lead to a more efficient and delightful experience for our advisers and their clients.
JB: What is Fidelity doing in terms of efforts to recruit RIAs who might be looking for a new custodian as the industry consolidates?
DC: The trend that I think will be upon us for the foreseeable future is adviser movement. And what you’re seeing are advisers who are leaving some of their incumbent providers – be it the wirehouses or the private banks – who want to start their own firm.
You’re seeing it also in terms of advisory firms that are working with an incumbent custodian that want to make sure that they’re going to get the proper degree of service and attention in a stable fashion. One of the reasons that I feel like our technology story is under-told is that we don’t work with the vast number of firms that some of our competitors work with – we work with about 3,000 advisory firms.
I do see a lot of adviser movement in terms of leaving their incumbent, but also in terms of looking for a diversified custodial provider.
JB: Considering the ultimate potential of a Schwab-TD combo, how do you make the case that Fidelity is a better option for custody service?
DC: We may be a big firm, but we get told time and time again that we feel small because we engage, we consult – whether from a practice management standpoint or a technology standpoint or how do we help you achieve your business goals. That’s a big part of it.
We’re a big firm overall, but we really roll up our sleeves on the advisory side and we don’t serve as many clients as others. And then beyond that it is that private ownership piece – most of the adviser businesses we work with are also privately owned – and by virtue of our private ownership, we’re here for the long term and to invest on a counter-cyclical basis.