Read the Fine Print: Three Key Components to Your RIA Custodian Agreement

Make sure your RIA’s next provider has the pricing, cybersecurity, and data policies to support your business.

Before signing on with a new RIA custodian, advisors likely follow a few common steps: develop a list of providers, connect with other advisors, take technology demos, to name a few.

However, one of the most important steps is often the last – reviewing and negotiating an RIA custodian service agreement.

Here are three key aspects to review with a fine-tooth comb before signing on the dotted line: pricing, cybersecurity, and data sharing.

At the core of an RIA custodian services agreement is the pricing structure for the relationship. Among other things, this pricing structure outlines whether the RIA will be charged ticket-based or asset-based pricing, or perhaps a platform fee.

During this process of establishing a pricing structure with the custodian, advisors may find that their prospective provider is relatively rigid in their approach to pricing. The provider may offer a one-size-fits-all rate sheet – while that may work for some advisors, it could put other RIAs at a disadvantage.

With some big-name custodians, this cookie-cutter offering includes zero-fee trading. Take, for example, advisors that trade primarily in mutual funds on a platform that offers zero-fee trading for single stocks and ETFs – those advisors may end up paying disproportionately high fees for their mutual fund trades, potentially passing a larger cost on to their clients.

To help advisors better understand different RIA custodian pricing arrangements, TradePMR has developed an RIA custodian pricing guide. This guide dives into different ways RIA custodians make money, and how advisors can negotiate with a prospective provider to find a pricing structure that makes sense for both parties.

While some providers may look to lock advisors into a one-size-fits-all pricing structure, TradePMR takes on a more flexible approach to pricing. The team looks to understand each RIA’s approach, team structure, investment philosophy, and growth goals. Only once TradePMR knows the RIA’s unique situation can it develop a pricing model designed to facilitate that firm’s success.

While pricing has always been a key factor in the custodian service agreement, cybersecurity has not always been as front-and-center. That is changing, and cybersecurity is becoming an increasingly important component to the RIA-custodian relationship.

With the proliferation of RIA software solutions has come an expanded cybersecurity threat. Client account information often spans multiple platforms and tools – each with its own set of cybersecurity policies, procedures, and risks.

Taking the time to dive into how a prospective RIA custodian approaches cybersecurity can be a key to ensuring client information remains safe and secure in the long-term.

Before signing on with a new provider, advisors should consider asking some key questions about cybersecurity, including:

1. How is cybersecurity monitored at your firm?
2. How often are your systems and controls audited by an independent third party?
3. Is there a set of approved and published information security policies used by the organization? What security measures are in place for securing and protecting customer data?
4. Are the organization’s security objectives and goals shared and aligned across the organization?
5. Has an ongoing security awareness and mandatory training program for all employees been implemented? What is the frequency of the training?
6. Has an access control policy been established which allows users access only to network and network services required to perform their job duties?

Getting answers to these questions can be difficult during initial calls with a provider’s sales team. That’s where an RIA custodian RFP can come into play.

An RIA custodian RFP is an advisor’s chance to ask all the in-depth questions on policies, procedures and offerings not covered in the initial conversations with the custodian.

To help RIAs design their own RFP, TradePMR has developed an RIA Custodian RFP template. Download your copy of the template to help streamline your custodian search and ensure you ask prospective providers the right questions.

Beyond cybersecurity, advisors should make sure they understand how their prospective provider approaches data sharing. Specifically, if that firm will make their RIA’s data accessible to the advisor, how the provider will protect that data, and if the custodian will sell the RIA’s data to third parties.

To gather this information, consider asking some questions like:

1. Please provide documentation on all data that would be available to our firm via batch file or API (e.g., file structures, data element definitions, transaction code descriptions, allowed values).
2. What outside systems do you integrate with (and transmit data with) that is not client/user initiated?
3. Is all data classified as sensitive, confidential, or required by law/regulation (i.e., PCI, PHI, PII, etc.) encrypted in transit? Are encryption controls being used in compliance with all relevant agreements, legislation, and regulations?
4. Do you rely on third parties for processing client data? If yes, are information security and vulnerability assessments conducted on a regular basis?
5. Do you handle data storage internally within your company? Or do you utilize a third-party to store the data?

Data analysis is becoming an increasingly important tool for RIAs. Long gone are the days where data can only be used by the largest of firms – RIA firm data can deliver real insights for advisors that can help level-up their approach, streamline their operations, and ultimately improve the valuation of their firm.

These in-depth data questions can fit right into an advisor’s RFP, alongside their questions about cybersecurity, pricing, service, technology, and anything else top of mind.

Finding the Right RIA Custodian Service Agreement for Your Firm

Ensuring your next custodial service provider is the right fit for your RIA can be tricky. There are tons of points to evaluate and questions to ask, it can be difficult to know where to begin.

If you’d be interested in learning how TradePMR approaches pricing, cybersecurity, and data sharing for RIAs, we should talk. We can dive into your unique business, and if TradePMR’s tailored approach to custodial services and technology could benefit your team, and your clients.