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Managing Your Practice
Custodian Roundtable: The Industry Landscape, Options, and Innovation in 2024 and Beyond
01:01:05
With more options than ever, how do advisors decide on a custodial partner? Ben Harrison of BNY Mellon Pershing, Gabe Garcia of SEI, and Thomas Moore of Betterment for Advisors join us in a roundtable discussion on how their custodial firms are going...
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- [00:00]
Kathryn Williams
Foreign.
- [00:06]
Ben Harrison
Welcome to Dimensional Fund Advisors Managing youg Practice Podcast. This podcast series is dedicated to helping financial professionals make the critical business decisions successful firms face every day in key areas such as driving growth, building enterprise value and the client experience.
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Kathryn Williams
Hi everyone. Thank you for joining us today. My name is Kathryn Williams and I am head of Practice Management here at Dimensional Fund Advisors. And I'm really looking forward to our conversation today. You know, one of the most critical partners for any advisory business are the custodians that care for their client assets, really help partner with them as they think about the future of their business. These partners help, of course, first and foremost help advisors to safeguard and manage client assets. But as we've all seen, particularly over the last, you know, 10, 15 years, the complexities of advisor businesses, the needs of clients have continued to expand and therefore the relationship with custodians has expanded as well on both sides. And that's created both opportunity as well as perhaps maybe even some challenges. And so that's really what we're going to talk about today. And to help me through this conversation to think about, you know, what is the state of the advisor custodial relationship today, where is our opportunity and really how can advisors think about the best partner for them? It's my pleasure to introduce three fantastic guest today, really excited for our conversation. Ben Harrison is Managing Director head of Wealth Solutions for BNY Melling Pershing. And for those of you who may not know this, BNY Melling Pershing has been around for 85 years. Ben has not been with the organization that long, but they, with over 50,000 employees have been delivering global financial and banking services for over eight decades. So really tremendous history there. We're going to talk a little bit more about that joining as well today we have Thomas Moore who's the director of Betterment for Advisors. And Betterment, which was founded in 2010, has over 40 billion in assets today, a full suite of back office portfolio management and client experience tools for advisors as well as end investors. And then rounding out our trio today, I'm really excited to have Gabe Garcia who is the managing director of REA Client Experience for SEI and SEI for those of you are not totally familiar with their platform, they've been delivering technology operations, investment solutions for not just financial professionals and institutions, but ultra high net, ultra high net worth families founded in 1968. They've been doing that for a very long time. Gentlemen, it's great to have all three of you with us today.
- [02:41]
Gabe Garcia
Thank you Katherine.
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Ben Harrison
Great to be with you, Katherine.
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Kathryn Williams
So I'd love just to further orient before we dive in and talk about all things custodians, which is what we're here to do today. Ben, I'd love to start with you. Could you give just an additional snapshot? Where is BNY Pershing Mellon Pershing today? And what is your focus in the business?
- [03:01]
Gabe Garcia
Sure.
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Ben Harrison
Well, thank you, Katherine and great to be with you, Gabe and Tom, I'm excited about this podcast. And Catherine, as you mentioned, Pershing has been a clearing provider for the last 85 years and we're also a part of BNY Mellon. The bank of New York was founded in 1784 by Alexander Hamilton. So we're celebrating our 240th year anniversary at the BNY Mellon level.
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Kathryn Williams
That's amazing.
- [03:31]
Ben Harrison
First stock ever to be traded on the New York Stock Exchange. And we do have a broad reach and impact on the financial services marketplace. We've got nearly $50 trillion of assets under custody at the firm. We are the sole provider of clearance to the United States Treasury, United States government. And custody of assets is really at our core. Within Pershing, I look after the wealth solutions business. The wealth solutions business is our RIA custody business as well as our broker dealer clearing business and our bank trust business. So it's essentially all of the advisor forward business within Pershing. And Pershing is the second largest business within all of BNY Mellon now. So the advisors that we look after assets for have a, have a big footprint within the company.
- [04:33]
Kathryn Williams
I love that. And Thomas, in your role as direct, as a director at Betterment for Advisors, what are you focusing on? What's Betterment thinking about today?
- [04:43]
Thomas Moore
Yeah, I'll start by just echoing Ben's sentiments and thanking you all for hosting us today. I'm excited to be alongside two other amazing providers here. Betterment has not been around quite as long as Pershing. We can't claim a 200 year.
- [05:02]
Kathryn Williams
You're the young kid on the block, right?
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Thomas Moore
Yeah, that's right. So I'll come from the other side of the spectrum, but no, Betterment's been around now for about 15 years. So I think, you know, we're tenured when it comes to kind of the next generation of digital wealth management platform. We've been operating in the custody space now since 2015. You mentioned Betterment as a whole has about 50 billion in assets under management. And you know, our roots are really in building great technology and great end user experiences. And so we focused that kind of first on the retail investor. Now we're focused on building for the Advisor as well as for the small business in our retirement plan, in the retirement plan space. But you know, that's technology is at our core and that's what we're really trying to enable our partner advisors with. So I head up what we call betterment for advisors that spans custody and, and retirement. And we're really working with our firms to help them scale secondarily. You know, we really, we really elevate service as a core competency. So the idea of kind of leveraging scalable, a scalable technology and scalable business model to provide a high standard of service to our target ria, which is the small RIA at a very competitive price, that's, that's the bishop.
- [06:35]
Kathryn Williams
Well, I know in our time today we're, we're going to talk more about that client experience, what's happening in that and then specifically around that technology as well. So looking forward to more conversation on that. Gabe, so great to have you with us as well. And certainly as we think about SEI and really the broad spectrum that you all are operating in, how does that look for you? What are some of the areas that SEI is particularly focused on these days?
- [07:00]
Gabe Garcia
Well, I'll echo my colleague's comments. Thank you all for hosting this. I kind of, I'm, I'm the, the filler in between the Oreo cookies. Not quite 240 years old, not quite as young and innovated and spry as, as Thomas firm at betterment. So SEI is about 56 years old. And we've been serving the profession of advice specifically for over 30 years now. And the construct of our business is really serving the financial intermediary marketplace. We have four core businesses, one of which is the independent Advisor solutions business that I'm part of here serving the profession of advice. And we come to the marketplace. Most may have known us primarily as a tamp back in 1992 when we started. We were one of the first providers in that space and certainly very proud of that history, but have evolved quite significantly from there to be a premier destination for RAs when it comes to both custody technology as well as wealth management solutions. But outside of that we have three other core businesses which all kind of run and operate on the core back office capabilities. Our investment manager services business, which is a fund administration business for traditional and alternative funds. We work with 48 of the top 100 investment managers there servicing those funds. Our private bank and trust business, which works with 10 of the 20 largest banks in the US and then our institutional ocio business. So the engine, the architecture that supports the RA business is the same engine and capabilities that support those institutions. So we lean on that from a efficiency and processing perspective. And it brings benefits to the RA community with respect to some of the capabilities that they develop or bring to market that we can then curate for the client experience and the service proposition that the range is looking to deliver in the marketplace today. So we serve about $100 billion of assets under custody for independent advisors today, globally about 5,000 employees and serve about 1.4, $1.5 trillion of assets. So it's a significant business that we run here. We like to say that, you know, we are focused on serving growth minded advisors who love financial planning, models based investment management and looking for a great technology platform to bring efficiency to their day to day operations.
- [09:29]
Kathryn Williams
That's great. And for those of you listening just simply by hearing what these three organizations are doing, I think this question of what does that custodial partnership or relationship look like these days? You're getting a sense of that. And one of the reasons why wanted to have the three of you on is because you also of course have this, the view and the lens of how your organizations, your respective organizations are showing up for the raa, for the advisor community. But you also have perspective on the larger landscape and really giving some perspective and some ideas around what the evolution of that custodial, of the role of a custodian and what that relationship has looked like over time. So thank you all for giving us some background on your organizations. Matt, I'd love to start with you. When you do think of the primary role of a custodian, what comes to mind?
- [10:20]
Ben Harrison
Sure, happy to jump in there. So a custodian is really a safe keeping place for which advisors can keep assets on behalf of their clients. So it's a destination for securities to remain within a custody bank or brokerage firm. That's what it is at its core in terms of safety, stability, resiliency. But at the end of the day, we're really an extension of the advisors business. We are the core operating platform for which businesses run. So as a business solution, provider advisory firms can put their assets with a custodian, have access to a technology platform to view client accounts, obviously get access to capital markets, get access to investment managers like dimensional bill, client accounts, et cetera. And the way that this all began was really back with the 40s act around institutional managers, you know, needing access to house investment funds at a custodian. And that's the, you know, that's manifested itself in what we do as custodians, providing access to fiduciary advisors.
- [11:50]
Kathryn Williams
So Thomas, building on that, you know, thinking beyond that, what sort of that, that core and Ben's touched on this already, you know, when you think about the, the role of the custodian, what comes to mind?
- [12:05]
Thomas Moore
Yeah, Ben and I had had similar definitions, surprise, surprise of a custodian in that, you know, it's really an institution that safeguards client assets. I think one of the things that's kind of implicit in that is that this institution be a trusted one by both advisors and clients. And I think that's where, you know, we really focus on kind of brand, brand awareness and brand equity in the market as something that advisors can lean on. And then if, and then kind of moving into, you know, how, how custodians have evolved and are evolving. I mean, Ben touched on this a little bit as well. I think custodians in a nutshell, just continue to do more. So whether it's, you know, portfolio management, billing, reporting, a client portal, custodians are offering more technology as kind of this extension of the advisors business. And then I guess, kind of outside of the stack, I think custodians are more and more acting as true business partners when it comes to strategy on how to grow, on how to provide a higher level of service. And ultimately custodians should make their advisors look good, whether that's customer service tooling or just the other aspects of an incredible client experience from beginning to end.
- [13:36]
Kathryn Williams
Gabe, when you think about, as Thomas said, serving as someone who's coming alongside the advisor, thinking about their overall business strategy, what comes to mind? What's that evolution look like from your perspective?
- [13:50]
Gabe Garcia
Yeah, well, it has been an interesting couple of decades. What started as very small entrepreneurial businesses in the late 90s that we serve today, that construct has evolved. And what started as books of businesses turned into practices turned into real businesses. And now we have what we would all deem as true enterprise at the top end of the market. So serving and supporting those various business models and stages of evolution is a significant task. And at its core, I think Ben said it well, the safekeeping and return of capital is the primary job of all custodians. Right. Safety and stability of that confidence that both the, the advisors and, and the end clients have is critically important. But then at the end of the day, this has become a much more competitive marketplace. What was a nascent business segment now has had investment of capital, investment of providers that is unparalleled. Quite frankly, and in many cases has access to capabilities that are far in a way better than some of the largest institutions in the market. And the reality of that is that making informed decisions around how to deploy your capital, how to implement technologies, how to deliver the services and the client experience that you envision is a pretty significant and daunting task. So being a true business partner, a coach, a consultant, bringing the expertise and the lens that all of us have through our teams of the landscape of what other firms are doing, what the top performing firms are doing, is one significant value add. But having a perspective and a decisive opinion on how we see the marketplace evolving to help inform those decisions is critically important. So whether it's increasing or decreasing your technology footprint, increasing or decreasing your pricing and your service model, merging, monetizing, acquiring businesses, these are all things that are happening at a rapid pace today as the industry continues to not even evolve, quite frankly, transition into the next chapter of what the RA community is going to look like.
- [16:10]
Kathryn Williams
Let's talk a little bit specifically about the technology piece. I mean all three of you have touched on it. You know, when I, in my work with advisors globally and when we're talking about technology within the advisors business, it's obviously, it's been a game changer for so many organizations, allowed them to scale, it's allowed them to grow, it's created efficiencies and really made a difference in the client experience, if you will. And you all have a perspective on that and have a role or potentially have a role with advisors. So I'd love to specifically hear from each of you around your view of that technology piece in particular. Ben?
- [16:58]
Ben Harrison
Sure, happy to, to jump in there, Catherine. So you know, as Gabe mentioned, you know, the, the landscape has evolved significantly over the last several decades and we've also seen a tremendous investment in technology into this space. So custodians like SEI and Betterment and BNY Melan Pershing, we, we develop our own technology and provide those solutions to clients that utilize our platforms. But we also connect to a variety of players throughout the ecosystem and there's been an influx of those players come into the, into the marketplace and that's actually provided great purpose built solutions for advisory firms to, to leverage for a variety of different components of their, of their client experience needs. But it's also created a a lot of complexity for which advisor advisory firms need to navigate. So one of the things that we've been seeing is a an evolution in the way in which firms are thinking about technology. We have seen a problem arise in the marketplace where so many of the advisors and home offices in the marketplace are almost paralyzed from their challenges with their tech stack. And we have seen a number of solutions really come into the space, but at the end of the day, they don't. All, all of the data does not pass from one application to, to the next in an elegant way. So it creates in some cases, more work rather than less work. So when we go talk to advisory firms, we see a persistent problem that advisors are spending 80% of their time away from the client work and more on the, on the running of a business or utilizing tools and technology. So that's something that we've been very focused on at BNY Mel in Pershing, which is to, you know, kind of buck the trend there and to provide a more interoperable experience between the custody workstation and the, and an advisory platform so that we can pass data between applications in a, in a way that really makes for a much more seamless experience. So I'd say that's a major challenge that we're seeing right now in the marketplace. The other thing that I would point out is just the complexity of the operating environment has changed so significantly. You know, obviously there are, you know, significant cyber threats, there's significant regulatory challenges that advisory firms need to deal with in terms of retention of data, privacy, all of the things that are required for an investor to feel very secure and, you know, that their assets are in a trusted place, as Tom mentioned. So the role of the advisor in all of this leveraging technology has changed significantly and kind of raised the stakes on all of the things that they need to contend with.
- [20:26]
Kathryn Williams
Gabe, have you observed that with, with regard to that, that the integration of technology, the flow of data, the inefficiencies or efficiencies of that. Is that an area that you've observed as well? We've certainly seen it so. Oh my God.
- [20:46]
Gabe Garcia
Yeah, it's interesting. Ben said it very well, maybe a decade ago, just to kind of put a pin in a calendar. The idea of building a fully customized and curated technology stack and having the best of breed and everything was very attractive. And the attraction of the RA space made fintechs really invest and develop capabilities. And there was just an enormous amount of choice. And Ben's comments strike to the heart of it. The integration, the adoption and the deployment of the technology to fully deliver that vision of the experience that most RAs wanted in many cases didn't come to fruition. And when you think about the maintenance, the reconciliation, the contracting the data privacy and security that Ben mentioned is a full time job for someone. More importantly is that a lot of these technologies don't speak to each other. So then you have to work on the integration and then the data entry. You're entering data in multiple systems because they're not unified. So we're seeing a reemergence of people looking to shrink their footprint, look for the ability to outsource certain functions to get back to spending more time in the most valuable activities, being in front of clients, serving their clients and serving their communities, and looking for that interoperability that Ben mentioned that brings a unified experience both at the advisors role desktop, but also for the end client in how they consume the data and the experiences they have and the ability to interact collaboratively in, in the experience that the advisor is providing to them. So it's an interesting time in the marketplace because there's significant amount of choice. But you know, the typical firm is hosting at least 11 distinct technologies in their ecosystem today. And that's a daunting task to consider. So as the marketplace continues to evolve, I think we'll see a shrinking of the footprint. One, from a client experience, two from the administration and expense to manage all of those and three, quite frankly from a data security and privacy perspective because the more tentacles you have out there in the cyber world, the more exposed you are and vulnerable you are.
- [23:14]
Kathryn Williams
And managing as a, as a business owner, as an advisor man, you know, like that managing that risk, both to them as a business, but also of course to their clients is a, is a big one for sure. And I mean Thomas, when I think about betterment and you know, this is, this is kind of, this is how you all came into the market, so to speak, and really how you have shown up. So when we talk about that technology and making it accessible and efficient for advisors, what comes to mind?
- [23:47]
Thomas Moore
Yeah, at risk of echoing both Gabe and Ben, you know, we fundamentally believe that as a custodian and a technology provider, the more that we can build a proprietary vertically integrated stack, the more efficiency we can drive for advisors both in their workflow and in data management. Right. So that's what we've really tried to do when we think about not just the core custody feature set, but billing, reporting, portfolio management. Right. If you can own that stack, then you can really take advantage of kind of the scalable infrastructure. And then of course outside of that you need to make sure you can support the integrations that advisors need day to day. So that's kind of the first piece of It, I think from there, you know, what, what you know, Betterment's really focused on is, you know, where can we, we can, where can we come in and automate work streams and workflows that are not particularly reven revenue generating ones for advisors? Things like, you know, back office processes, even trading in a lot of portfolio management. You know, we want to provide flexibility to support an advisor's business model. But can we help really simplify and automate things so that they can spend their time on the revenue generating activities? And so that's, that's again, you know, what we've tried to attack when we think about innovating and building out additional features.
- [25:26]
Ben Harrison
I would just go back to another thing that's really important for, for business owners to focus on when they're contemplating which types of technology to integrate, use, etc. One of the things that we're seeing play out in the marketplaces, while the ecosystem of providers has grown significantly, we've also seen firms be built to then be sold and then have it integration hurdles for wherever they may end up. And I think that we, we often see practitioners or leaders of firms, you know, kind of be enamored with a new piece of software or there's actually, you know, other emerging providers coming in the marketplace. And you know, just to ask a couple of questions, is this a core business that the firm is committed to? Is you know, what's the longevity of the, of the end game? Is it being built to be in service for a long period of time? Or is it there's, is there an eventual exit down the road? Those are really important questions that you should be contemplating in terms of how patient capital is and in the company that you're looking to deploy within your ecosystem that you're going to put all your client assets on and expect to run efficiently for years to come.
- [27:00]
Kathryn Williams
Well, I think you make a good point, Ben. I mean certainly within just that M and a landscape alone, we've seen certainly increased activity whether you're buying, selling, but certainly when we're, when we're talking with firms who have self identified as being sellers, probably they're going to be, if not in the minority, you know, looking to maybe solve for succession or figure out how to get to that next level of growth by partnering with the right firm, that technology stack and how it shows up for them, for their clients. What does that look like on the other side, the integration of that? Certainly the topic of okay, well how, where, you know, where, where do the custodians show up in that conversation as well is a big one and an important one, and one that in addition to asking good questions about that underlying technology, how does it fit into the broader landscape? Some of you already touched on even the end client experience and how that's impacted as well too. We know in particular with the high performing firms in our Global Advisor study that they are providing a broader set of services to their clients. A greater percentage of their clients take advantage of those services. How are each of you thinking about helping advisors as they're looking to deliver expanded services, really deliver a client experience that hopefully turns into a referable experience since that's where so much of their growth comes from. Gabe, what do you what's SEI thinking about in that space?
- [28:27]
Gabe Garcia
Yeah, this hearkens back to previous comments that we've all made around the evolution and transitioning of the industry. This boomer was built by boom business was built by boomers for boomers. But most firms today are serving at least three distinct generations and possibly four now with Gen Z coming into play. And that creates a dynamic that we haven't seen certainly in the last few decades of the RA industry. So when you think about the client experience and the solution set required to serve those distinct generations in their journey, whether it's wealth accumulation, preparing for retirement, or you know, preparing for accumulation in retirement, that is a significant task ahead of folks. So when you think about how you want to build your business, you overlay the demographics of clients, then you overlay the demographics of advisors. You just talked about M and A and Ben talked about, you know, patient capital and you know, firms consolidating or selling. You have, you know, multiple forces at work here. Consolidation of providers, whether it's technology or custodian, this consolidation of asset managers, consolidations of the RA businesses themselves, and then the transitioning of the demographics with which those organizations interact with each and every day. So when we think about how do we support our clients, how do we help them advance their value proposition and build sustainable businesses, all of those come into play. And this comes back to the expertise, the lens that we all bring to the conversations we engage in because of the view we have of all the clients we serve and partners that we interact with, such as dimensional, where we share insights and experiences and research to bring that to bear to help them understand, you know, what's the next decision I need to make and how do I build a business that's going to last and endure and continue to serve each of those demographics. The interesting factoid, just a little sidebar, since you brought up data and research. You know, we talk about boomers, and it's almost like they're about to be extinct. And you need to focus on the next generation of investors and clients for your business. But the reality of it is that the oldest boomer is just turning 76, 77 years old. And if you reach age 65, males are expected to live to 85, females to 88. So they're going to be around for several more decades, but their needs are going to change from what we all provided them over the last several decades. And then you enter Xers, my generation and Ben's generation, and then the millennials who are beginning to accumulate wealth. So how do you deliver the experience via technology and collaboration and interaction and the services. So you have a proliferation of services. You need to offer technologies to deliver those experiences and then the talent to support that. So I think we all come to the table both with insights and resources and expertise and great partners to help them execute on that. But at the end of the day, the operating business model has to have a great partner such as, you know, BNY Mellon, Pershing Betterment, SEI to support the activities, to access the markets and provide those services.
- [31:42]
Kathryn Williams
So Gabe and I want to absolutely hear from Thomas and Ben as well on the original club, but let me ask you a follow up.
- [31:47]
Gabe Garcia
So.
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Kathryn Williams
You'Ve got to run a profitable business and you're helping advisors as well run profitable businesses. So we've covered a lot of territory today. How do you prioritize? How do you decide where to really lean in in a way that makes good business sense, if you will?
- [32:12]
Gabe Garcia
Yeah. You know, acting as a forcing function is one. And I think we would all attest that probably over the last 20 to 30 years of surveys and benchmarking studies, and you ask advisors, what are their priorities, what are their biggest challenges? The same three come up. They might change number two to number one and number three to number two year over year. But it's talent growth and technology. We've talked a little bit about the technology landscape and the decisions that are in front of folks today and the changing landscape and how do you protect your client experience and your investment of capital and resources, which is critically important. But as you think about those three aspects, it depends where you are in your journey and who you want to be in the Future. And there's 18,000 plus registered investment advisors out there, and they all have unique business models. At the end of the day, they're looking to deliver advice to the clients they serve and help them Achieve their financial goals and power their success. But how you do that is critically important. So when you think about how do you bring that to bear, how do you help the firms think about those decisions and prioritizing it really comes to being a true partner. I think Thomas said this at the beginning about how they approach the marketplace. How do you engage in a long term relationship, be a trusted partner who understands their business and then have a perspective on the marketplace of where the next iteration in innovation is going to be and bring that in an informative and educational way to help people make those decisions and at the same time bring those capabilities where they make sense as part of your core ecosystem so that they don't have to go make those choices independently in the marketplace and filter through dozens of potential providers.
- [34:00]
Kathryn Williams
So Ben, with Pershing, how. Going back kind of a little bit to that original question, but as I've tacked on, you know, sort of how do you prioritize? How do you know where to sort of or where are you thinking about really leaning in? But you know, through the Pershing lens as you go, you know, beyond the technology and I'll ask you to even look beyond the Pershing lens so you have a, you know, all three of you have a broad understanding of the larger landscape we're operating in. What does that look like for custodians? Where do you think is, you know, really necessary to show up for advisors, advisory businesses?
- [34:33]
Gabe Garcia
Sure.
- [34:33]
Ben Harrison
So I just kind of want to go back to the comment and, and you know, concept of convergence that we're seeing in the marketplace first. So we are seeing this convergence in the wealth management marketplace around the holistic planning and advice fiduciary model. And really that has been informed by, that's the way investors want to be served. They want to go to a one stop shop, they want to get a financial plan, they want to have an advisor that sits on the same side of the table as them, that isn't a product salesman but a product advocate and really handle their financial lives from end to end. Which you know, and there's a lot of complexity and in individuals lives. Right. So that kind of sets the foundation. That's the, that is one of the reasons why we brought our wealth oriented wealth forward businesses all together in one wealth solutions business at Pershing, because we saw this convergence happening in the marketplace and we no longer wanted to approach the business with individual business unit silos. We really wanted to align our talent and our resources and our capital, you know, really to serve financial advice businesses so that's number one. As Gabe mentioned, there were, there are 18,000 registered investment advisors in the marketplace. That's a lot of different businesses and constituents. However, there are 1200 50, 50 or some, some odd of those that are a billion dollars or more in assets under management and they control 75% of the assets in the marketplace. So that was really informative to us as we think about our business and we decided to focus on an optimal client profile of really serving businesses and enterprises. We're not in the practice business. We have, we have enterprises and businesses that are clients of ours that absolutely serve practices and can do that really effectively. But we've chosen to really focus on the billion dollar plus type of advisory business because that's where we believe we can deliver the most amount of value across the BNY Mellon enterprise to support those financial intermediaries. So then you get into, as you said, this expanding kind of scope of services and what advisors need to offer to their clients. So the stakes have been raised, the expectations are a lot higher by, for the individual investor to really have a full set of capabilities for which they can access, you know, really at a one stop shop. And that's what they expect from their financial professional.
- [37:34]
Kathryn Williams
Yeah, you're an extension of that in terms of what they're looking for from their advisor. And so Thomas, with Betterment, you know, I joked earlier how you're, you know, you're not, you're not the kid on the block, so to speak, you all have been around for some time, you're the new kid compared to these two. But. Right, right, but you know, certainly, you know, Betterment has absolutely, you know, has a perspective on this if you will, and is thinking about their engagement. How do they really rise to the needs of advisors? What does that look like for you all and how do you think about that?
- [38:12]
Thomas Moore
Yeah, I think I can, I can offer kind of a different perspective in, in the sense that, you know, I mentioned at the top of the, of the call that we are really focused, like laser focused on what I would call the small RA. So you know, a firm that manages say under 300 million in assets. And so I think there's a very specific set of challenges associated with those types of firms. We're talking, we're talking to a lot of, of you know, got small practices that are still, you know, really thinking about how to iron out their processes and you know, create more scalability. And I think you know, to, to Gabe's earlier comments like it sort of starts from an introspective place Right. You know, we, we work with advisors a lot to, to better define, you know, who are we targeting, what value are we bringing to the table, how do we, how do we effectively articulate that? And then lastly where our technology comes in is, you know, how do we create process that allows us to really focus and amplify that unique value that we bring to the table. You know, all that's kind of the groundwork that a young and scaling firm needs to put in place so that they can, you know, grow to a billion and, and, and you know, start working with Ben's firm. But that, that's, that's kind of our, our unique set of criteria that, you know, we're really focused on solving for. And I think that's consistent when you, when you look at, you know, what Betterment's mission has been kind of from day one, whether it's direct to consumer, to small businesses or to RIAs, we're focused on serving kind of that small and growing clientele.
- [40:04]
Kathryn Williams
And so with that profile of client, I'm going to put the same question to Gabe and Ben as well too. So let's, you know, when you're, what factors into determining costs and points of entry, if you will, for client relationships. When you know, and because I, part of my goal here with our time today, and we'll finish with this question in a few minutes of you know, what should advisory businesses be asking or what are the questions they should be asking as they're considering who, who, who to partner with as far as their custodian. So you know, certainly that cost points of entry is an area of that. How would you answer that question?
- [40:44]
Thomas Moore
Yeah, I mean certainly cost is important services whether the, the vendor or the provider is aligned with their, their business model. But I would say, I guess take a step back. You know, what I love to tell firms when they're trying to decide on, on who what partners are aligned with them is, you know, look at their marketing. Are they speaking to you? Are they speaking to your needs? Because that's very indicative of whether that vendor's strategy is aligned with, with your priorities. And then I think, you know, digging into, you know, questions like what is your target market, you know, what is your long term business vision and how do I, you know, Mr. Or Mrs. Advisor fit in to that long term vision? You know, there's, there's such, it's such a shifting landscape all the time. It's important, especially if you're looking for your, your vendor for the next 15, 20 years, that there be kind of that core alignment. So I think it's, it's really important to kind of set that foundation before, you know, jumping into all the specifics, the business model.
- [41:54]
Gabe Garcia
I'll jump in, Catherine. I will take, I'll take 30 seconds to touch on a little bit about our business model. That's context for it. So we come to the conversation of who we serve slightly differently and we don't think about it, you know, in terms of asset size. Now form follows function, size usually dictates complexity to a certain degree. The uniqueness about SEI is, you know, we custody assets on SEI's private trust company. So we're an OCC regulated custodian, which is a little different than a brokerage clearing custodian. Not better or worse, just different in how we operate and how we're regulated. And because of that there are things we do and things we don't do. As we like to say, it's not just what a custodian can do, it's also what a custodian can't do. So as an occupated entity, we don't charge commissions, we don't participate in payment for order flow lending activities, we don't offer margin, so there's no hypothecation and we don't hold securities in street name. And certainly that has been a little bit of a differentiator for us in the last year or two with some of the instability that's gone on in the bar in the banking marketplace. But when we think about who our optimal client is, if you could envision in your mind's eye sort of a Venn diagram and through the center a four pillar, which is our custody platform. And we enter the conversation both as a technology platform that's unified and integrated into the technology into the custodial platform that is a true business operating platform. We have a long history as an outsourced asset management provider, as many call it a tamp, which is a capability set that we deploy into the independent broker dealer space, but certainly is leveraged by the RA community either in whole or in part for segments of clients or sleeves of their portfolios and then wealth management solutions, much like Ben mentioned, you know, we try to serve our clients with the capabilities they need to serve their clients. So we are a trust company, so we have trust capabilities, whether that's corporate trustee, delegated discretionary trust agent for trustee services. We have some great tax loss harvesting capabilities because of our asset management capabilities capabilities and we have lending capabilities as well to manage both sides of the balance sheet has been said eloquently, so we have a full complement of resources available. So when we think about who our optimal client is, we think about it in more psychographics who would benefit the most and be aligned for their experience and their outcomes best with what we provide. And that is really someone who's a financial planning oriented firm that has a models based approach, whether they're using our investment models or partners like dimensional, who is on our platform or building their own custom models and who value service and personal relationships. So we have this people plus technology approach and really invest in enveloping every one of our clients with primary touch points from service account management, relationship management, and then encircle that with subject matter experts, whether that be, you know, our trust, our lending, our asset management, our tax expertise, et cetera, to build that entire ecosystem. Now to the question. I tend to be very direct when people ask questions about price and cost because there's nothing to hide here. So we come to the marketplace, we don't participate in some of those other revenue generating activities. So we charge a custody platform fee for assets on our platform. Very clean, transparent pricing schedule. There's five ancillary charges beyond that custody fee. So whether you want to purchase a dimensional fund or an equity or a bond, there are no transaction fee. So that is a differentiator for us. We have a great high yielding government money market fund that is our sweep vehicle for clients. So we have that value proposition for cash balances for clients in a rate environment where that has become more prominent, more important folks. So when you think about what you pay versus what it costs, we have the conversation of if we bring time back into your life, allow you to spend more time on the high value activities and let us do the rest. That's a soft cost that you may not be able to put it a dollar figure to be put a time figure to. If our business operating platform, which goes from, you know, digital account opening proposal, risk management, investor portal, aggregation, performance reporting document, bulk billing engine, if you want to use that in its entirety, it's there for your use. Or if you have some components that you prefer that you want to integrate, we're open architecture and if you want to have your entire technology footprint footprint on your own, you can do that as well. So we think about firms in how they run their business who value what we have to offer. And certainly we serve firms who manage north of $30 billion and firms who are core and emerging types of firms. But I'll end with this. I think we have a very unique and distinct value proposition for new and emerging firms because of the unified technology and asset management and wealth management solutions. Meaning rather than diligencing, you know, technology vendors from CRMs to performance management to billing engines to all the other things you need to run your business, you can literally flip the light switch tomorrow and be operable. And if something we offer doesn't Meet your needs, 12, 24, 36 months down the road, unplug it and plug what does make sense. So we think we add tremendous value for newer or newly established firms and also for firms who are established that may not have the complexity of a 10 or 5 or $1 billion firm, but is running a very healthy business, but is looking for that efficiency and outsourcing of some of the administrative functions so that they can. Back to your question of profitability and cost and how does that impact the firm? How do they translate that into value to their clients and profitability for their business?
- [48:07]
Kathryn Williams
Ben, anything you would add to that.
- [48:08]
Ben Harrison
I'll bring us home. Here at Pershing, we have a saying that we like to say that price is only an issue and absence of value. And, but I think the look, my, my colleagues covered it fairly well. You know, I think it starts with alignment. It absolutely you need to be aligned in terms of the needs that you have for your firm and in your clients with whichever provider you choose. So you know, Tom talked about the optimal client profile that Betterment has. Gabe just went through it with sei. You know, we're very clear about, you know, who we serve and, and that custody is, is really the core of, of what we do as a company. That's the first part of, of our alignment choice. Transparency and flexibility is another thing that's very critical in our philosophy because we do deal with large complex firms that have different requirements. We don't have a, you know, kind of a one size fits all type of, of model because there's variability in terms of the needs and the requirements. We're in a very interesting business. This business is one where the value exchange that often pays for the services is paid for by the clients that advisory firms bring to the table. So whether it's an asset based fee, a transaction based fee, you know, a, you know, spread on cash, it is, it is often the, the client that their portfolio is, is paying a portion of the freight that the wealth firms that operate on our platforms gain benefit from. So that in, in terms of the, the what that means for relationships. I think one of the, one of the things that I've learned along the way is that businesses that operate on our platform that are highly respectful of the fact that they understand that the custodian, you know, has needs to reinvest in, in solutions, needs to provide a great service experience, needs to provide differentiated experience, needs to be compensated for that. So, you know, to have that, you know, kind of communication about, you know, is our, is our business valuable to you? You know, how do we make money, you know, for us, you know, as Gabe said, very highly transparent. It's, it's accounts balances and, and interest. That's how we make our money. And you know, at the end of the day, our best relationships are aware of that and you know, kind of know what they pay us and know the value that we're providing to them.
- [51:20]
Kathryn Williams
So I'm going to ask you to ask each of you, as we close out our time here, to kind of put your, I'll call it more of an industry level hat on for just a moment when you do think about the future of the advisor custodian relationship, the opportunities, the things that sort of get you excited. And I'm asking you to think about it as an, at an industry level with the idea that we all benefit from these relationships continuing to evolve and be beneficial for everyone. But Ben, what comes to mind when I ask that question? What gets you excited as you think about the future of this landscape we've been talking about today?
- [52:00]
Ben Harrison
Yeah, so I think what gets me excited is I feel as though we are really. There is so much opportunity in the marketplace. The demand for advice and to help advisors is significant. Our mission at Pershing is to help advisors help more people. And that is something that we take to heart and really kind of live each and every day as we're executing on our strategy. So the marketplace is growing. There is a need for financial advice. There is a great opportunity for existing providers, for new providers, for, you know, to create great jobs for new talent coming into the marketplace. We need to get more diverse talent into the marketplace. We've got a great opportunity to do that. So, you know, what I'm most inspired from is really the opportunity for continued innovation and growth in the space because it's a great business, it's served me and my family very well and I think that so many other people are going to benefit from our industry and we're just getting started.
- [53:29]
Kathryn Williams
Thomas, how about you?
- [53:30]
Thomas Moore
Yeah, I'll kind of piggyback off that. What gets me excited is the opportunity as well. But I'll frame it a little differently, you know, I think, you know, over the years that, you know, kind of speaking about the RIA custody market specific specifically, we've seen more and more consolidation at the top.
- [53:47]
Ben Harrison
Right?
- [53:49]
Thomas Moore
But what we've seen from the providers outside of that, that legacy circle is a response, right? A response to the opportunity that's opened up as a result of that consolidation. And I think as it pertains to the advisor, what that means is innovation, right? We're going to see more innovation, we're going to see more of the firms that are on this panel today solving real problems that exist and elevating the level of service, the level of, level of technology and the level of partnership. And so it's conversations like this and that we're having every day that have me super optimistic. Not only the opportunity for us as a business, but the opportunity to improve, you know, the technology and the service that we're bringing to our advisors.
- [54:42]
Gabe Garcia
Please.
- [54:45]
Kathryn Williams
Gabe, you're in the middle of the Oreo, as you, as you said at the top of the call there.
- [54:51]
Gabe Garcia
I'm the middle of the Oreo. Well, I'll say these thoughts and it connects to what Ben and Thomas both said. For me, what excites me is just the general trends in the industry. This has always been and certainly is today, and I hope for the future continues to be a relationship based business. Then we're all talking about, you know, serving our optimal clients where we align with them and they align with us for the best outcomes and having those partners who value each other. And that continues today. And you know, some of the trends are, you know, the transition of first generation founders to second generation leaders. And now you get to engage with the next generation, help them think about their vision and their strategy and grapple with some of the things we touched on here. The proliferation of technology, the continuing evolution of regulatory environments, the various demographics that they need to serve and innovating and thinking and strategizing around that with our clients is fun, is exciting. I mean, processing a trade, getting a wire out, you know, after cutoff, we all got to do those, you know, little fire drills and that, that's important, but those are the fun things to think about. Well, where do we need to go with the client experience? How do we help you think about your business risk in this ever evolving cyber AI world and landscape? But how do you pull that in to be a value add as opposed to, you know, stiff arm it? Because it's scary if you think about the convergence as, as Ben said, I loved how he used that, that that term of, of the industry. You see, the wirehouse is moving to more of a fiduciary like investment fee based vice model. Certainly the largest, you know, broken dealers are moving in that direction. But we continue to see roughly year over year, plus or minus 600 plus new RIA firms being established in the market in the face of all the consolidation. So there are more entrants, more professional out there who like this business model who need a good partner to help guide them and support them in building a successful business. So to me, that's the exciting part of it. And the biggest tailwind is the need for advice. The need for advice for what our clients do each and every day for the families and businesses that they serve is critically important. So they've got this natural tailwind that helps them be successful. And how do we, all three of us here representing our firms, think about innovating, being out in front of that and bringing the tools and the resources and the capabilities to help support that success and at the end of the day power their clients. So to me, that's what's exciting.
- [57:27]
Kathryn Williams
I had a couple of objectives with our time today. First and foremost, wanted to help our audience really understand the level of innovation, the vitality that's happening with regard to the custodial landscape, the partners that you all are for the businesses, and you've all touched on this, you look at advisor businesses today, even those that would say we work with a very specific type of client, size scale, whatever that might be, there's still uniqueness and complexity even within that sort of single type of client. And that all has to be cared for, if you will. And so really wanted our audience to come away with an understanding, but also to illuminate the fact that there are a lot of options out there, just as there are a lot of options in terms of an end client choosing an advisor and the services that they're going to, they're going to get from that advisor. We're also seeing an expansion of options when it comes to thinking about that right custodial partner, the right business partner to help manage not just the safe and well being, safety and well being of your client assets, but also as we've been talking about here today, growth scale technology, your people, how do you manage M and A, even if you're partaking in that. And so I really want to thank all three of you for bringing that broad perspective to this conversation today and helping to really illuminate that as advisors are thinking about the future of their businesses, the partners that they not just might want, but will likely need in order to grow to the size and the scale that they're looking to achieve, they're going to need partners like you. So thank you, all three of you. Thanks, Ben, Thomas and Gabe for joining me today. It was a pleasure to speak with you.
- [59:08]
Gabe Garcia
Thank you.
- [59:09]
Ben Harrison
Thanks Katherine.
- [59:10]
Kathryn Williams
Thanks gentlemen. Take care and absolutely for our audience. You can find Gabe, Ben and Thomas on all the usual social media platforms at LinkedIn. In particular, if you want to check out, get in contact with them. And for those of you that are interested in learning a little bit more about Dimensional and how we work with financial professionals, you can find us@dimensional.com and with that, we'll catch you all next time. Thank you.
- [59:35]
Ben Harrison
Thank you for joining us for Dimensional Fund Advisors Advisors Managing youg Practice Podcast. For more information, please visit www.dimensional.com. dimensional Fund Advisors LP is an investment advisor registered with the securities and Exchange Commission. The views, information or opinions expressed during this podcast are solely those of the individuals involved and do not necessarily represent those of Dimensional or its affiliates. Dimensional is not responsible for and does not verify for accuracy any of the information contained in the podcast. All expressions, information and opinions are subject to change. This podcast is distributed for informational purposes and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products or services. Please consult with qualified legal or tax professionals regarding your individual circumstances. Investing involves risks. Risks include loss of principal and fluctuating value. This podcast is available for private, non commercial use only. You may not edit, modify or redistribute this podcast without the express written consent of Dimensional. Dimensional assumes no liability for any activities in connection with this podcast or for use in connection with any other website, computer or playing device.