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BNY Mellon Pershing is (again) courting RIAs that prefer fee-based subscription fees because the demand for higher yields on cash is growing in the current rising interest rate market.
“Subscription pricing is one of the available options for our clients, and we would expect an increased level of adoption,” says company spokeswoman Amy Kester, via email.
Subscribers are eligible for extra-sweet interest rates payouts, though Pershing has yet to disclose what exactly that marginal increase amounts to.
The Jersey City, N.J., custodian–one of the “big three” with Schwab and Fidelity–believes many RIAs want to get past custody fees that get baked into products or are imputed, which makes costs and conflicts hard to track.
“We expect the custody fee debate to continue. As the wealth and advisory industry continues to grow and evolve, so will expectations for innovative solutions, pricing and fair value exchange,” Kester says.
Yet Pershing is realistic that making any change — not withstanding an optional fee — is hard to accomplish.
Torpedoed
Pershing’s subscription fee push actually began two years ago, only to have Federal Reserve Chairwoman Janet Yellen torpedo it in March 2020 when she cut interest rates to near zero to prop up the economy in the face of the COVID-19 lockdown.
The rate plunge undermined the plan, Ben Harrison, now Pershing co-head for wealth solutions, told Citywire at Pershing’s recent Insite conference, June 17.
“We didn’t have a ton of adoption of subscription [pricing] over the last couple years … [and] once there was no yield in any cash products, the idea of having that benefit really didn’t have an impact.”
The top-end interest rate was 1.58% in February 2020 — but it took a massive dive after that over time. Today firms are offering top rates at or near 1.75%.
The “subscription” strategy came as Mark Tibergien handed the reins to to Harrison.
Launched, Mar. 5, 2020, Pershing expected that simplified pricing — from $25 per advisor per month* — higher yields on RIA cash, and reduced minimum RIA asset requirements would win business. Pershing has yet to state the exact yield it offers.
The subscription fees were also a means to court RIAs worried about getting caught in the TD Ameritrade/Charles Schwab Corp. merger.
More needed
Today, RIAs opting to pay Pershing subscription fees have access to higher yielding cash accounts. The yield depends on how much money an advisor holds in Pershing cash accounts. It jumps once an RIA’s cash balance tops $100,000.
Yet for Pershing to succeed, it will have to do more than use higher yields to win greater market share, according to leading RIA advocate Michael Kitces, founder of Bozeman, Mont, XY Planning Network, author of the “Nerd’s Eye View” blog, and head of planning at Buckingham Strategic Wealth.
“It wasn’t ill-conceived to pursue money market cash yields as a feature of a pay-for-custody offer … [but] it wasn’t viable … for cash yields to have been the driver … Most advisors keep low-single-digit percentage allocations in cash,” he explains, via email.
“It’s hard to convince advisors to pay for custody on100% of their clients’ assets in exchange for giving them higher yields on less than 5% of their client holdings and not provide improvements in the offering for the other 95% of their client assets,” he continues.
“A viable pay-for-custody offering will need to bring favorably-priced products in more domains than ‘just’ cash yields.
“It’s about actually reinventing the RIA custody value proposition to provide a superior shelf of investment products that would make advisors want to change RIA custodians,” he says.
Irrelevance?
Yet if Pershing still believes it can outflank Schwab and Fidelity with a more transparent fee model, others in the industry have moved on from the custody fee debate.
“No one cares, it’s just business as usual, and this [subscription fee issue] didn’t come up at all [among advisors] at the [recent Pershing] conference,” says Welsh.
“Everyone there has billion[s]-plus [of AUM], so none of it applies to them,” he adds.
In fact, revolution over evolution is never the right call, according to Jason Wenk, founder and CEO of Los Angels RIA custodial overlay, Altruist, via email.
“[It] would be a change for the worse … a mega RIA would likely pay half the rate as a start-up … that’s a huge competitive disadvantage … which would further consolidate the industry … This isn’t good for innovation, serving underserved clients, or enabling entrepreneurship,” he argues.
“A number of ways custodians and clearing firms make money should go away [including] mutual fund 12b-1 fees, shelf space fees, [and] soft dollar arrangements … [but] modest changes and more transparency is the best path forward … subscription style prices would be a very bad idea,” he adds.
“The topic of custody fees is certainly important,” adds Österberg. “[That’s why we specifically call out our commitment to … no AUM minimums and no custody fees,” she says.
Point, counterpoint
Kitces continues to advocate for up-front custody fees.
“There was also a lot of skepticism about whether advisors charging fees would ever be competitive against brokerage platforms that could price advice and financial planning ‘for free’, because they got paid on brokerage products … [but] consumers voted with their feet,” he argues.
“The rise of RIAs has … undermined the margins of both products and platforms … [as advisors squeeze] out cost from their providers … [and] ongoing pressure on margins will eventually force RIA platforms to reinvent a new pricing model … instead of being the antagonist whose margins are sacrificed,” he continues.
Yet even Kitces accepts that unless RIAs are demonstrably paying more than they would under a different model, up-front fees will be a hard sell.
“Transparency matters because advisors can’t even figure out what a ‘good’ deal on RIA custody would be,” he says.
“It’s only by understanding what we do pay in RIA custodial costs that we can understand why and how it might be a better deal for clients to pay a lower but more levelized and aligned cost outright,” he concludes.
Broken records
Schwab and Fidelity challenged Kitces to debate on custody fees in March but backed down when he called their bluff. See: The ‘Great Debate’–pitting Bernie Clark and David Canter against Michael Kitces–collapses after the Schwab and Fidelity custody chiefs have second thoughts.
Fidelity refered only to RIA chief, David Canter’s March LinkedIn post, which snubs the fee-model as “one size fits all.” Schwab restated its 2020 pledge to shun custody fees.
Betterment for Advisors (B4A) is one of the few custodians offering access to fee-based custody pricing.
B4A charges $1,800 per advisor using it as a custodian and a standard wrap fee of between 12 and 20 basis-points for assets managed through its software, depending on the value of assets under management (AUM). See: Knocking down a ‘wall,’ Betterment will make RIA custody its ‘biggest business’ as Schwab/TDA merger opens door and robo-advice glut deepens.
SEI, which recently revamped its custody system, has also adopted a custody fee model.
“Our custody and technology platform pricing model is an asset-based fee designed to align with the RIA community’s advice-centric approach and tiers based on a firm’s total platform assets with SEI and their client AUM,” says Erich Holland, head of sales and experience for SEI’s advisor business, via email.
SEI also just appointed Gabriel Garcia, a former Schwab, Pershing and E*Trade RIA executive as its new head of RIA client experience, business development and strategy.
In April 2021, Pershing restructured its custody arm combining its bank and trust, broker-dealer, and RIA custody divisions.
It appointed Maura Creekmore, formerly head of global client relationships, as co-head of wealth solutions, alongside Harrison.
Bulls eye on Schwab
Merger disruption never much materialized as a result of Schwab’s $22 billion merger with TDA, though Pershing is right to believe it still might and to create a differentiated offering in the event it does, according to Tim Welsh, president of Larkspur, Calif., consultancy Nexus Strategy, via email.
TDA RIAs have even been docile in the face of service changes. See: Schwab sends most RIAs to 1-800 custody service — a downgrade the mass of incoming TD Ameritrade RIAs will have to swallow.
“Bottom line: Everyone is gearing up to smash Schwab when they actually make the [final] integration of TDA and it goes incredibly, terribly wrong,” says Welsh.
Welsh says in an email he makes the assertion based upon “dozens of conversations with current and former TDA and Schwab executives working on the integration project.” See: Mark Tibergien sets up Ben Harrison to challenge Schwabitrade.
“But when will that [merger final point] be? 2025?” he asks.
“It will be in 2023” as previously repeatedly publicly stated with no expectation of disruptions, Schwab spokeswoman Kerstin Österberg counters, via email.
Schwab agreed to buy TDA in fall 2019 and closed the deal in fall 2020. The company has repeatedly reiterated it is on track to complete its integration of TD Ameritrade by “mid-to-late 2023” — the far end of its estimated integration date. See: Charles Schwab & Co. registers TD Ameritrade brokers to rep Schwab products.
Sized up
Schwab has promised minimal “repapering” will be necessary when the systems merge.
Schwab also vowed to its RIA that they will never be subject to custody fees. Fidelity charges custody fees in rare cases — like in a first year for a sub-$25 million account..
Pershing is the third largest custodian in the US by assets under its custody.
Today it holds $2 trillion on behalf of 1,200 clients, up from $1.8 trillion in 2020, although this figure also includes its bank and trust and broker-dealer assets.
In March 2020, Pershing custodied $822 billion of RIA assets but with a different way of counting assets.
Fidelity administers $4 trillion in institutional assets by a Pershing style accounting of assets.
In March 2020, Fidelity custodied just under $1 trillion of RIA assets, according to a Cerulli Associates report. Schwab custodies $3.2 trillion of RIA assets — a relatively pristine and RIA-segmented accounting
* Pershing’s subscription model charges fees from $25 and up per advisor, based on the value of assets under their management.
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