With move beyond Schwab, RIA predicts shake-up of custody business

Less than a month before the planned merger of Charles Schwab and TD Ameritrade, a large registered investment advisor has decided to look beyond those two firms for the custodying of client assets.

CG Advisory Network, a Haslett, Michigan-based firm with $3.1 billion in assets under management and roughly 70 advisors, announced plans Monday to let its registered representatives custody client assets with Axos Advisor Services, a support firm for RIAs. Tony Mazzali, the CEO of CG Advisory Network, said the decision doesn't mean his firm is abandoning Schwab Advisor Services, where it has held assets in custody since Schwab's acquisition of the online brokerage TD Ameritrade in 2020 for $22 billion.

But CG Advisory Network representatives will now have another firm they can look to when they're considering where assets should be held for safekeeping.

"We had to train ourselves to move out of the matrix of the past 20 years and stop looking at the same names and resolve the issues that are going to be coming forward," Mazzali said. "This created a new opportunity for us to look beyond those same names as well as look for new solutions for our clients." 

The Securities and Exchange Commission, which oversees the advisory industry, requires that registered investment advisors hold stock and other clients assets with banks, brokerages or other third-party custodians to provide additional supervision and avoid conflicts of interest.  A Cerulli report from February found that four firms — Schwab, Fidelity, Pershing and LPL Financial — control 84% of the market for custodying client assets. Of those four, Schwab is the biggest player. The same report found that about 44% of all RIAs work with only one custody and that fewer than 4% had switched custodians in the previous year.

Mazzali said he thinks that's about to change. Firms like his will be seeking to work with partners that help emphasize their brands rather than overshadow them.

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Mazzali said it became clear to him after nearly three years of working with Schwab that the brokerage giant's goals did not align with his.

"It's all out there in the public for everyone to see," he said. "And as you connect the dots on what's out there in the public domain, it gives a pretty good sense as to that question: Who's brand matters? We have a network of advisors, and we feel we have a responsibility to represent their brands."

A Schwab spokesman declined to comment.

The firm has been stepping away from Schwab and TD Ameritrade for a while. In April, it announced that it had chosen LPL Financial as its broker-dealer and primary custodian. 

Mazzali said many of the principles at Axos are former TD Ameritrade executives whom he had worked with before the acquisition by Schwab.

"So there was the trust factor, the reliability, and knowing where they are going," Mazzali said.  "This is the future strategy for supporting advisors."

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CG Advisory Network's announcement may be less of a hit to Schwab than it appears at first glance. If anything has been surprising about Schwab's acquisition of TD Ameritrade, said Doug Fritz, the founder and CEO of the wealth tech consultant F2 Strategy, it's that so few firms have so far decided to take their held assets elsewhere.

Many in the industry are waiting with bated breath to see if Schwab can pull off its plans to move as many as 8,000 advisors and their accounts over to its system from TD Ameritrade. Any stumble in that process could present an opportunity for rival firms to pick off custodial clients.

Yet so far, Fritz noted, most RIAs seem content to stick with Schwab.

"The fact that there has not been the exodus that was predicted, and that's only been a couple of angry people leaving and not a ton of publicity, is a feather in Schwab's cap," he said.

Fritz said he doubts many advisors at CG Advisory Network or other firms that give their representatives the ability to work with a new custodian will want to go to the hassle of moving clients' assets over. The process of "repapering" investors so their assets can be transferred is not only tedious but also takes a great deal of time.

"Going from TD to Schwab is the easy path," Fritz said. "Getting your clients to sign up to transfer their assets is a huge operational burden and a lot of work. That's a lot of impact on your clients just for not liking Schwab's culture." 

Mazzali said CG Advisory Network is still looking for more custody partners, particularly firms that specialize in working with high net worth clients. Several other firms seeking to work with that much-coveted group have announced plans in recent weeks to bring Goldman Sachs Advisory Solutions on as a custodian.

Mazzali said he plans at least to consider adding Goldman or other firms to CG Advisory Network's custodial mix in the future. Eventually, he'd like the firm to have three or four asset custodians. But he also wants to see who else will step up to offer these services.

"Quite frankly, I'm not in a hurry," Mazzali said. "I think what you are going to have in the next two or three years are firms like Axos — ones we haven't heard from yet — and they're going to come full circle on their offerings and really make advisors pay attention to all that they have."