The Path to Bringing in Held-Away Assets: Roadblocks and Detours

By Erik Poje, CFP® on Friday, March 25th, 2011

Forgive me for the hyperbole here, but like reducing our dependence on foreign oil and ‘going green’, the concept is a no brainer.  Grow my AUM by bringing in held away assets? Great idea!  Advisors inherently understand that, and don’t need convincing.  However, implementing that strategy is a completely different story. 

Let’s examine some of the ubiquitous roadblocks that advisors typically face when considering bringing in held-away assets, and map-out some detours for how we can get around them moving forward.

Roadblock #1: Perception. 

A lot of the RIAs I speak with perceive the value provided to client 401(k) assets as probably being less than that for client assets managed directly with the firm’s primary custodian(s). The common misconception is that the only money they can “manage” are funds residing with their custodian. Some of this stems from an ingrained philosophy that likely originates from their days at BD's or Wirehouses—a regulatory/business model predicated around consolidation.  Yes, I acknowledge that there are Registered Investment Advisory firms that have established themselves from the ground up, devoid of prior ties and preconceptions. But even those practices have centered their businesses on only a few institutional relationships. This is not nearly as much a hindrance as in the Family Office space, but a reoccurring impediment nevertheless. 

Detour: RIAs need help understanding the value they’re providing their clients by bringing in held-aways if the perceptions are to shift. 

Roadblock#2: Mechanics.

Theoretically, incorporating held-away accounts into your practice is remarkably simple.  RIAs do their own billing and tell their custodians exactly how much to sweep from client accounts on a regular basis.  But realistically, there’s still a great deal of conjecture around how to actually implement this strategy.  A blueprint for implementing a technological solution and practically applying it across your client base simply does not exist in the RIA community. Add in the reality that no two practices are 100% alike (disparities in AUM, levels of service, and asset management strategies, etc.), and the perceived complexity increases exponentially. 

Detour: RIAs need a specific, direct, and dynamic blueprint for how to implement and apply the process of bringing in held-away accounts, from both a technological and practical standpoint.

Roadblock #3: Compliance.

So if I can report and ultimately bill on held-away accounts, how does that alter my compliance structure and internal controls? In addition to SEC Rule 206(B) about what constitutes custody (if you’re not familiar please see link), there’s a host of overarching concerns associated with tracking and billing on held-away assets.  

Detour: RIAs need to be assuaged of any and all compliance concerns before pursuing a venture like this within their practices.

Roadblock #4: Change. 

It’s a natural instinct to abhor change, or anything else that requires us to breach the perimeters of our comfort zones.  It is for that reason that the idea of change is about as popular as paying taxes.  Now, transpose that distaste from an individual level and apply it collectively across the financial services industry:

“My business is fine and my clients are happy.  Why would I want to deal with the headache of trying to report on accounts and transactions held at another custodian?”

Make sense? Sure. It’s like saying, “If it’s not broken, why fix it?” I get it. But on the other hand, it’s also like saying, “My landline works fine, why get a Smartphone?” Any new endeavor or notable transition—however much an improvement—can be disruptive initially and take some time getting used to. But of course, that’s never a good reason not to do it.

Detour:  RIAs need clarity to understand why changing their process is worth it in the long-run for them, and more importantly, for their clients.

comments powered by Disqus