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      Why Independence in Financial Advising Matters: The Hidden Conflicts of Large Custodial Platforms

      The Conflicts Within Large Custodial Platforms

      By Kit Lancaster, CFP®, Sterling Edge Financial

      In an industry built on trust, understanding the incentives behind the financial advice you receive is essential. While all financial advisers are legally required to act in your best interest, the reality is that those tied to large custodial platforms often face pressures that can lead to recommendations not fully aligned with your goals. As an independent adviser, I want to shed light on how these conflicts manifest and why independence matters in mitigating them.

      The Conflicts Within Large Custodial Platforms

      Large custodians like Fidelity, Charles Schwab, Merrill Lynch, TIAA, and BlackRock manage trillions in assets, and their business models prioritize profits. These firms often create incentives that subtly or overtly push advisers toward higher-margin products that may not serve their clients’ best interests. For example, Fidelity has been embroiled in lawsuits highlighting practices that prioritize corporate profits over fiduciary duties.

      A recent whistleblower lawsuit revealed that Fidelity pressured advisers to “shift assets” into proprietary funds, such as the FCASH fund, which offered lower yields for clients but higher revenues for Fidelity. Similarly, Charles Schwab has faced multiple lawsuits accusing it of using client cash sweep programs to fund acquisitions, such as the TD Ameritrade purchase, at the expense of client returns. These practices create hidden conflicts, where custodians prioritize their bottom line over client outcomes.

      Fiduciary Failures and Real-World Examples

      Consider Mark Armbruster of Armbruster Capital Management. When Fidelity’s custodial representative demanded his firm generate an additional $90,000 in annual revenue, they presented options that included moving client assets into less favorable funds managed by Fidelity. These recommendations would have reduced client returns while increasing Fidelity’s revenue—a direct conflict with fiduciary obligations.

      Similarly, TIAA and Morningstar have been accused of steering clients into TIAA’s most profitable funds through opaque fee structures and biased fund ratings. These schemes highlight systemic failures in fiduciary duty and demonstrate the need for greater transparency in custodial practices.

      Schwab’s cash sweep program is another example of conflicts in action. Schwab has faced lawsuits over allegations of reducing client yields to fund corporate acquisitions, like its purchase of TD Ameritrade, and for manipulating cash sweep features to maximize profits. These actions highlight how custodians can exploit client assets to meet their own financial objectives.

      Even higher education institutions have been impacted by custodial conflicts. The University of Chicago settled a lawsuit over excessive fees tied to its retirement plans, demonstrating that fiduciary failures extend beyond individual clients.

      University of Chicago Excessive Fee Suit: https://www.napa-net.org/news/2019/2/university-chicago-settles-excessive-fee-suit/

      Why Independence Matters

      Independent advisers are not immune to conflicts of interest, but we are often better positioned to mitigate them. Unlike captive advisers tied to large platforms, independent advisers have the freedom to:

      1. Choose Custodians and Vendors: We can select custodians that align with our clients’ best interests, even if it means incurring additional costs.

      2. Avoid Proprietary Product Bias: Independence allows us to recommend investments based solely on their suitability for clients, not corporate profit margins.

      3. Negotiate Transparent Fees: Independent advisers often negotiate flat fees with custodians, ensuring that conflicts related to asset shifts or hidden fees are minimized.

      As a financial advisor and planner in the independent space, I get solicited all the time. Mutual funds, software, annuities, life insurance, private placements, private REITs, and custodians—the more complex, specialized, unique, or expensive, the larger the marketing budget wholesalers have to motivate advisors to place, sell, or otherwise use their products. I typically don't get calls from commoditized offerings like low-cost ETFs. This pattern underscores how the financial products with the biggest profit margins for companies often get the most aggressive sales tactics, a dynamic that independent advisers must navigate carefully to protect client interests.

      The Challenges of Captive Advisors

      Advisers tied to large custodial platforms, often referred to as captive advisors, face significant challenges that can compromise their ability to act in their clients’ best interests. These challenges include:

      1. Pressure to Push Proprietary Products: Captive advisors are often incentivized to recommend high-margin products, even when they may not be the best fit for their clients.

      2. Revenue Quotas and Targets: Firms may impose sales targets that prioritize the company’s profits over client outcomes, creating a conflict of interest.

      3. Limited Flexibility: Captive advisors are typically restricted to offering products from their parent company or affiliated custodians, reducing the breadth of investment options available to clients.

      4. Opaque Fee Structures: Clients of captive advisors often face hidden fees or complex pricing models that can erode their investment returns.

      What You Can Do as a Client

      To protect your financial future, it’s crucial to ask the right questions and remain informed. Here are some steps to take:

      1. Understand How Your Adviser Is Compensated: Ask your adviser about potential conflicts of interest and how they mitigate them.

      2. Inquire About Custodial Practices: Ensure your adviser’s custodian is transparent about fees and investment options.

      3. Stay Educated: Keep up with industry developments and lawsuits to understand the broader landscape of financial advising.

      Sterling Edge Financial: A Multi-Custodian Approach

      At Sterling Edge Financial, we are proud to operate as a multi-custodian firm, partnering with Pershing, National Financial Services, AssetMark Private Trust, and primarily SEI Private Trust. Our focus is on placing client assets on platforms that create the most value, ensuring transparency and adaptability as the marketplace evolves.

      Why SEI Private Trust Stands Out

      • Meaningful Transparency: SEI Private Trust offers a clear breakdown of fees, ensuring clients understand exactly what they are paying for.

      • User Experience: Their platform is intuitive and user-friendly, making it easier for clients to monitor and manage their investments.

      • Fee Transparency: SEI provides a straightforward fee structure, avoiding the hidden charges often associated with larger custodians.

      • Adaptability: SEI’s innovative platform allows for seamless adjustments as client needs or market conditions change.

      We are committed to continuously evaluating our custodial relationships. As the marketplace evolves, we remain open to moving some or all client assets to platforms that better align with our mission of delivering value and transparency.

      The Bottom Line

      Large custodians are not your allies. Their revenue models often rely on practices that create conflicts of interest, even as they claim to support fiduciary standards. Independent advisers, while not immune to challenges, have greater freedom to align their practices with client interests.  

      At Sterling Edge Financial, our independence empowers us to act as fiduciaries, putting your goals above all else. By choosing an independent adviser, you can trust that the recommendations you receive are driven by what’s best for you—not by the profit margins of a custodial giant.

      References and Resources

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