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Is Your Custodian Messing with Your Money? – Episode 78

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Are your investments protected from conflicts of interest?

What is the relationship between your advisor and the custodian of your accounts? In this Dentist Money™ episode, Reese & Ryan discuss the role of a custodian, why it matters who your custodian is, and how investors have lost fortunes by trusting the wrong people. They also explain how custodians get paid and provide tips for protecting yourself from investment fraud.


Reese Harper: Welcome to The Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old co host, Sir Ryan Isaac.

Ryan Isaac: Yes, and good afternoon. Thank you for having me back.

Reese Harper: You are trusty, but I’ll tell you about someone who is not, Sir Ryan. Someone who is not my co-host. He is not trustworthy, but he has been all over the news the last five years.

Ryan Isaac: Was he knighted?

Reese Harper: Especially over the last couple of weeks when he was on an HBO special that you have been talking to me about.

Ryan Isaac: Yes, I have been bugging you about this. It was our main man, Mr. Bernard Madoff. He is not our main man, by the way, we don’t like him. The Bernie Madoff, The Wizard of Lies, is the name of the HBO show.

Reese Harper: I would like you to tell us a little bit about his story. Tell us about this fine young man, how it all began.

Ryan Isaac: How it all began. Bernie Madoff was a very widely respected man on Wall Street for decades. He grew his reputation. He was widely respected. But what ends up happening is about ten or fifteen years into it, they haven’t pinpointed it exactly. At some point his proprietary trading strategy started losing money. It wasn’t working any more. It lasted for about ten years and it started losing money. Instead of showing those losses to people, admitting it, and being a normal firm that goes through ups and downs. He decided to stop trading. He stopped buying and trading with his clients money, and he started creating false reports of his trading activity. He would create reports for his clients that said, “yesterday we bought and sold these stocks, and this was your gain or your loss.” They falsified these reports. They backdated all of the trades so they coincided with actual stock movement patterns, mostly U.S. stocks, mostly S&P blue chip companies.

Reese Harper: That in and of itself is a massive undertaking. I don’t want to skim over that!

Ryan Isaac: No, this wasn’t two people sitting in an office.

Reese Harper: They actually backdated everything to look like it was real so that it would make sense. The securities that people were holding…

Ryan Isaac: They had to invest in millions of dollars of computer equipment just to pull it off. This guy was so detailed about it that they had perfected apostrophes in different statements. According to some of his staff he was obsessed with fonts, different bold type, how big and small the letters were. Then they started building multiple offices overseas and across town.

Reese Harper: Also, his family’s role is interesting. He had two sons that were involved intimately in the business. They were over different departments though, and never really got to see the investment advisory operation, allegedly. There is some controversy over that, but Bernie really did try to keep the investment advisory operation private. Which if you look at it, he had a floor of his building that they occupied entirely dedicated to statement creation, and no one really went up there. No one really thought to go up there! It is really interesting that this went on for dozens of years.

Ryan Isaac: Ya, it was about forty years, man. It was from the seventies until about 2008. I mean it is mind boggling to think that they were able to pull this off for so long. Part of the mystique is that this guy created such a reputation that nobody ever questioned anything he ever did. He could get investors to give him money, and people would beg him to take their money in massive sums and quantities. There are stories of him knowing exactly how much of a return each client was supposed to get in order for him to maintain the cashflow of the scheme. What this ended up being was a Ponzi scheme where there are no returns, nobody has value. The only way he is paying out old investors is with new investor money. He knew in so much detail about what every account held and what every person was supposed to be getting in order to maintain the cashflows of the scheme, so that every individual was assigned certain gains or losses that they would go backdate and create fake trading reports and false statements to all of the people.

Reese Harper: It was a brilliant theft.

Ryan Isaac: Think about spending that time. What if a guy that smart, and obsessively detailed, just taught people to have a high savings rate and convinced them to save more money and spend less.

Reese Harper: Yes, or fixed our national deficit. Something useful!

Ryan Isaac: Invented a better Root Beer, I don’t know.

Reese Harper: Let’s just talk about the sum of the losses real quick. It ended up being somewhere around 17 billion dollars in actual losses. In real money that people had contributed that had disappeared. On paper, if you read all of the statements that were going out at the time there was 65 billion dollars in paper losses. After all of that time, the 17 billion, even if it had been sitting in bonds it would have at least doubled in value! It would have been a lot bigger than 17 billion, but he was showing 65 billion in losses.

Ryan Isaac: That is what people thought they had. The sum of what people thought they had with him totaled 65 billion dollars. In their mind, that is what losses were, but it was about 17 billion. The question is, “how was this allowed to happen?” I mean, you would have to watch the movies and documentaries and read a lot. There were investigations that were so close to finding out everything that missed the mark by inches.

Reese Harper: What is the thing that kind of surprises you the most out of this whole story? As you watch the documentary and have read the posts and articles. They have done interviews while he has been in prison. What is the most surprising thing to you? What are the big take aways?

Ryan Isaac: There are two things that always surprise me about this story. Number one, the structure that he held the client money in was actually legal, and it is still legal. The structure that he held the money in was that all of his clients money was held in his business’s bank account name. These were not accounts set up in the names of each client that gave him money. They were held in Bernie Madoff’s business. In his bank account. It is called having custody, and it is legal. His firm chose to have direct custody of the assets, whereas most investment firms, like ours, and thousands of others, choose to have third party independent custodians that hold the money in the client’s name provided and provide independent reporting. Number one that is the thing that shocked me. How much money this guy got from people knowing that it is sitting in his name. He had direct access and control the whole time. The other part of the movie that most surprised me is kind of technical. When the buying and selling and trading of securities happens on the public open market there is a company that holds all of the securities temporarily to facilitate the buying and selling. This is massive. To the tune of trillions of dollars. It is called the Depository Trust Company, or DTC.

Reese Harper: It moves from one brokerage company into this DTC, and then moves out of that place when it goes to the other companies. If Raymond James is buying a bond from Chase it will go in between these two banks and sit in this DTC account and the other firm will then take possession of the money. It takes a few days.

Ryan Isaac: Yes, takes a few days to facilitate. Essentially, every registered advisor, broker, or investment company has a DTC account with an assigned account number. There is a point in this movie where the SEC comes in and start grilling Bernie for his DTC account number. Essentially all they would have to do is go and look in the DTC to see that trades were actually happening. It shows in the movie that him and one of his main men were arguing about whether or not to give him a fake number. For decades there was actually no activity. They just made it up. He ended up giving the SEC investigator the real account number. Then what happened is the guy went back and never checked the account number. All he would have to do is call the DTC, check the account number, and make sure that there were actually securities being held in that DTC account and that there was activity. Basically, a routine audit that the SEC does on a regular basis. They request this DTC number from the firm and they can do a routine audit on the exchange of the securities. They won’t check every transaction ever, but they can look at recent statements and do a quick check. It is a pretty common practice. One of the interesting things about Bernie Madoff’s interview in prison is that when he gave that number over, which was years and years before he was actually imprisoned, he thought he was done. He was prepared at that moment to just be uncovered.

Reese Harper: He sat around for days! He was fine with it, he was just tired of all of the routine.

Ryan Isaac: Oh man, can you imagine?

Reese Harper: Those are two really surprising things though. They never called!

Ryan Isaac: They didn’t go back. It would have been over in five minutes because they would have checked the DTC account and saw that there was no activity for thirty years. In the world’s biggest private hedge fund, no activity.

Reese Harper: To make this come full circle and explain why we wanted to bring this up. When we meet people it is not uncommon for us to not see investments where they have turned over large amounts of money to another person to hold that and invest it for them in an account that is not in the name of the dentist, but in the name of the business, or investment that they are putting the money into. That is not uncommon. I will say with larger investments, like if you are going to invest in a hedge fund, or you are going to invest in any type of private investment, which this was, that is one of the risks that you take on. A lot of the accounting is done by the business that you are giving the money to, and there is not really a third party involved to insure that that money is actually doing what the investor is saying it is doing. It is really important that we start off by saying the reason we are telling this story is that we want to make sure that people understand how their money is being held and that they are very cautious about the structure of what they are doing with their investment dollars. You need to understand the different parties that are involved in managing an investment account. It is incredible that behind 65 billion dollars worth of value were people who were just kind of ok with one person creating statements and holding money. I’ll let you wrap up your thoughts on this.

Ryan Isaac: I was just going to say, it is a legal structure. When someone, like an investment company, decides to be their own custodian of client funds, they are responsible for creating the statements. They show transactions, fees, gains or losses, and there is more oversight there than there used to be. In 2009, the SEC implemented some new rules that said if you are a custodian for your clients money and you don’t use a third party then we are going to start doing surprise audits and we will mandate third party regulators to come in every once in awhile. They require CPA firms, accounting firms, etc. to come and do some audits on this stuff. But to your point, it is still common. Financial advisors can hold the money in their own bank accounts. It is common in other private investments that we have seen dentists be involved with from real estate deals to privately held companies and transaction. There are other private investments where there is not an official third party holding the money and doing the accounting. That is why we are telling this story. The point is that that is the basis that allowed Madoff to continue his scheme for so long. It was a structure that is actually still in place, and it is still possible. What we want to do today is talk about what a third party custodian is when you have an investment. Who are they, what do they do, what do they cost, how do they make money, how are they involved, how do they protect you, and the functionality of that. You and I, like you said, we talk to a lot of dentists and it is surprising the things we hear. Let’s say for example that you have an investment account at Fidelity. Fidelity would be the custodian holding the money. They assume that a financial advisor is a direct employee of Fidelity, but it doesn’t mean they are. Or they think the custodian is the actual investment themselves, like, “I invest in fidelity.” There are a lot of misconceptions about what custodians do. They play a really, really important role with an arms length reach between money and advisory.

Reese Harper: Yes, there is a website called that tracks how many public Ponzi schemes there are, that have been made public. There is no way to really track the amount of losses that happen in private Ponzi Schemes, those are probably the larger amounts. The stuff that happens that you just never hear about. I can think off the top of my head of more private losses that have happened that stay between five or ten people than there are clients affected by large ones, so it kind of makes me wonder how many people are actually affected by this. Anyways, the Bernie Madoff Ponzi scheme was by far the largest one in history. It was from such a prominent figure that had a lot of financial clout and responsibility. I mean, he was the chairman of NASDAQ, he was sitting on the national association of dealers regulatory board for many years. He was like an institution in Wall Street. That is where it really just blew everyone’s minds. He was able to go through so many routine audits, and so many conversations where he was able to pass off as a really trustworthy, bright person. I think that is what is dangerous in these kind of situations. You made the comment that at some point he began losing money in trades and was forced to, or had to do something about it. I just couldn’t help but think how he literally became a sociopath and really believed that what he was doing he could get out of it. He is arrogant. He starts believing that he is smarter than anyone, and that he can avoid people. At the same time he is able to maintain a straight face and talk to people and make them feel like he is honest. It is important to not let the way you feel about somebody ever replace the proper levels of security and the proper levels of compliance and financial protections that you need. Just because you like someone and feel good about them, just because they seem trustworthy and they seem credible, is not a reason for you to trust them. If some of the smartest people in the world could entrust this individual, who is one of the directors of one of the largest investment operations in the world at the time and also involved in wall street compliance and regulation and a Wall Street institution, if that person can steal from people, you can get stolen from too. It is really important to make sure that you have the right structure in place to protect yourself. Today we are going to talk about how to do that. We want to clear up what a custodian is, why they are used, and what makes a good custodian. Also, what makes a bad custodian and why they are so important when it comes to investing your money. When we come back we will talk about that. Let’s take a quick break and we will get right back into all of these interesting issues.

Ryan Isaac: Alright Reese, welcome back from the break. I hope you are ready to talk about custodians and custodial duty. I know every person wakes up and wonders, “what is a custodian?”

Reese Harper: Ultimately, it is a bank that holds your investment accounts and does certain types of tasks for you. It is a bank that is separate from your financial advisor, hopefully, and they handle this process of buying securities and complying with all settlement dates. When you buy securities they are moving from different custodians. Those custodians have certain days that they are allowed to move the securities before they have to prove that they have them and that they are physically there. That’s a settlement date. There is only a certain amount of time allowed, so they have to allow regulators to see that these securities are being transferred in a timely manner.

Ryan Isaac: Ya, it is a huge process. We were talking about the DTC functionality before. A bank will work through the DTC to move securities and there are deadlines. Like you are saying, it is a really complex process. In the past, I think what happened was that you would physically walk up and hand a company money and they gave you paper certificates to hold on to. Then it became electronic, and easier in some aspects, and harder in others. That is the first step of opening an investment account. You go to the bank, whether through a financial advisor or directly, and they open the account. They do a whole bunch of things to make sure that the naming and the titling is legal for estate planning purposes. They provide all of the record keeping on the account. This is one of the big things with the Bernie Madoff scandal. He made up his own records and history. A third party bank would have circumvented that whole thing. They were the ones who kept track of all transactions, purchases, sells, fees, and costs. They are responsible for sending all statements out. Again, if there was a third party custodian involved it would have solved the whole problem. If he were not creating the statements there would have been no way to falsify those records or make them up. There a lot of other things that they do. You mentioned a few of them here. Some of them are like tax reporting. We get calls every February or March when everyone gets their statements in the mail of all their 1099’s. They receive all of their gains and loss reports from their accounts and they have to facilitate all of the tax reporting that goes to the IRS and clients.

Reese Harper: Anytime activity happens in an account such as a security is bought, sold, or transferred there has to be a statement showing that there has been activity. That has got to be delivered to the owner of the account. There are all of these corporate actions that you guys have probably seen like a proxy in the mail, or stock splits, or voting requests that you get in the mail. The custodian is responsible for notifying you when those things happen and allowing you to have the opportunity to participate in voting on the securities that you own in your account. Most people neglect that, and don’t get involved. But legally, you have to be notified and without a custodian it is pretty difficult to communicate all of that information. There are also dividends and interest payments that come in from bonds, dividends from stocks, all of those things have be collected and assigned a specific security that it is coming from and reported on. There is also lending that they are involved in. A lot of wealthier people, once their account balances get higher, borrow against their accounts kind of like you would borrow against a house or create a home equity line. That is a huge part of a custodian’s business, they also have money market deposits that money sits in and they invest that money to try and earn returns like any other bank would. Anyway, the custodian provides the investor primarily with a lot of protections. And this Bernie Madoff scandal would have been completely avoided had there been a third party custodian involved. He consciously did not want that to happen. It is very clear that that was not his intention, and I think people ever since that time have been much more skeptical of having a financial advisor have custody over an account.

Ryan Isaac: It is still common, though. I was thinking about that. I was wondering too, I don’t think it was as common back in the sixties and seventies to have third party custodians? I think it was a lot more common to have direct custody.

Reese Harper: Ya, it was.

Ryan Isaac: As an investment manager, which is, you know, probably how a lot of different firms started. Over the years, it has definitely become something that is a must. You would not open an investment account without having some sort of third party, arms length distance between you, and the advisor, and the investments themselves.

Reese Harper: I thought a lot of people before just wanted to simplify their lives. Do you want to have four thousand accounts? When you are trying to run a strategy that on occasion depends on buying one big asset or several large assets, you have to pool money to make that possible too.

Ryan Isaac: Like a hedge fund.

Reese Harper: There are logistical reasons for it. Even today though, even if the money is in one big pool account, their should be one big third party independent audit happening. You should be getting a statement from that company on the accounts themselves and not just allowing the single pooling account to be creating your performance statements. It can still be done properly, but it clearly was not done correctly. Let’s talk about how custodians actually make money and how they earn money. I would imagine that there are plenty of people who don’t know that.

Ryan Isaac: It is important to know that they do make money. If you go directly to a custodian, such as Fidelity, TD Ameritrade, Charles Schwab…

Reese Harper: Vanguard, E-trade, Merrill Lynch, Edward Jones, Smith Barney, all of these places.

Ryan Isaac: It is important to know that they are businesses too, and they do make money. They have revenue coming from their customers which are all of us that have our accounts there. One of the ways, we will list a few ways that custodians make money, one of them would be annual fees. This is really similar to a practice checking or business account. You might have an annual maintenance fee. It might be a quarterly or annual fee. Usually small dollar amounts of $25.00 or $50.00.

Reese Harper: Sometimes if it is a smaller custodian, then your self directed IRA’s or accounts, the custodian will be a self directed account manager. Sometimes the annual fees on those accounts will be much higher. They might be $250 or $300 a year in an account fee. A lot of custodians will wave their account fees if you are willing to buy a certain amount of mutual funds, or trade a certain volume. You might not have an annual fee on your account that is being transparently charged to you, it might be waved for some reason. Kind of like how some banks don’t have fees for checking accounts and others do.

Ryan Isaac: You have to keep certain balances or spend enough on their credit card or whatever.

Reese Harper: They also make money on trading costs. That is a big one. When you buy or sell you will pay a commission of some sort to trade a security. That is revenue for them. I have seen different mutual funds with different transaction charges. A lot of that has to do with what we call buying shelf space or whether the mutual fund is paying the custodian to be featured or to be bought or sold without a transaction charge. Sometimes mutual funds will share some of their revenue with the custodian so that they can charge no transaction charge or no fee. That way the custodian says, “I don’t care who pays me, if it comes from the client paying me ten bucks, or if your mutual fund wants to pay me ten bucks when the client buys it.” A lot of times you will see certain mutual funds will pay the custodian so that you don’t have to pay the trade charge. That is not necessarily a bad thing, but it is not a great thing either. In an ideal world, you would want the custodian to get paid their lowest possible cost per transaction. You would have the mutual funds not paying the custodian to be featured at all, or to be highlighted. You want the mutual funds to be bought on their own merit because they are the best option. Or the ETF to be bought on its on merit because it is the best option. You want the transaction to just be fair so that when people buy or sell with a custodian they are paying the lowest possible cost that they can. Maybe no the lowest possible cost, but a cost they choose to pay based on the value they feel like they are getting. There is also back end fees. Do you want to talk about those a little bit? They are related to what I was just talking about.

Ryan Isaac: It is usually when a fund gets sold. Sometimes its fees will get kick back from the fund back to the bank or custodian. Those aren’t as common anymore and they are kind of looked down upon and they are going away. A lot of people don’t have those or use those anymore. They are a bank too. If you think about how your bank makes money on deposits and having certain amount of cash on hand that they can lend at fairly conservative low risk ways and making money on the spread and paying it back to the investor.

Reese Harper: They are making money on your money market, or your cash balance, just like a bank will. How does your custodian actually make money on your account? Do I pay an annual fee? Do I pay transaction fees, and what are they? Do I own mutual funds? Are the mutual funds paying my custodian at all, what is the relationship like there? Is that affecting why I own these? There is a margin of lending department inside of every custodian. They make money on the interest of loans and you should understand how your margin agreement works. These are all things that you should know about your custodian. These are separate things from your financial advisor. The fees that your custodian is earning are separate from what your distributors are earning. Sometimes you don’t know how these people are getting paid. Which is really important to be able to compare and know what is a good custodian and a bad one. If you don’t know what you are paying, then how are you supposed to compare? Let’s say the third thing to really think about is, how do I pick a custodian?

Ryan Isaac: I would back up a little bit to the most important thing to know upfront and that is the relationship between the people involved. The people who are involved is this bank or custodian that you have, the investment products themselves, those are the funds, ETF’s that you are buying, the companies manufacturing the products and funds, and then you have the advisor. Those are three different people. In an ideal world you want those three different people to be separate. It is often really common that the bank who happens to manufacture proprietary in house funds also employs the financial advisor to sell the proprietary funds. It gets really convoluted. I would say that step 1 in picking a good custodian is knowing those things are separate. The mutual funds that you are going to buy, or funds you are going to put in your account are not manufactured by the bank that is holding the money. And the advisor or broker is not employed by the fund family or the bank directly. There will be incentives there.

Reese Harper: Let’s back up and reclassify that. You have an advisor, products, and the bank, right? A simple example in my head that I have tried to work out the last few days is like this. If I was going to go buy a car, there would be the cars, the dealership, and there is the car salesman. Cars, dealership, car salesman, ok? If the dealership and the cars and the car salesman were all in the same place, which in most cases they are, then I know that my experience is going to be relatively painful interacting with them. Even though I like my car salesmen. I have got to get a car, I know Tom, he is a great guy. I also know that he works at the Ford dealership. He is a Ford guy, he is paid by Ford, and Ford makes the cars. It is at a Ford dealership so no one is going to tell me that the Silverado has better rebates this year. Let’s imagine in this ideal world, it hasn’t happened with cars yet, but let’s imagine that this could be the case. There is this dealership that is just like a giant floor of cars. It is all of the cars in the world. They all come and park their cars on this lot. It makes it really easy for you to go and see every type of car in one location. That lot makes money because the cars literally just sit there and they pay money. You don’t have to worry about anyone getting featured or anything. They all have to pay the same to just sit there. There are a bunch of car salesman that are self employed car salesmen. You can just hire them. You can pay them. You say, “let’s go to the dealership on 8th street.” Mike is a car expert, he has been in the business for 25 years. He knows cars in and out. He knows what dimensions the seats are, who stitched it, he knows the length of each car, what fits in each garage, he knows what is good for a family of four, what is good for a family of two, he knows what deals are running, what rebates are happening, he knows every car brand. Then you tell Mike, “it doesn’t really matter what car we buy, how about we just pay you $500 to go to this independent car dealer place and you help us find the right car and we will just pay you for your time.” It is probably like $50 an hour to go shopping with us, check out the cars while we are there, open the hood up.

Ryan Isaac: Give us all the data and compare.

Reese Harper: That would be the dream car experience. Where you just love it. That is the way that a good financial advisor should be. He is Tom, the guy that you are driving around with.

Ryan Isaac: Mike.

Reese Harper: Did I say Mike or Tom?

Ryan Isaac: Tom was the employee.

Reese Harper: Stick with Mike, he’s the independent guy. He can go to any one of these big dealers and pick any car and it doesn’t effect how he is going to get paid. He just knows a lot about the cars. The dealers are like custodians. The car lot is like the custodian. Mike is going to go shop a few of them and know that the one over on 9th and 9th is the best lot because they have the most inventory this time of year.

Ryan Isaac: The best technology to search the inventory. They have golf carts that drive you around.

Reese Harper: The next time you buy a car though he might take you over to a different lot. It might have better inventory over there now. You are paying Mike directly so he is going to figure out first the right lot for you with the right inventory. Then from there he will pick the right cars for you. That is how it should work in financial planning. It does work in the case of our firm, and plenty of others like ours, but in most cases, you are literally going to one dealer with one car type and one salesmen that is paid only to sell that type of car. The advice you get all of the time just feels so constrained and so awkward. You are like, “I know this is the best thing in the world Tom, but it’s not. I was just with Mike and it was so much easier because he was on our side of the deal.”

Ryan Isaac: Mike did not car if I was going to buy a Porsche or a mini van.

Reese Harper: He didn’t care at all.

Ryan Isaac: He was concerned with what I really needed.

Reese Harper: I feel like we have to tell this analogy to make it come to life. It makes more sense in this context. If you are TD Ameritrade or Fidelity and you are literally trying to say, “how do we differentiate ourselves? How are we going to be different so that people want to come to our big lot to shop?” Everyone is starting to have the same cars, how do we make it different and how do we make our experience better? Ya, so Reese and Ryan have to look at what lot we like or which custodian we like based on a lot of factors to say that is the right place to put the money. Our clients have to like that custodian as well in order to make sure that they are really happy with the choices and benefits that custodian offers. If we don’t like it, we just switch car lots.

Ryan Isaac: Go to 9th and 9th, instead of 8th. They are really close together apparently!

Reese Harper: They are like a block away. Let’s talk about a few things that differentiate a custodian. First of all, how easy is it for you the client, or for Ryan Isaac the advisor, to go and find what he wants to buy to compare things. How fast can he do things? How easy can he do it? Some car dealerships in our figurative example here, some car dealerships, or custodians of investments, they have really, really bad technology. It makes it really hard to do anything. So I have to go fill out this piece of paper, then click this button and send it here, and then if this doesn’t work I do that, and if this doesn’t work I have to call a phone number. As long as you only do this one thing, this one of the three, we are great. If you want to buy a Mazda3 and you are trying to get an airstream trailer, plus get a Ford F 150, and look for a wagon, and you want it tomorrow? We cannot do that. A lot of times your financial advisor will want to get something done that can’t be done easily through a particular custodian. That is really important. Good technology is one of my most important things. The second thing that I just can’t stand is bad customer service. If someone is just stupid, and I am talking to them, then I feel like, “you can’t be worth a dollar an hour.”

Ryan Isaac: Stop making up answers!

Reese Harper: You are just saying random things at me right now. You actually don’t know anything! The thing is, good custodians, the best custodians, have really good training programs and they have excellent customer support. When you want to get something done and you are trying to get something done quickly, for example, “I need a margin loan set up and I need the money transferred out in the next 24 hours and I need all of this paperwork to be accepted, approved, signed, and done because my client just told me that he put an offer in on a piece of property and if I don’t get that money to him tomorrow the title company will be upset and the client didn’t tell me until too late.” That has happened a lot. Without a good custodian, great technology, and customer service, than I can’t get that transaction done quickly. It is a big deal under certain circumstances. What are ways you think a custodian differentiates?

Ryan Isaac: I was going to mention the processes that all of them go through from our perspective as being different than one person going directly to TD Ameritrade and doing their own buying, selling, and trading or using the technology. We have to facilitate hundreds and hundreds of trades every day from tens of thousands of dollars that come in every day from savings. That process, even with good processes, it takes a couple hours a day to go through that. It could just be such a big waste of time if the process/technology wasn’t as good. You mentioned some of those, there are emergencies on occasion, when clients need something really fast and it is usually ahead of what is normal.

Reese Harper: There have been a lot of times where we have had to have a custodian rush something that was outside of their process, but they could get it done. We have multiple custodians that we work with and I can say definitively that some custodians are better suited for certain types of clients. Really, really high net worth clients will have certain types of sophistication needs. Other clients do not. You will find out at some point in your career if you are with the right custodian based on the types of products and services that you are being delivered. Each custodian has to pick who their target market is. They have to decide if they like people coming to them directly or through financial advisors? Are we a 401 k platform? Are we an options platform? Do we do futures? Are we a stock and bond shop? Are we ETF’s primarily? There are so many different ways to differentiate as a custodian. The real rule of thumb here is does your financial advisor know what you need? Does your financial advisor work with a lot of dentists? If not, chances are that the custodian they are working with doesn’t really have the same requests being placed that someone who is only working with dentists would be requesting. I promise the things that we ask our custodians to do are very specific to our dental clients. A lot of things wouldn’t happen without us going through the process of saying, “who is our client and what services do they need?”

Ryan Isaac: As you are saying that, I can think of two or three things that our custodians actually had to invent for us. Our typical client is still in their career and saving money. The target of a lot of financial advisors around the country are looking for wealthy retired people that have already saved all of their money.

Reese Harper: Yes, large lump sums.

Ryan Isaac: There is just a different set of processes and technologies and ways to do trading and rebalancing that are unique to people who are in the middle of their career saving money compared to someone who is done saving money and who is taking a withdrawal out of the account. Totally different situations. I can think of times where someone on our staff in the office will be like, “I got to call and ask them this thing because I don’t think their system does this!” There are just unique situations.

Reese Harper: Auto drafting is a huge factor. I have had some custodians tell me that if we need money we just have to send it in over this wire transfer request form that you fill out and you can just send it in. I am like, no, this will be happening every single month for this client. We are saving a percentage of their income, they have steady cash flow, they are going to be rebalancing this. There are hundreds of these people. The custodian is just like, “so they are going to save money every month at that level? At that amount? That is a lot of money!” When we say a normal average auto-draft and our average auto-draft deposit will be close to ten thousand dollars on a monthly recurring basis most custodians are not used to seeing that kind of autograft deposit come in. They are also not used to seeing a rebalance that we are trying to trigger on a monthly basis.

Ryan Isaac: That’s another huge one. This is probably another subject for another episode on rebalancing, but because so many of our clients are savers instead of rebalancing by selling things all the time we have a chance to rebalance by just using new cash to put on the stuff that has gone down or is lower to keep an account in balance. That is not typical for a custodian.

Reese Harper: No, they are used to seeing we are going to get a $500,000 transfer.

Ryan Isaac: Then quarterly or annually we will sell some stuff, buy some other stuff.

Reese Harper: It affects how they charge. Here’s another example, you have got a client that has a low balance. Maybe they have under $100,000, but they will be saving a high quantity of money. So a dentist will have a quarterly draft or monthly draft anywhere from ten to thirty or forty thousand dollars. They will be saving large quantities of money on a quarterly basis. When I ask for a margin loan request to be filled the custodian will say, “well, the rate will be x.” Then when I say they will be depositing this much on a monthly and quarterly basis, they say, “Oh, never mind, let me see if I can get special approval and the rate will actually be x. I didn’t realize that they would build up so much money on such a short time frame.” If your custodian can deliver better pricing on trades, they can deliver better pricing on the type of money market accounts you occupy, on reducing your account fees, on reducing the interest rate that they charge on margin, on eliminating any conflict of interest that they might have. They might just be giving you a lot better communication and support level. The larger the clientele, you get assigned special service people that respond to requests within like hours. These are massive requests, responded to sometimes instantly. A smaller client that is going through a retail channel, they might sit on hold for 15 minutes. We have got a direct line into someone with a masters degree because the custodian wants to invest in a different channel. It is just important to know that when you think about custodian. It is not all generic, and it is not all the same even though they do feel a little bit commoditized. It might feel like it doesn’t matter whether your money is at Charles Schwab or Fidelity, but there is a lot of differences between why you pick one over the other and it will have a big effect on your retirement. Most importantly though, know who is holding the money, know where it is at, and make sure that it is a third party from your financial advisor. Wouldn’t you say that is one of the big takeaways today for dentists?

Ryan Isaac: Yes, especially starting with the Bernie Madoff story. That is the safeguard from fraud, embezzlement, theft, not to mention the list of two dozen administrative things that have to happen in an account to make everything work the way that it should. They have a very, very important role. Another take away for me, which you mentioned, is to make sure that the advisor that you are working with, the products you are putting in your account, and the bank holding the account are not all of the same thing. Don’t go to the car dealership on 8th.

Reese Harper: Ford, Ford, Ford, and Ford.

Ryan Isaac: Let’s be fair. I would say, Reese, that is the most common thing I run into from people who will send in an account statement and ask us to look at their portfolio. They will ask us what they are paying and what funds inside of the account are the banks funds and the employee that was the advisor on the account is a W2 employee from the bank. A lot of people just don’t know that they can be separate and when they are it is in your best interest, and it will probably cost you less money to do so.

Reese Harper: Let’s say it probably will cost you less, but let me make another example. Do you always buy the cheapest car?

Ryan Isaac: Is this the twenty two year old Ryan you are asking or the thirty year old Ryan?
Even when I was broke, I didn’t buy the cheapest car, actually.

Reese Harper: What I am saying is if they are all the same person, it might be cheapest, it might just be.

Ryan Isaac: Maybe, even if it is the same.

Reese Harper: But it won’t be the best option. The best bank is not making the best funds and they are definitely not hiring and training and grooming from scratch the best advisors, right? Those three things are different businesses. The custodian is a different business in the goals that they have and the things they are trying to compete on. The funds, investments, they are trying to compete on merit of the returns they provide and the advisors are trying to build their breadth of knowledge across all product lines. A better way of clarifying this is even if it costs slightly more, which it most likely will not, but if it does, you are going to get a better advisor for your situation because that advisor will be custom tailored to you. They will know you and your situation and your industry, your pain points, the things you are struggling with. You will get the best products in the marketplace because no one is being paid to push something You will get the most optimal duration bond fund. You will get the best small cap value mutual fund, you will get the best stocks in Europe. You will have the best gold holding and intermediate term bonds. All of this because the advisor is not focused on one product he will be focused on his breadth of knowledge. You will also get the best custodian because they have the best incentive to be a good custodian. By going to the Lexus dealership, you might get a really good car. But it is really hard to know that it is the absolute best car for your situation because you didn’t shop it that way. You didn’t go to an indent care person and an independent dealership and select from the five series, and the Lexus, and the Audi A6, and look at the Porsche, and consider the new Camry. Which is a dang nice car for all you people out there.

Ryan Isaac: Are you anti-testa?

Reese Harper: And the Tesla! You didn’t compare all of those objectively you just went to one place and settled with it. That might work for cars, maybe it would, I think we could all agree that it would be a better car buying experience if we didn’t have to go through it the way we do. It won’t be the optimal choice for your situation. By having these people be separate you will insure that you have a better shot at making work optional at an early age, and retiring with a lot of financial security. I think that is just the better choice. The one where you are getting the best of breed in all of those three important channels. You are getting the best advisor, product line up, and custodian to manage the money. No one is getting paid by each other. They are all independent. That insures that all of them have to build skills and competency in order to compete. The other way really cripples people. The Ford dealership never has to learn anything except how to pitch you the F150. He doesn’t have to learn anything else. He does not become a car expert. That is enough to wrap up for today, Ryan.

Ryan Isaac: That is a great spot to end. I am going to ask you one question then, any advice if you are being pitched an investment from a guy with the last name Madoff? Could it have been more perfect?

Reese Harper: Couldn’t have been like Thompson.

Ryan Isaac: It couldn’t be Thompson. The biggest Ponzi scheme of all time and his last name was Madoff. We thank everyone for listening, we are glad that you download and tune in. We would love if you would go directly to iTunes and leave us a quick review that helps us get to the top of the search lists when other dentists are looking for new podcasts. If you want to see a list of the episodes you can go to iTunes or you can go to That will give you a list of all the episodes. While you are on the site, if you would like to book a consultation with one of our advisors you can click a link at the top of the page and schedule an appointment. We would love to hear from you at any time.

Reese Harper: Carry on!

Investing, Advisors

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