If you’re looking for something new to worry about, imagine how it would impact your firm if the independent custodians were to decide that instead of charging your clients a variety of fees for their services, they would charge you an asset-based fee that would cover everything. The custodial costs would suddenly come out of your pocket.

What would drive such a change? The custodians worry that their favorite customers – the most fiduciary, cost-conscious among us – are also their least profitable customers, and the trend is not encouraging. Most advisors are trading less, and using the least expensive fund classes wherever appropriate, and keeping as little as possible in the 0% interest custodial sweep accounts. They are doing everything they can to squeeze custodial profit margins – which is normal fiduciary behavior.

Meanwhile, the costs of maintaining the custodial trading platforms are going up.

Even some advisors consider the current arrangement to be somewhat un-fiduciary. The custodian is providing the conveniences of a trading and back office platform to the advisor in return for the fees that it is collecting from the advisor’s clients. This is not unlike a soft dollar arrangement: you give us a certain amount of business, we’ll pay for a variety of services that are vital to your firm.

I recently polled my Inside Information readers, asking what they thought of this arrangement, and (not astonishingly) they wanted to know how much money we’re talking about. Michael Kitces, who actually started this discussion (see here: here proposed that the smallest firms would pay 10 basis points on client assets, with the price scaled down to 7, 5 and 3 basis points as the firms brought in more assets and business. In other words, larger firms would be paying a lower percentage fee than smaller ones, and this was a pretty big sticking point, even with some of the larger firms. They didn’t think it was fair to disadvantage their smaller competitors.