Non-custody solutions may be on the rise, especially among high-net-worth (HNW) individuals, but there is a distinct divide in advisers’ understanding and knowledge of the products.
Research by platform Praemium and research house CoreData has explored whether non-custodial solutions are being used by advisers and for what reasons.
However, it demonstrated a clear divide between those who understand the assets – primarily those who deal with HNW clients with over $6 million in assets – and those who have only limited familiarity.
Almost half (47 per cent) of HNW-focused advisers said they had limited familiarity with non-custody solutions, rising to 55 per cent for advisers who didn’t work with HNW clients.
“This gap highlights a critical area for professional development and client education. This is particularly important given client preference is the top reason why advisers use non-custody,” Praemium said.
A further 66 per cent said they were concerned about the complexity of managing non-custodial solutions which could require multiple processes and reporting. Other challenges reported by advisers included consolidated reporting and performance tracking, more complex fee collection, lack of liquidity and client perception of risk.
However, there was another half of the adviser landscape who were familiar with the solutions for their access to a broader range of alternatives, greater flexibility, lower operating costs, and increased control over client accounts.
Over a third of HNW-focused advisers said they had noticed an increase in the usage of non-custodial assets in the past three years, and 70 per cent said they had clients who held non-custodial holdings in their portfolios.
Direct shares, managed funds and real estate are the most common non-custody investments, but they also offer exposure to private equity, cryptocurrency and alternatives, with 48 per cent of advisers of HNW-focused advisers saying they value the access to alternatives.
Praemium chief strategy officer, Denis Orrock, said: “High-net-worth investors are increasingly demanding bespoke investment strategies, and advisers must respond by building robust non-custodial solutions into their offering.”
Regarding future usage, 50 per cent of HNW-focused advisers expect them to have a growing or essential role in portfolios for their HNW clients over the next three to five years compared to 40 per cent of advisers overall. Some 37 per cent of advisers overall expected them to have a minor role for niche clients with specific risk tolerances or liquidity preferences only compared to 28 per cent of HNW-focused advisers.
