What Is a Custodian?
A custodian or custodian bank is a financial institution that holds customers' securities for safekeeping to prevent them from being stolen or lost. The custodian may hold stocks or other assets in electronic or physical form on behalf of their customers.
- A custodian is a bank that holds financial assets for safekeeping to minimize the risk of theft or loss.
- Investment advisors are required to arrange for a custodian for assets they manage for their clients.
- In modern times, these assets may be stored in physical or electronic form.
Since they are responsible for the safety of assets and securities worth hundreds of millions or even billions of dollars, custodians tend to be large and reputable firms. In another sense of the word, a custodian may be appointed to manage the assets of a minor child. Investment advisory firms routinely use custodians to safeguard the assets they manage for their clients.
Most custodians offer related services such as account administration, transaction settlements, collection of dividends and interest payments, tax support, and foreign exchange management. The fees charged by custodians vary depending on the services that the client needs. These firms often charge quarterly custody fees based on the aggregate value of the holdings.
A custodian may have the right to assert possession of the assets if required, often in conjunction with a power of attorney. This allows the custodian to perform actions in the client's name, such as making payments or altering investments.
In the U.S., some of the largest custodian banks include Bank of New York Mellon, JPMorgan Chase, State Street Bank and Trust Co., and Citigroup. Abroad, some of the best-known custodians are Bank of China, Credit Suisse and UBS (Switzerland), Deutsche Bank (Germany), Barclays (England), and BNP Paribas (France).
In cases where investment advisors are responsible for customer funds, the advisor must follow custody rules set forth by the U.S. Securities and Exchange Commission (SEC). In particular, the person or entity must be considered a qualified custodian. That limits the field to banks, registered brokers, registered dealers, and certain other individuals or entities. Notices must be supplied to customers when certain activities are conducted on their behalf. Regular account statements must be supplied to the customers.
A custodian may be appointed to manage a minor's assets. In this case, the custodian could make active investing decisions.
Custodians for Minors
If an account beneficiary is a minor, a custodian is often required (i.e., a custodial account). In such cases, the custodian may be a responsible individual rather than an institution. The custodian has the authority to make investment decisions regarding the assets in the account, but the funds are ultimately intended for use only by the named beneficiary.
Each account can have only one beneficiary, the minor account holder, and one custodian, a designated adult representative. The custodian remains in place until the beneficiary reaches adulthood.
Other people can contribute to a minor's account, but they have no authority over how the funds are managed once they are deposited.
What Purpose Does a Custodian Financial Institution Serve?
A custodian financial institution keeps the securities owned by individuals and organizations safe. This serves an important purpose since financial securities must be cleared and settled properly, with various regulatory and accounting procedures met. These are often far too complex or time consuming for investors or traders.
What Other Services Do Custodians Offer?
Custodians today do more than safekeeping assets. They also provide accounting and settlement services, such as managing dividends or interest that has been distributed to the account or managing stock splits. The custodian performs such actions in the client's name, and the SEC ensures that custodians will notify customers when certain activities are conducted on their behalf in addition to sending regular account statements.
What Are Some of the Largest Custodian Banks?
Bank of New York (BNY) Mellon, JPMorgan Chase, State Street, and Citigroup are among the largest custodians in the U.S. Some of the best-known custodians overseas include the Bank of China, Credit Suisse and UBS (Switzerland), Deutsche Bank (Germany), Barclays (England), and BNP Paribas (France).