Custodian: What It Means in Banking and Finance


Investopedia / Lara Antal

What Is a Custodian Bank?

A 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, bonds, or other assets in electronic or physical form on behalf of its customers.

Often, a custodian bank does more than provide asset protection. It can manage customers' accounts and transactions, manage the settlement of financial transactions, account for the status of assets, and ensure compliance with tax regulations.

Key Takeaways

  • A custodian bank 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.
  • These assets may be stored in physical or electronic form.
  • Custodian banks can also manage financial accounts, handle settlements, and deal with compliance and tax issues.
  • Custodian banks can serve as mutual fund custodians.


How a Custodian Bank Works

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, such as banks. Investment advisory firms routinely use custodian banks to safeguard the assets they manage for their clients.

A custodian also may be appointed to maintain control of the assets of a minor child or an incapacitated adult and manage them on their behalf.

Other Services Provided

Most custodians offer related services such as account administration, transaction settlements, the collection and distribution of dividends and interest payments, tax support, and foreign exchange management.

A custodian bank may handle investment activities for customers. This could involve placing orders with a brokerage to buy or sell securities, transferring funds to and from accounts, overseeing investment account activities, and reporting account activity to customers.

Custodians may also prepare the necessary tax filings related to investment activities for customers.

The fees for their services depend on exactly what they provide and can be based on the value of assets held.

A custodian bank may have the right to take possession of assets if required, often in conjunction with a power of attorney. This allows the custodian bank to perform actions on behalf of a client, such as making payments or altering investments.

Custodian Banks vs. Traditional Banks

The difference between custodian banks and traditional banks lies in their primary roles.

Custodian banks are concerned above all with the safekeeping of financial assets belonging to individuals or institutions. They may also offer services related to that primary role. However, they don't offer the services provided by traditional banks.

Traditional banks are financial institutions whose primary role is to take and hold deposits for customers and extend loans to them. Bank customers should be familiar with such activities and the products that represent them.

These products can include checking and savings accounts, certificate of deposit accounts (CDs), money market accounts, personal loans, car loans, and mortgage loans. All are related to their primary role.

Traditional banks may offer other related and beneficial services such as check cashing, credit cards, investment services, and business banking.

A traditional bank may also offer custody services and thus function as a custodian bank, as well.

Custodian Banks vs. Mutual Fund Custodians

As mentioned above, a custodian bank takes on the responsibility of safeguarding the financial assets of individuals and institutions. It may provide additional, related services, as needed.

Mutual fund custodians are third party institutions that protect the securities in which mutual funds invest. A mutual fund custodian is often a custodian bank, but mutual fund custodians are focused on mutual fund company assets.

The separation between mutual fund and mutual fund custodian is important. Should a fund's management declare bankruptcy, the mutual fund custodian, which has maintained control over the fund's assets, will return investments to the shareholders.

In addition to safeguarding the assets, mutual fund custodians can handle settlements, track investors' transactions, and ensure that money is deposited in the custodial account or sent to investors (or their brokerages).

The mutual fund custodian also pays fund expenses related to share transactions and monitors the companies in which the fund invests to ensure the mutual fund companies are in compliance with U.S. Securities and Exchange Commission (SEC) regulations.

The mutual fund custodian must also maintain transaction records and report activities to the SEC, as required.

Special Considerations

In cases where investment advisors are responsible for customer funds, the advisor must follow custody rules set forth by the 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 provided to customers when certain activities are conducted on their behalf. Regular account statements must also be provided to the customers.

One of the nation's oldest banking institutions, JPMorgan Chase & Co., is also one of its largest custodian banks.

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 Custodian Banks Offer?

Custodians today do more than maintain the security of 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 bank 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 custodian banks in the U.S. Some of the best-known custodian banks overseas include the Bank of China, Credit Suisse and UBS (Switzerland), Deutsche Bank (Germany), Barclays (England), and BNP Paribas (France).

Why Are Custodian Banks Important?

Custodian banks are important because the security services they offer are needed by both individuals and institutions. They can be of valuable assistance to holders of financial accounts and assets who don't want to (or can't) play a role in the day-to-day management of their accounts' transactions and other activities. Custodian banks also can manage assets, handle reporting, and ensure compliance with regulations. They can also address tax management goals.

Are There Custodians Other Than Banks?

Yes, a custodian can be an individual. Other types of firms, such as a law firm or an accounting firm, can be custodians, as well.

The Bottom Line

Custodian banks play an important role in holding and protecting the financial assets owned by individuals and institutions.

They perform related activities such as account administration, transaction settlements, the collection and distribution of dividends and fixed income interest payments, tax support, and foreign exchange management.

Custodians can also be appointed to aid in the oversight and management of financial accounts held by minors and adults unable to care for their affairs due to age, illness, or physical debilitation.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Investor Bulletin: Custody of Your Investment Assets."

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