Custody Services: What They Cover and How They Work?

Custodian services are usually provided by a large and reputable firm, such as a bank, trust company or similar financial institution empowered to safeguard individual and institutional securities from being lost or stolen.

Cash, stocks, bonds, electronic or physical assets are all forms of securities owned by clients and entrusted to custodians to hold on their behalf. Investment advisers and asset managers frequently use custodian banks in order to protect their clients' holdings, collateral and other assets.

A custodian may also serve the responsibility of managing the assets of the minor child or the incapacitated adult.

Other Services Provided

Many custodian companies provide client related services like account management, payment of dividends and interest, income tax assistance and foreign exchange management. A custodial bank can provide investment services to clients.

Services provided by custodians often include placing orders at brokerage firms to sell securities, transferring funds in and out of their accounts, overseeing investments settlement of transactions, and tax regulation compliance.

Custodial authorities need to prepare the tax support documents required to handle the transactions of investment clients.

Custody services can be adjusted according to asset holdings. Fees are dependent on services provided and usually based on the value of the assets held in account.

Custodian Banks vs. Traditional Banks

This distinction is the most important role for custodians. Custodian banks are responsible for the protection of individual and institutional client assets. They can even provide client services related to these basic roles. However, they may also offer financial instruments similar to a traditional bank.

A traditional bank is a similar financial institution responsible for providing banking services that are primarily taking deposits for the clients and also lending to those clients.

Traditional bank products include checking and savings accounts, money market accounts, certificates of deposit, personal and auto loans, and mortgages. Bank clients should understand these services and their products offered.

Traditional banks may offer custody services as well, and function as a custodian bank.

Custodian Banks vs. Mutual Fund Custodians

Custodian banks are required to protect financial assets of individual and institution accounts in a financial institution. It can offer more related services, securities lending, alternative investments and financial instruments when required.

Mutual fund custodians are third parties who provide security to mutual funds investing in their securities. The trustee is typically the custodian bank. Generally, however, mutual fund custodians focus on mutual fund companies' asset types.

Separate management of mutual funds is a must. Should the fund company declare bankruptcy, the mutual fund custodian can return investments to its shareholders.

Mutual fund custodians, aside from protecting financial assets, can also track investors' trades, handle settlements, and make sure money is sent to custodial accounts or to investors or their brokerages.

Any expenses related to share transactions are paid by the mutual fund custodian. They are also responsible for monitoring the companies the fund invests in to assure compliance with US Securities and Exchange Commission (SEC) regulations.

Other Custodian Banking Requirements

When investment advisers manage client funds, they must adhere to SEC regulatory requirements regarding custody.

More specifically, a person or organization must be regarded as a qualified guardian. This restriction includes banks, registered brokers, registered dealers, and certain other individuals or entities.

A client must be notified by the company about a specific account activity being conducted on his behalf. A daily statement of accounts is one of the regulatory requirements.

What Are Some of the Largest Custodian Banks?

The Bank of the USA, or BNY Mellon, is a major custodian banking group in the United States. Some of the most famous global custodian banks overseas include Credit Suisse, and The Bank of China.

What Other Services Do Custodian Banks Offer?

Currently, a governmental custodian does more than protect assets. It also delivers accounting or settlement services such as managing dividend or interest payments or managing share splits.

The custodian bank performs these functions under its customer name ensuring that custodians inform customers about the activities that have been performed by their customers.

The US Security and Exchange Commission also ensures the sending of payments to regular accounts.

Custodians for Minors

In the event that the beneficiary is a minor, an adult custodian will be appointed and granted authority to access and make investment decisions regarding the account assets on behalf of the minor. The custodian may be a responsible individual or an institution, but funds are intended for use only by the named beneficiary at a future date in time.

The designated adult custodian and the minor beneficiary are the only people listed on the account. The custodian retains sole access and authority over the assets until the beneficiary reaches legal age.

The trustee and others may make investments in assets within an account but retain no authority over those funds once they are deposited.

What Purpose Does a Custodian Financial Institution Serve?

Custodian Financial Institutions secures assets owned by individuals and organizations. Since securities must undergo clearing and proper trade settlement, they serve an important purpose ensuring regulatory procedures and proper accounting activities are settled. Investors and traders often do not manage these complex processes.

Why are Custodian Banks Important?

Custodian banks play a vital role by providing asset security services to individuals and financial institutions. Customers who want financial assets safekeeping but are unable to manage the daily oversight of account activities or other transactions can make use of custodian banks. Custodian banks manage assets, ensure compliance data and handling reporting and many offer tax management services as well. 

Are There Custodians Other Than Banks?

Yes, the bank custodian can be a person. Some kinds of businesses, such as law firms or accounting firms, can also be a custodian.

How do custodian banks make money? 

Typically, custodians charge a fee for their services. Most fees are based on the assets under management of the custodian. Commissions, annual or transaction fees may also be charged by custodians. Some ways custodians charge for services includes:

Asset Under Management (AUM) Fees

A percentage of the total value of assets held. This fee is charged for safekeeping, trade execution, and reporting.

Cash Management

Custodians also earn by managing clients’ cash. This can include money market funds or interest earned on cash balances.

Mutual Fund and ETF Servicing Fees

These fees cover the cost of administrative tasks related to these investments.

Transaction Fees

Custodians sometimes charge clients for executing trades, such as buying or selling securities.

What is the difference between custodian bank and a Clearing House?

Clearing houses focus their expertise on settling transactions by acting as intermediaries between broker-dealers and investors. Clearing houses handle the administrative activities related to clearance and execution. Broker-dealers can't clear, so they rely on clearing houses.

Custodians focus their attention on safeguarding the assets of individuals or institutions from being lost or threatened. Custodians hold both physical and electronic forms of assets.

What is the difference between a custodian bank and a Prime Broker?

A prime broker is an institution that handles the placement of trade orders. As such, they are responsible for trade clearing, arranging financing for leveraged trading or buying, and selling assets with borrowed money.

Prime brokers provide advice, track, and record market activity for tax purposes, and maintain records in case of disputes. Some prime brokerages also offer custody services. 

In general, prime brokers are smaller operations, and investors might find it difficult to trust them to safeguard assets.

Custodians keep and protect assets. They are the gatekeepers of your account and with your consent, allow your prime broker access. They manage the flow of money in transactions, transfer electronic entries representing stock certificates, and handle cash, all on the beneficiary's behalf.

They are usually nationally or globally recognized banks or financial institutions, which are closely monitored to prevent errors, fraud and insolvency.

While in the past,stock certificates were stored physically, most custodian services today store entries that represent stock certificates electronically.

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