A custodian bank is a financial institution dedicated to holding its clients’ securities for safekeeping, ensuring they are neither stolen nor lost. These institutions can store assets such as stocks, bonds, or other securities either electronically or physically on behalf of their customers.
Often, custodian banks do more than just protect assets. They manage customers’ accounts and transactions, oversee settlement of financial transactions, account for the status of assets, and ensure compliance with tax regulations.
Key Highlights
- Custodian banks provide asset protection and minimize the risk of theft or loss.
- Investment advisors are required to utilize custodians for the assets they manage for their clients.
- Assets may be stored in physical or electronic form.
- Custodian banks offer additional services such as financial account management, settlement handling, and compliance and tax services.
- These institutions can also serve as mutual fund custodians.
How Custodian Banks Operate
Given their responsibility for assets and securities worth many millions or billions of dollars, custodians are typically large and reputable firms, often banks. Investment advisory firms regularly use custodian banks to safeguard the assets they manage for their clients.
Custodians can also be appointed to manage the assets of minor children or incapacitated adults.
Ancillary Services Provided
Most custodians offer services including account administration, settlement of transactions, distribution and collection of dividends and interest payments, tax support, and foreign exchange management.
Custodian banks may also handle investment activities for customers, such as placing orders to buy or sell securities, transferring funds, overseeing investment account activities, and reporting account activity to customers. Tax filings related to investment activities are also managed by custodians.
The fees for their services can vary based on what they provide and can be tied to the value of the assets held.
A custodian bank might also have the authority to take possession of assets if required, usually through a power of attorney. This enables actions on behalf of a client like making payments or altering investments.
Custodian Banks vs. Traditional Banks
The primary distinction between custodian banks and traditional banks lies in their roles.
Custodian banks primarily focus on safeguarding financial assets for individuals or institutions. They don’t generally offer typical retail banking services.
On the other hand, traditional banks take deposits and extend loans. Services they offer include checking and savings accounts, certificates of deposit (CDs), money market accounts, personal loans, car loans, and mortgage loans.
However, traditional banks may also offer custody services and function as custodian banks.
Custodian Banks vs. Mutual Fund Custodians
While custodian banks safeguard individual and institutional financial assets, mutual fund custodians specifically protect the securities in which mutual funds invest. Mutual fund custodians, often custodian banks, focus on mutual fund company assets.
The separation between a mutual fund and its custodian is crucial for asset protection in the event of fund management bankruptcy. Mutual fund custodians ensure the fund’s assets are returned to shareholders if needed.
Custodian Banks in Special Cases
When investment advisors manage customer funds, they must adhere to the custody rules outlined by the U.S. Securities and Exchange Commission (SEC), which require using a qualified custodian like banks or registered brokers. Notices and regular account statements must be provided to customers.
Custodians for Minors
For accounts benefiting minors, a designated adult custodian, instead of an institution, handles the account until the minor reaches adulthood.
Purpose and Importance of Custodian Banks
Custodian financial institutions play an essential role by safeguarding securities and ensuring they are properly cleared and settled according to regulatory procedures. Custodian banks help investors manage complex and time-consuming investment activities.
Major Custodian Banks
Some of the largest custodian banks include Bank of New York (BNY) Mellon, JPMorgan Chase, State Street, and Citigroup. Major international custodian banks include Credit Suisse and UBS (Switzerland), Deutsche Bank (Germany), Barclays (England), and BNP Paribas (France).
Why Custodian Banks Matter
Custodian banks offer necessary security services for both individuals and institutions. They are invaluable for those who prefer not to manage daily investment transactions or lack the expertise. Additionally, they ensure compliance with regulations and provide tax management.
Beyond Traditional Custodian Banks
Custodians can also be individuals or firms, such as law or accounting firms.
The Bottom Line
Custodian banks play a critical role in protecting financial assets for individuals and institutions. Besides asset protection, they offer a range of related services, including account administration, transaction settlements, dividend distribution, tax support, and more. They are key players in managing financial accounts for minors and adults who may be unable to do so themselves.
Related Terms: investment advisor, mutual fund custodian, traditional bank, qualified custodian.
References
- U.S. Securities and Exchange Commission. “Custody of Funds or Securities of Clients by Investment Advisers”.
- HelpWithMyBank.Gov. “What Is a Bank Custodian? What Services Do They Provide?”
- U.S. Securities and Exchange Commission. “Division of Investment Management: Report on Mutual Fund Fees and Expenses”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: Custody of Your Investment Assets”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: Custody of Your Investment Assets”.
- J.P. Morgan. “Custody Services”.
- Fidelity. “Custodial Account”.
