By Lee Sherman
When doing your financial planning, it’s a fair bet that you haven’t given much thought to where your assets are kept. For many investors, one federally insured bank is as good as another. But, if like many investors, you’ve lost faith in the financial services industry after the Ponzi schemes perpetrated by Bernie Madoff and Robert Allen Stanford, you may want to take additional steps to protect your investments.
What is a Custodian?
A custodian is a financial institution that holds onto your financial assets in either electronic or physical form for safekeeping so they can’t be stolen, lost, or misused. The role of a custodian is mandated by the US Securities and Exchange Commission (SEC) which requires financial advisors that are registered with the SEC to follow the “custody rule”. Assets under management are required under the rule to be “protected” by a qualified financial advisor custodian. While the term “custodian” sounds like an individual, typically a custodian is a bank or other large financial institution with secure physical premises (like say a safe-deposit box) or bank-level digital security. Familiar names such as Charles Schwab, Fidelity Institutional, and TD Ameritrade are among the financial institutions that can act as custodians. The idea is to prevent the assets from being stolen, lost, or, in a worst case scenario, even misused by the financial advisor. While the majority of financial advisors are trustworthy, this provides an additional level of protection. Your financial advisor is required under the law to arrange for a custodian for all of the assets they manage for their clients.
The Role of the Custodian
While your typically Registered Investment Advisor (RIA) or Investment Advisory Representative (IAR) plays a strategic role, advising you on where, how, and when to invest, it is actually the custodian that performs the day-to-day tactical transactions, under the direction of your advisor. Your custodian is responsible for processing transactions when you buy and sell securities, funds, and ETFs, collecting dividend and interest payments, handling distributions, and preparing monthly statements on the current status of assets under management. To get the most accurate sense of how your money is being invested, compare these statements to the reports provided by your financial advisor.
The fees the custodian collects on behalf of the advisor may include a fee that is a percentage of assets (the percentage varies among financial institutions that act as custodians) and the custodians transaction charges when investments are bought and sold. Some combine these into what is called a “wrap fee”.
Custodians provide necessary oversight but be aware that there are still some kinds of investments including mortgages, real estate equity, and promissory notes that can be made by your financial advisor without the involvement of a custodian.
While custodians act as a kind of gatekeeper between your financial advisor and the regulators, this doesn’t mean that your financial advisor won’t also be looking out for your best interests. In fact, a reputable financial advisor is your best bet when it comes to where to keep your money. Your financial advisor, who is ideally placed to advise you on where to keep your money, can steer you to the highest earning accounts, lowest fees, and other advantages of particular custodians.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.