Custodian

What Is a Custodian?

A custodian is a financial institution, typically a bank, trust company, or broker-dealer, that holds and protects securities and cash on behalf of an investor. The custodian keeps records of what each client owns and carries out the administrative work that comes with owning those assets. Custody is usually kept separate from investment decisions, which are made by the investor or an investment manager.

How Custody Works

When a trade is made, the custodian is typically the party that receives the securities or payment, completes settlement, and updates the client's holdings. It also collects dividends and interest, processes corporate action notices such as stock splits, mergers, and rights offerings, and passes along proxy materials and tax information.

Client assets are generally recorded separately from the custodian's own assets. This segregation is meant to keep those holdings identifiable if the custodian runs into financial trouble. The level of protection depends on the country and the legal structure used.

Individual investors often rely on a brokerage firm, which acts as custodian for their account. Institutions such as pension funds, insurers, mutual funds, and endowments usually use a separate custodian bank. Investors with holdings in several countries may use a global custodian, which works through a sub-custodian in each market, since rules, settlement cycles, and tax treatment differ from one market to another.

Why It Matters to Investors

Where assets are held is a risk question as well as an operational one. Custody arrangements can reduce the risk of losing assets because of problems at an investment manager, but they do not remove counterparty risk entirely, and they do not protect against declines in market value.

Investors can learn who their custodian is, how client assets are segregated, and what protections apply under the rules in their jurisdiction. Terms vary, so reading a custodian's disclosure documents is a useful habit.