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 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 1custodian banks vs traditional banksthe difference between custodian banks and traditional banks is their primary roles custodian banks are responsible for above all the safekeeping of financial assets belonging to individuals or institutions 2 they may also offer services related to that primary role however they don t offer the same types of services provided by traditional banks traditional banks are financial institutions with the primary role of taking and holding 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 therefore function as a custodian bank as well custodian banks vs mutual fund custodiansa custodian bank takes on the responsibility of safeguarding the financial assets of individuals and institutions 2 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 3the mutual fund custodian must also maintain transaction records and report activities to the sec as required 4other custodian banking casesin cases where investment advisors are responsible for customer funds the advisor must follow custody rules set forth by the sec 1in 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 1notices must be provided to customers when certain activities are conducted on their behalf regular account statements must also be provided to the customers 5jpmorgan chase co is one of the oldest banking institutions and one of the largest custodian banks in the u s 6custodians for minorsif 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 by a certain age 7each account can have only one beneficiary the minor accountholder 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 