What are custodial vs. non-custodial investments?
If you’ve ever heard the term "custodian" used in association with investing, you may be wondering what exactly this means. In this blog, we take a deep dive into the purpose of a custodian and the difference between custodial and non-custodial investments, as well as some of the potential risks associated with holding investments through a custodian. Keep reading to learn more.
A custodian is an organisation or company that holds securities or investments on behalf of investors for safekeeping purposes. The concept of a custodian is to act as an intermediary and to prevent securities or investments from being stolen or lost. Custodians may hold assets in physical or electronic form.
An example of custodial investment assets would be holding a direct share like Commonwealth Bank of Australia (ASX: CBA) through an investment platform, not a stockbroker.
In these instances, the investment platform may use a custodian to hold the investment on behalf of the investor. As part of this arrangement, it’s important to note the investor is not the legal owner of the investments. The investment platform will then recuperate the cost from their clients in the form of administration or custodian fees.
An investment platform is similar to a broker in which it allows you to transact online to buy, hold and sell securities and managed funds. Platforms can also offer a more diverse range of options including wholesale managed investments, private equity, and term deposits. However, in the case of an investment platform, they in ‘most’ cases use a custodian to hold investments on behalf of clients and may charge administrative fees or custodial fees. There is also an administrative element as part of the platform's service offering.
The increasingly popular investment platforms in Australia include Hub24, Praemium, BT Panorama, NetWealth, Macquarie WRAP. They are often referred to as ‘administrators’ as they charge an administration fee, not a technology or service fee.
The aforementioned investment platforms all have similar arrangements where they may use a custodian to hold investments on behalf of their clients. As such, there are associated fees for this service. To find out if your investment platform is using a custodian, refer to the most recent Product Disclosure Statement (PDS) or their contact for customer support.
Non-custodial investments are where an investor or adviser on their behalf trades or has assets in the name of the investor. Often this occurs directly through a stockbroker like SelfWealth, Bell Potter, or Commsec, for example.
Under this arrangement using Australia as an example, the investor would have a holder identification number (HIN) on the Australian Securities Exchange (ASX) which is known as CHESS. When an investor or adviser executes trades on their behalf, the investor is registered on the ASX’s registry CHESS as the legal and beneficial owner.
In this instance, the investor will receive mail, notification of corporate actions, and statements including dividends or distributions. These types of communications aren’t received by the investor if there is a custodian holding the investments, however. In this case, the custodian would receive these updates and the investment platform would be responsible for informing the investor.
With non-custodial investments, the investments are held in an investor’s name with them as the beneficial owner. This means there’s not an associated third party risk or any administration or custodial fees applicable. The investor or adviser on their behalf can purchase more units or sell units on an exchange at the market price.
Note: For US holdings via an Australian broker there are instances where these are held via a custodian.
According to the article, Brycki’s firm has avoided using custodians for its investors.
"When that company goes belly up, you become a secured creditor and you actually have to chase your investments," he explains.
"So you're not only wearing the risk of the share market, you're risking your money with a counter-party that you're not sure how creditworthy they are."
This isn't just a hypothetical risk. Several major stockbroking and funds management firms have collapsed in Australia over recent years, with their clients often waiting years to access their investments, or what's left of them.
"You may not end up getting all of your money back," Brycki warns.
"So, in some recent cases, it may be somewhere like 80 to 90 cents in the dollar — you may be lucky and get more, but you could also be unlucky and get a lot less."
According to Brycki, that means it's important to know who you're dealing with before you hand over your money.
"If you are investing with a nominee company or a custodian, what's important to uncover is who the custodian really is and is it a trustworthy business."
Read the full article by the ABC here.
If you’re not already using Sharesight, what are you waiting for?
- Track all investments in one place, including stocks, ETFs, mutual/managed funds, property, and even cryptocurrency
- Automatically track dividend and distribution income from stocks, ETFs and mutual/managed funds
- Run powerful reports such as Performance, Portfolio Diversity, Taxable Income, Sold Securities and Multi-Currency Valuation
- Easily share portfolio access with clients (for Sharesight's professional plan, family and friends, an accountant or financial advisor
Disclaimer: The above article is for informational purposes only and does not constitute a product recommendation, or taxation, or financial advice and should not be relied upon as such. Always check with your financial adviser or accountant to obtain the correct advice for your situation.
How InstructAnt improves client service with Sharesight and AdviserLogic
We talk to InstructAnt, a small accounting and financial planning firm that uses the Sharesight/AdviserLogic integration to improve client service.
Australian ETF distribution components now available for FY22/23
Sharesight now has updated ETF distribution component information for the FY22/23 Australian tax year for most Australian ETFs.
Sharesight product updates – September 2023
Major updates for the past month include the rollout of our new exposure report, plus support for five new brokers and over 80,000 Luxembourg funds.