A financial custodian may be needed for a variety of reasons. For example, if you will be spending time overseas for work, you may wish to work with a financial custodian to keep your financial affairs in order while you are out of the country. Other situations that may call for a financial custodian include a minor who has various assets that should be managed by someone other than a parent or a senior with financial assets who needs help managing them. People who have complicated or nuanced financial holdings and don’t have the time to manage them all may call upon a financial custodian to do that work for them.
How a Financial Custodian Works
A financial custodian will send you a monthly or quarterly statement for your account letting you know what they are holding on your behalf. In addition to holding onto your money and investments and sending you an account statement, the custodian serves as a broker when you want to buy or sell investments. In an electronic market-based system, the buyer and seller never meet. Therefore, the custodian has the important job of making sure your money goes to the right person, and vice versa. When they take your instructions to buy something, the custodian will make arrangements for finding another custodian with a suitable seller of the stock you want to buy, trading your cash for their stock. If you want to sell a stock you own, they will also arrange a transaction to give you the right amount of money for the sale. If you own a stock, and it has announced a dividend, you need to make sure you actually receive it. A custodian will make arrangements for you to receive your dividend and will file all the necessary paperwork for you to report these dividends to the IRS, if applicable. Imagine the many stock transactions that occur during a calendar year. These activities of buying and selling add up, as the payment and receipt of dividends, as well as company-specific activities like stock splits or mergers. A custodian tracks all of this on your behalf.
Alternatives to a Financial Custodian
If you want a share certificate issued of the Walt Disney Company, for example, you would order a physical certificate (for a fee) in your name, and whoever has physical possession of this certificate is now the custodian. Once the stock certificate is issued, the financial institution is no longer the custodian and no longer has responsibility for tracking the ownership and transactions of the investment. In addition, registered investment advisory firms that manage assets on behalf of clients typically use a custodian to hold the client assets—they’re not the custodians themselves. For example, an independent investment firm uses Charles Schwab as the custodian for client assets. The firm directs the investments but does not have “custody,” or possession, of a client’s money. It is Schwab that actually has custody of the assets.
