Custodian: Definition & Meaning

KEY TAKEAWAYS

• Banks that maintain financial assets for safekeeping to reduce the risk of theft or loss are known as custodians.
• Assets that investment advisors manage for their clients must have a custodian set up for them.
• These assets can be kept in either physical or digital form in the modern day.

What Is a Custodian?

A custodian is a financial organization that stores customer securities in a safe location to guard against theft or loss. On behalf of their clients, the custodian may hold stocks or other assets in physical or electronic form.

A custodian is otherwise known as a custodian bank. 

What Is a Financial Custodian?

An organization serving as a custodian of its clients’ securities is known as a financial custodian. As a result, it is accountable for both the physical and electronic storage of such securities. And the settlement of the related transactions.

The securities that individuals and corporations own are safeguarded by a custodian financial institution. Financial securities must be cleared and settled correctly. And numerous regulatory and accounting procedures are followed, and this serves a vital purpose. Investors or traders frequently find them to be far too difficult or time-consuming.

Example of Financial Custodian

A bank may serve as a custodian for a customer’s investment activities by transferring money into brokerage accounts. Or by looking into potential investment targets like funds and companies, ordering brokers to buy or sell securities. As well as keeping an eye on the account’s investment activities, and informing the account owner of account activity. 

Based on the actions in the account, the custodian may also prepare the required tax filings on behalf of the owner.

How a Financial Custodian Works

Custodians may be chosen to maintain custody of a minor’s or an incapable adult’s assets. The custodian of a minor’s accounts may be an adult with legal standing. Giving money to a kid, for instance, at a time when their tax rate is lowest, is a typical tax technique. According to the Uniform Transfers to Minors Act (UTMA), an adult or parent opens the account on the minor’s behalf. They act as the account’s custodians, continuing to have full control and power over the custodial account. The custodian gives up control of the account when the minor reaches adulthood.

Banks, law firms, or accountancy firms frequently act as custodians. These firms typically charge extra for their services.

Other Uses of a Financial Custodian

Custodians today perform more tasks than just protecting assets. Additionally, they offer accounting and settlement services. Such as monitoring dispersed dividends or interest or overseeing stock splits.

The SEC stipulates that custodians will notify clients when specific operations are carried out on their behalf. This is in addition to delivering regular account statements. The custodian carries out such actions in the client’s name.

Summary

Custodians are frequently big, well-known companies. This is since they are in charge of safeguarding assets and securities that are worth hundreds of millions or even billions of dollars. 

In a different sense, a custodian may be chosen to look after a child’s assets. Custodians are frequently used by investment advice firms to protect the assets they look after for their clients.