A custodian is a financial institution that holds customers' securities for safekeeping in order to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form. Since they are responsible for the safety of assets and securities that may be worth hundreds of millions or even billions of dollars, custodians generally tend to be large and reputable firms. A custodian is sometimes referred to as a "custodian bank."
How a Custodian Works
In addition to holding securities for safekeeping, most custodians also offer other services, such as account administration, transaction settlements, the collection of dividends and interest payments, tax support, and foreign exchange. The fees charged by custodians vary, depending on the services that the client desires. Many firms charge quarterly custody fees that are based on the aggregate value of the holdings.
A custodian may also have the right to assert possession over the assets, if required, often in conjunction with a power of attorney. This allows the custodian to perform actions in the client's name, such as making payments or changing investments.
In cases where investment advisors are responsible for customer funds, the advisor must follow custody rules set forth by the Securities and Exchange Commission (SEC). The person or entity must be considered a qualified custodian, often limiting the options to banks, registered brokers, registered dealers, and certain other individuals or entities.
Notices must be supplied to customers when certain activities are conducted on their behalf or using their assets. Further, account statements must be supplied to the customers to keep them abreast of the current holdings associated with their assets.
If an account beneficiary is a minor, a custodian is often required due to the rules and regulations limiting the activities of minors, resulting in the creation of a custodial account. The custodian has the authority to make contributions and investment decisions regarding the assets in the account, but the funds are ultimately intended for use by the named beneficiary.
Each account can only have one beneficiary, the minor account holder, and one custodian, a designated adult representative. The custodian remains in place until he resigns or becomes incapacitated, or the beneficiary reaches the age of legal 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.