Global Custody Accounts

Understanding Global Custody Accounts and Fees

A wealthy investor looks into his global custody accounts.

Knowing what a global custody account is and how to use one can help you decide if you should open one. The major providers of custody services can make investing simpler for wealthy people and reduce unease brought on at the thought of lost assets in events outside of their control.

These accounts are for people who have over $500,000 in assets. The main function of these accounts is to serve as safe storage while letting funds be moved in and out as needed for trades or buys.

It helps to know a few details about how securities are traded so that you know what can go wrong. When you know the risks you face, you'll see the plus side of a global custody account if you have enough assets to warrant the extra expense.

How Security Trades Are Made

When you purchase a stock, bond, or other security, your broker makes the trade for you. They handle the paperwork, record the price that is agreed upon, and arrange to exchange cash for the security.

Trades often settle in two business days in the U.S., so by the set deadline, you and your counterpart will complete your portion of the deal. In this case, that would be the exchange of cash for an asset.

Failure to deliver or settle can result in penalties, fees, and regulatory problems. This is often why brokers are the ones making transactions. When you have a broker account, the broker conducts the trade for you so that your buys and trades take place with a small number of problems.

When you look at your account after a trade has been made, you'll see that the money is taken right away and the shares are shown in your account ledger. Still, this isn't actually what happens.

Brokers and banks often work the same when moving capital and assets. You'll see the transactions occur in your brokerage account, but they are not made until the settlement date.

Your online broker is taking your recently bought shares for you and sending your payment to the other party. Your name is not put onto the stock, though. In this instance, your stock is said to be held "in a street name," which is the name of your brokerage.

Most of the cons of investing are taken care of for small investors using brokerage firms. For instance, if yours goes bankrupt and is a member of the Securities Investor Protection Corporation (SIPC), you have little reason to worry. That's because account balances of up to $500,000 ($250,000 for cash) are insured against firm failure.

Still, if you have more than $500,000 in your accounts, you have reason to be concerned. Amounts greater than this are not protected by SIPC insurance. This is where a global custody account can help you.

Global Custody System

The global custody system was set up back in the 1970s after a spate of broker firm failures spooked people and sent shockwaves through the financial community.

For people with a lot more than $500,000, one of these accounts (preferably with a bank trust department) is much safer than traditional accounts or storing your assets with your broker.

The pros to this setup are that all of your assets are held in the same place and you can hire a registered investment advisor. You are able to invest in limited partnerships, and you can hold U.S. Treasury bonds and other valued property without having to worry about the $500,000 insurance limit.

Global custody accounts exist to reduce the risk of institutional failures that can cause people to take big losses when they invest their money.

You can even pay to have all positions registered in your name through the Direct Registration System (DRS). You assign a money market, cash, or another liquidity account to fund all your buys or receive all of your income distributions. Then, you instruct your global custodian to accept any incoming buy or sell orders from pre-approved brokers.

The broker makes any buy or sell orders you tell them to when they believe you will hold up your end of the transaction. Since they no longer hold the securities, they have to check with the custodian to make sure you're going to keep your end of the deal. The custodian then sends the money or receives the assets.

Asset Servicing

After sending the money or getting the asset, the custodian works on other tasks known as "asset servicing." These tasks often include providing asset price history so you can see the value of your holdings over time, making sure your dividend and interest payments are received according to corporate announcements.

You'll also be told about corporate actions such as stock splits, tender offers, or merger proposals, and will have any needed paperwork handled. You'll also be assured that costs charged to your accounts will be tracked.

Depending on the custodian, they may also be tasked with giving snapshots of liquidity, establishing an audit trail to prevent fraud and theft, making securities lending happen, and giving compound annual growth rate figures over time.

Global custody accounts add a few more benefits for people who hold assets outside of the U.S. Cash balances can be tracked and settlements can be handled in many global currencies on many global stock exchanges.

The establishment of a base reporting currency allows you to know the value of your foreign holdings and currency at any given time so you know your buying power in your home country. The global custodian also handles tax treaty issues and finds foreign tax credits you'll need when it's time to file your tax returns with the IRS.

Providers of Custody Accounts and Services

The Bank of New York Mellon, State Street, Fidelity, and Charles Schwab are a few of the major global custody providers in the U.S. In Switzerland, Credit Suisse and Union Bank of Switzerland (UBS) are among the biggest banks offering the service. In Europe, Hong Kong and Shanghai Banking Corporation (HSBC) is a major global custodian.

Costs of Global Custody Accounts

Like investment management services, global custody services are often contracted on a negotiated basis that depends on the level of assets you have and how complex your needs are. Stocks and bonds are level one assets, interest rate or currency swaps are level two assets, and level three assets are mortgage-backed securities or complex derivatives.

Municipal pension funds, for instance, can often get services that charge as little as half of a basis point (0.005%) annually per U.S. stock position, plus a very small fee at the time of the trade. Smaller accounts might charge a yearly fee of a few hundred to a few thousand dollars or a set charge per position plus a few basis points.

For people that have millions of dollars, the costs that come with a global custody account may be worth the ease of having all investments in one place. People with wealth like these accounts because they know they will be less exposed to institutional failure.

No matter how many wealth advisors or brokers you utilize, your money is parked safely in your account. It's your central treasure hoard from which all events related to your money flow.