Learn How a Custodian is Defined In Financial Services

Stock market floor
This is the stock market floor after a day of trading. These traders represent the custodians of your money invested in securities. Douglas Menuez / Getty Images

A custodian is a company that has physical possession of your assets. You deposit money or own investments which are held in their capacity for convenience and security. 

What a Custodian Does

When you make deposits to any type of account, your checks are made payable and deposited directly to your custodian with reference to your account number. Your custodian is responsible for the safe-keeping of your hard earned money.

The 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 also serves as the in-between person when you want to buy or sell something. 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. They will trade your cash for the stock you want to buy. If you want to sell a stock you own, they will also arrange a proper transaction to give you the right amount of money you deserve for the sale. (Note custodians typically charge a transaction fee when you buy or sell an investment.)

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.

So can 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. By using a reputable custodian, you can rely on their expertise to handle the tedious transactions along the way.

When a Company Is not a Custodian

If you want a share certificate issued, for example, of Walt Disney Company, 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.  Registered investment advisory firms that manage assets on behalf of clients typically use a custodian to hold the client assets.

For example, my independent investment firm uses Charles Schwab as the custodian for client assets. My 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. They hold the asset in "book form," meaning it is an electronic entry. To learn more read One Simple Way To Avoid Investment Fraud which explains the four ways custodians help protect your accounts from investment fraud.