Custody, or asset custody, refers to a legal agreement in which assets of an individual or a fund are held in trust by another party, such as a bank. The custodian of the account collects all interest and dividends, handles all fees and transactions and takes care of any other mechanical consideration for the assets concerned. This arrangement is common with assets owned by minors as it protects the asset from an uninformed individual.
Who uses Custody Services?
Virtually any party within the financial services industry can use custodian services for assets. Mutual funds, pension funds, and corporate firms are all among common customers for custodial services. Some banks prefer not to be a part of the decision-making as to what stocks are held, others will provide that service as well. It is mostly intended as a safeguard for an asset.
As an example, take Willy’s Banana’s Company of Nassau, Bahamas. Willy has a lot of the proceeds of his prolific banana business invested in the stock market. As Willy has little time on his hands or financial expertise to deal with his securities, he enlists the services of an investment banker at the First Bank of Nassau. The bank draws a written agreement that stipulates how and when they can make changes to the account and agree to handle the payment of transaction fees and distribution of money Willy earns from his stocks. The fees for operation are deducted from Willy’s business bank account and the dividends are deposited without him having to worry about it.
Custody Services for Minors
In many cases, a custodian holds accounts held by minors. This can be in the form of a parent or guardian or a bank or both. If the minor cannot handle the securities they hold, a parent or guardian may handle it for them. Similarly, if the guardian has no financial expertise, they may enlist a bank to safeguard the securities for them. In this case, the guardian of the minor would act as the principal of the custody agreement and the bank would again handle all mechanical considerations for the account.
Advantages of Custody Services
The most obvious advantage of a custodial agreement in accounting is that those who cannot manage their own securities due to either lack of time or expertise have access, not only to advice, but to services where a bank will take care of many of the cumbersome tasks associated with holding a security and, in many cases, prevent their client from making any egregious errors.
- "Investments, 8th Edition"; Zvi Bodie, et al.; 2009
- "Principles of Corporate Finance"; Richard A. Brealey, et al.; 2009
Justin Marpole-Bird began writing for the "Stanford Daily" in 2009. He holds a Bachelor of Arts in economics and international relations from Stanford University and uses his experience as a collegiate and professional athlete to write articles on finance, fitness and sport.