What Is a Financial Custodian?

Financial Custodians Explained

how a financial custodian works: A financial custodian is a company that holds on to your financial assets on your behalf. The custodian will send you a monthly or quarterly statement for your account. The custodian serves as a broker when you want to buy or sell investments. The custodian makes arrangements for you to receive dividends and files the necessary paperwork to report these to the IRS, if applicable. The custodian tracks stock transactions such as buying and selling, payment and receipt of dividends, and company-specific activities like stock splits or mergers.
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The Balance / Hilary Allison

Definition

A financial custodian is a company that has physical possession of your financial assets. It's often a brokerage, commercial bank, or other type of institution that holds your money and investments for convenience and security.

Definition and Examples of Financial Custodian

Also called bank custodians, financial custodians have physical control over financial accounts, which include checking, savings, money market, 401(k), and more. 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.

A financial custodian may be needed for a variety of reasons. For example, if you will be spending time overseas for work, you may wish to work with a financial custodian to keep your financial affairs in order while you are out of the country.

Other situations that may call for a financial custodian include a minor who has various assets that should be managed by someone other than a parent or a senior with financial assets who needs help managing them. People who have complicated or nuanced financial holdings and don't have the time to manage them all may call upon a financial custodian to do that work for them.

Note

A custodial financial institution may charge you a custodial fee for the safekeeping of your money.

How a Financial Custodian Works

A financial 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 serves as a broker when you want to buy or sell investments. 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, trading your cash for their stock. If you want to sell a stock you own, they will also arrange a transaction to give you the right amount of money 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, as 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.

Alternatives to a Financial Custodian

If you want a share certificate issued of the Walt Disney Company, for example, 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. 

In addition, registered investment advisory firms that manage assets on behalf of clients typically use a custodian to hold the client assets—they're not the custodians themselves. For example, an independent investment firm uses Charles Schwab as the custodian for client assets. The 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.

Key Takeaways

  • In financial services, a custodian is a company that has physical possession of your financial assets.
  • It's often a brokerage, commercial bank, or other type of institution that holds your money and investments for convenience and security. 
  • When you make deposits, your checks are made payable and deposited directly to your custodian with reference to your account number.
  • The custodian also serves as a broker when you want to buy or sell investments.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Office of the Comptroller of the Currency. "What is a bank custodian? What services do they provide?" Accessed July 4, 2021.

  2. U.S. Securities and Exchange Commission. "Holding Your Securities." Accessed July 4, 2021.

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