Don't Overlook the Role of the Custodian

What is a Custodian?

While much of the focus of fiduciaries is on asset allocation, manager selection and consultant selection, don’t overlook the role of the custodian. A custodian is an institution that provides services including holding, valuing and transferring securities; receiving interest and dividends; and providing notice of corporate actions. These services are most frequently provided by large global custodian banks or through fund companies/brokers. While both types of institutions satisfy the minimum requirement of being a “custodian,” there are differences in client experience and asset security.

A custodian is an institution that provides services including holding, valuing and transferring securities; receiving interest and dividends; and providing notice of corporate actions.

Unless a non-profit has a relatively small amount of assets (i.e., under $25 million) with limited investments in commingled funds (i.e., 1-3 mutual funds), it is highly recommended that the custody bank model be utilized.

Why the Bank Custodian Model Makes Sense.

In contrast, to a broker dealer services, nonprofit organizations can benefit from the bank custodian model due to:

• Centralization of assets: Bank custodians are able to hold all the assets of the trust on their books, allowing for a single client service contact and consolidated reporting, generally leading to a higher degree of administrative efficiency for the non-profit organization.
• Additional asset security: Bank custodians hold assets in the client’s name (“nominee name”), as opposed to the broker/dealers that hold it in their own name (“street name”). Holding assets in a nominee name protects assets from creditors if the financial institution becomes insolvent.
• Elevated quality of reporting and optimized work flow: As the single provider holding all assets, the custody bank provides consolidated reporting along with performance reporting and is the central party for cash movements, trades, standing instructions, etc. The custodian is also the central party to spearhead the settlement of the transactions, as opposed to having multiple mediators.
• Sophistication to comprehensively support numerous and complex investments: The additional complexity of diversifying investments (such as illiquid assets, direct holdings in foreign markets, derivatives, custom unitized investment pools, etc.) requires a different asset servicing structure.

The Aon Custody Consulting Team consists of custody industry veterans that are 100 percent dedicated to custody and investment operations. The team maintains strong relationships with the leading custody banks, and can work with non-profits of different sizes to determine the best custody partner depending on your circumstances.