Client Question: Role of a Custodian

June 2, 2022

As discussed in a recent article, Windermere (in its role as registered investment advisor) has chosen to use Charles Schwab & Co., Inc. (“Schwab”) as the primary custodian for its clients. A client recently asked me to clarify what the term custodian means – and how they should think about that important role versus the role of Windermere as their advisor

The Oxford definition of custodian is: A person who has responsibility for or looks after something

I tend to think of the custodial role (in a financial context) as a vault – or a security guard

A custodian, as it relates to financial items/investments, is a firm that has the physical possession of your financial accounts and the underlying securities (ie: cash, bonds, stocks, mutual funds, etc). Custodians hold your securities in your individual account(s) and ensure their safekeeping and proper recording, valuation, and recordkeeping. Since the custodian has possession of the securities, they are also the party processing and reconciling transactions impacting the accounts (ex: trades, cash movements, and corporate actions such as dividends and stock splits). They also provide direct reporting to each account holder in the form of trade confirmations, statements, and tax reporting documents.

Where do investment advisors, such as Windermere, fit it? As a Registered Investment Adviser, Windermere offers clients fiduciary advice about investing and other financial matters. As part of those services, the majority of our clients grant us authority (via a limited power of attorney) over their custodial accounts, allowing us to take actions on their behalf. However, all of those actions (again, trades or cash movements) must be processed by the custodian since they are the one with possession of the assets. The data Windermere uses to prepare client reports is all directly obtained from data feeds received from the custodians and will reconcile in full to the information sent by the custodians themselves.

At no point does Windermere have possession of client accounts. They remain in clients’ name and the custodian (Schwab or another custodial firm) is in complete control of their safekeeping.

The custodial relationship received considerable attention during the Bernie Madoff scandal (as he did have custody of the assets and was therefore able to fabricate returns and trades) and since then, added regulations and controls have been put in place to protect investors. These have been great developments and have only served to enhance investor protections.

Rest assured, as a Windermere client, all of your assets are held with custodians and are under their careful and diligent safeguarding. If you are an individual investor or work with another advisory firm, it is a good idea to ensure you too have a trusted custodian in your corner. It is an essential component of any financial team.

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