These accounts are for people who have over $500,000 in assets. Their main function is to serve as safe storage while letting funds be moved in and out as needed for trades or buys. It helps to know a few details about how securities are traded so that you know what can go wrong. When you know the risks you face, you’ll see the plus side of a global custody account if you have enough assets to warrant the extra expense.
How Security Trades Are Made
When you purchase a stock, bond, or other security, your broker makes the trade for you. They handle the paperwork, record the price that is agreed upon, and arrange to exchange cash for the security. Trades often settle in two business days in the U.S., so by the set deadline, you and your counterpart will complete your portion of the deal, the exchange of cash for an asset. Failure to deliver or settle can result in penalties, fees, and regulatory problems. That is often why brokers are the ones making transactions. When you have a broker account, the broker conducts the trade for you so that your buys and trades take place with few or no issues. When you look at your account after a trade has been made, you’ll see that the money has been withdrawn right away and that the shares are shown in your account ledger. Still, that isn’t actually what happens. Your online broker is taking your recently bought shares for you and sending your payment to the other party. Your name is not put onto the stock, though. Your stock is said to be held “in a street name,” which is the name of your brokerage. Most of the cons of investing are taken care of for small investors using brokerage firms. For instance, if your brokerage firm goes bankrupt and is a member of the Securities Investor Protection Corporation (SIPC), you have little reason to worry, because account balances of up to $500,000 ($250,000 for cash) are insured against firm failure. If you have more than $500,000 in your accounts, however, you have reason to be concerned. Amounts greater than that are not protected by SIPC insurance. This is where a global custody account can help you.
Global Custody System
The global custody system was set up back in the 1970s after a spate of broker firm failures spooked people and sent shockwaves through the financial community. For people who have a lot more than $500,000, one of these accounts (preferably with a bank trust department) is much safer than traditional accounts or storing your assets with your broker. The advantages to this setup are that all of your assets are held in the same place, and you can hire a registered investment advisor. You can invest in limited partnerships, and you can hold U.S. Treasury bonds and other valued property without having to worry about the $500,000 insurance limit. You can even pay to have all positions registered in your name through the Direct Registration System (DRS). You assign a money market, cash, or another liquidity account to fund all your buys or receive all of your income distributions. Then, you instruct your global custodian to accept any incoming buy or sell orders from pre-approved brokers. The broker makes any buy or sell orders you tell them to when they believe that you will hold up your end of the transaction. Since they no longer hold the securities, they have to check with the custodian to make sure you’re going to keep your end of the deal. The custodian then sends the money or receives the assets.
Asset Servicing
After sending the money or getting the asset, the custodian works on other tasks known as “asset servicing.” These tasks often include providing asset price history so you can see the value of your holdings over time, making sure your dividend and interest payments are received according to corporate announcements. You’ll also be told about corporate actions such as stock splits, tender offers, or merger proposals, and will have any needed paperwork handled. You’ll also be assured that costs charged to your accounts will be tracked. Depending on the custodian, they may also be tasked with giving snapshots of liquidity, establishing an audit trail to prevent fraud and theft, making securities lending happen, and giving compound annual growth rate figures over time. The establishment of a base reporting currency allows you to know the value of your foreign holdings and currency at any given time so you know your buying power in your home country. The global custodian also handles tax treaty issues and finds foreign tax credits you’ll need when it’s time to file your tax returns with the IRS.
Providers of Custody Accounts and Services
The Bank of New York Mellon, State Street, Fidelity, and Charles Schwab are a few of the major global custody providers in the U.S. In Switzerland, Credit Suisse and Union Bank of Switzerland (UBS) are among the biggest banks offering the service. In Europe, Hong Kong and Shanghai Banking Corporation (HSBC) is a major global custodian.
Costs of Global Custody Accounts
Like investment management services, global custody services are often contracted on a negotiated basis that depends on the level of assets you have and how complex your needs are. Stocks and bonds are level-one assets, interest rate or currency swaps are level-two assets, and mortgage-backed securities or complex derivatives are level three assets. Municipal pension funds, for instance, can often get services that charge as little as half of a basis point (0.005%) annually per U.S. stock position, plus a very small fee at the time of the trade. Smaller accounts might charge a yearly fee of a few hundred to a few thousand dollars or a set charge per position plus a few basis points. For people who have millions of dollars, the costs that come with a global custody account may be worth the ease of having all investments in one place. High-net-worth individuals appreciate these accounts, because they know they will be less exposed to institutional failure.
