Understanding Custodians: How is Your Money Protected?

Published March 16th, 2022

Reading Time: 9 minutes

Zoe | Incentives of IRAs

Written by:

Christy Matzen, CFP®
Director of Financial Planning at Zoe

Understanding Custodians: How is Your Money Protected?

Published March 16, 2022

Reading Time: 9 minutes

Zoe | Incentives of IRAs

Written by:

Christy Matzen, CFP®
Director of Financial Planning at Zoe

This guide to custodians will help you fill the gaps and answer where your investments are held, and how your money is being protected. 

Centuries ago, gold was the only form of payment. Over the years, we’ve (fortunately) seen a drastic evolution from coins, cash, paper checks, and credit cards to entirely digital payment experiences. Now, you can leave your house without a wallet and pay with a simple cellphone tap.

Opening the door to ever-increasing technology means has also meant opening the door to a bit of uncertainty. We don’t really know where our money is. Nowadays, you can’t hold it in your hand like a bar of gold. You see a number on a screen, and you just know you have that amount. 

If you have a savings account with a bank, you know the bank is keeping your money safe. You’ve never doubted that, right? But when talking about investing uncertainty increases. You know your money is invested somewhere, but most people don’t really know where that is. For many investors, understanding where their money is held often feels pretty mysterious. The answer is simple: custodians

Custodians are designed to work as a safe for your investments, protecting your money and giving you the peace of mind you need. This guide to custodians will help you fill the gaps and answer where your investments are held. 

The Custodian, The Investments, The Advisor

The Custodian 

Definitionally, a custodian is a person who has responsibility for or looks after something. When people think of a custodian, a parent or caretaker is typically what comes to mind. , Essentially someone responsible for looking after a child to ensure they are fed, clothed, educated, etc. 

A financial custodian works in a very similar fashion, but instead of basic physical needs, it’s focused on holding and protecting your investments. You may have heard this term before, but let’s review how it really applies to you.  

In addition to just holding onto your money, the custodian has several other responsibilities, such as ensuring the safety of your funds so they’re not lost or stolen. 

Basically, if someone tries to withdraw your money, the custodian will stop them unless they have your permission first. 

The Investments

When you are opening an investment account, you need to put your money with a custodian in order for them to be able to hold and protect it. 

Once your money has been transferred to the custodian, you can start investing it. One thing to keep in mind is that not all custodians can access every investment. If you have a particular investment plan or strategy in mind, it’s worth confirming if the custodian you want to use can access it or not. 

As an investor, you can buy and sell the investments in your account as often as you like. You can also add more money into your account if you want to invest more, and you can even withdraw the money if you want to use it for something else. Transferring funds from your custodian account is pretty easy. At the end of the day, the money is yours and you can decide what to do with it! 

We live in the digital age where money can be transferred electronically, stored electronically, and distributed electronically. Are you familiar with receiving store receipts electronically? Custodians do the same. When you buy or sell an investment, your custodian makes sure you get a receipt for the transaction. These typically come in the form of statements (monthly or quarterly) and also a full year-end summary that you use for your tax reporting (1099).

Why is this crucial? If the custodian is safeguarding your money and facilitating your transactions, it needs to provide full transparency and trust. Statements help you reconcile every movement that has been done in your account and ensure you’re aware of everything. 

The Advisor

What if you as an investor (or aspiring investor), don’t want the responsibility of managing the trades of your investments? This is where a wealth planner walks in. An advisor or wealth planner manages the funds inside your custodian accounts. The good part is, the custodian never lets the money go. It’s still housed there, but the advisor is given permission, by you, to pick and choose what investment vehicles are in your accounts. 

The advisor never gets possession of the money. This way if you want to bring a third party to help you manage your investments, you can still feel that your money is kept safe. 

But with hiring an advisor also comes a catch. You need to find the right one! The best advisors are those who work in your best interest and according to your goals and needs. If your main wealth goal is to save for your kid’s education, your financial strategy will be built around meeting that goal! They will be sure to give you the proper diversification you deserve, offering you the investments that fit your needs the most. 

Advisors may have agreements with specific custodians. If this is the case, you may need to transfer your account to it. Always keeping in mind that the advisor should never take possession of your money.

If you are looking for an advisor, consider working with one who has a custodian that is separate from their firm. This is an extra safeguard against getting caught up in a ponzi scheme (ever heard of Bernie Madoff?).

How Custodians Protect Your Money… In Summary

The finance-y lingo surrounding investments is often tricky to understand. Asking the right questions will help you better understand where your money is, and who is controlling it. 

What’s important for you to take away is that custodians exist, to keep your money safe. Financial advisors direct the money held by your custodian to different investments, but never take possession of it nor can they withdraw the funds without your direction. 

Protection is the main reason why custodians exist, to add a layer of security for investors.

You’ve earned this money, and you want it to grow and be protected. Custodians are just one piece in the investment machine that helps protect you as an investor. 

This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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