Bank vs. brokerage custody

November 21, 2022

Selecting a custodian to safeguard your securities is an important task. Learn the differences between using a bank and a brokerage firm, and discover which provider best meets your portfolio’s needs.


Bank custody and brokerage custody are both viable options for holding and protecting assets; however, different rules and standards apply to how the assets are held. Selecting a custodian is an important decision, and understanding these differences is a critical step in determining whether bank custody or brokerage custody is more appropriate for your portfolio.

Brokerage custodians

Brokerage custodians are regulated by the SEC, and these regulations are supplemented by the jurisdiction and oversight of various self-regulatory organizations (SROs), such as FINRA or the National Securities Exchange. The rules of SRO membership (Section 15(b)(8) and Rule 15b9-1) require brokerage firms to become a member of an SRO in order to assist the SEC in regulating the firms’ activities.

Brokerage firms typically pool client assets and include them on their balance sheet. This process is commonly referred to as holding assets in “street name.” Investors should note the language in a brokerage firm’s account agreement, assessing any permission for the broker-dealer to lend, pledge or otherwise use customer securities. When assets are held in street name, they are often used for a variety of brokerage activities and are potentially subject to seizure by creditors in the event of the brokerage firm’s insolvency.

This risk of creditor seizure became apparent during the financial crisis of 1968-1970, when hundreds of broker-dealers were forced to merge, sell their business or close their doors. Some of these firms were unable to meet their obligations to clients and declared bankruptcy. In response to the losses investors incurred, Congress passed the Securities Investment Protection Act in 1970, which created the Securities Investor Protection Corporation (SIPC).

SIPC is designed to protect against the loss of cash and most depository eligible securities that are held with a SIPC-member brokerage firm. SIPC covers the first $500,000 of a customer’s portfolio, with a $250,000 limit for cash. Many brokerage firms also provide their clients with additional private insurance known as “excess SIPC.” This extra insurance covers some additional assets after SIPC coverage is exhausted. Coverage limits vary from firm to firm.

In addition to SIPC coverage, brokerage firms must also satisfy the regulatory capital requirements of the SEC’s Net Capital Rule (Rule 15c3-1) in order to remain qualified to offer protection to clients. The Net Capital Rule calculates the brokerage firm’s net worth, adjusted by items such as unrealized profits or losses, illiquid assets and tax liabilities. Brokerage firms must maintain sufficient net capital prior to, during and after purchasing or selling securities. Firms must also file periodic reports, demonstrating their financial and operational condition. The Net Capital Rule’s checks and balances confirm a brokerage firm’s compliance and identify a firm falling below the net capital minimum, which requires liquidation prior to greater loss, formal proceedings and financial assistance from SIPC. Brokerage firms are required to periodically calculate net obligations to customers, and the excess of customer credits must be kept with an insured depository institution, such as a bank. 

Bank custodians

National bank custodians are regulated by the Office of the Comptroller of the Currency (OCC), and their parent bank-holding companies are supervised and examined by the Federal Reserve Board. To ensure compliance with federal consumer financial laws, the Consumer Financial Protection Bureau supervises and examines certain depository institutions as well.

Generally, customer assets held in custody are registered in the bank’s name or the bank’s “nominee” name. Securities held by the bank in custody for customers are kept separate and apart from the bank’s assets, are not included on the bank’s balance sheet, and are not subject to the claims of that bank’s creditors. As such, even upon a bank’s insolvency, custodied securities should be returned to each individual investor.

Cash deposits are not securities, even if they are held in a custody account. Deposits at a bank are not kept separate and apart from the bank’s assets, are reflected on the bank’s balance sheet, and are subject to claims made by the bank’s creditors. Deposits at an FDIC member bank are insured by the Federal Deposit Insurance Corporation, generally up to coverage limits set by law.

Similar to brokerage firms, national bank custodians must also satisfy regulatory capital requirements. Bank regulatory capital is graded against a risk-based standard and a leverage standard, measuring a bank’s financial health. The OCC analyzes a bank’s capital and assigns it a category, determining if the bank is well-capitalized, undercapitalized or adequately capitalized. In assigning a grade, the OCC considers the potential impact that events, expected or unexpected, may have on a bank’s capital or earnings. In addition to the requirements of the OCC, the FDIC sets high standards for minimum capital levels. The FDIC’s standards are intended to strengthen the quality and quantity of bank capital and promote a stronger financial industry, one that is more resilient to economic stress.

A bundled or stand-alone solution?

Brokerage firms often offer custody as part of a broad suite of services, including trade execution, performance reporting, research and margin lending. Bundling these services offers a convenient and comprehensive solution for a client’s safekeeping and investment needs but can be cost-prohibitive. For example, if a client wishes to use their primary broker as their custodian but use a different broker to trade certain securities, their primary broker will often charge a trade-away fee.

Banks, however, typically offer custody as a stand-alone product. Clients forego bundled services for more flexibility to choose the individual products they need and the specific providers they prefer. This flexibility can help clients who use more than one broker-dealer or investment advisor. Bank custodians typically do not charge trade-away fees. Additionally, using a single bank custodian for multiple accounts can save significant costs for advisors' clients. By executing block trades, advisors can instruct the custodian to settle one trade in multiple accounts and only be charged one commission. 

Making an educated decision

Choosing a custodian for your assets in an important decision, and every portfolio has different requirements and objectives. It is important to have knowledge about the various regulations, coverage limits and operational structures of both brokerage firms and banks. Understanding custody from these two perspectives will help you arrive at an informed and prudent decision about where to hold your assets.


At U.S. Bank, our experts have the knowledge and experience to safeguard your assets and offer comprehensive solutions that are tailored to your needs. Contact us to learn more about the custody services we offer.

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