Both banks and brokers can act as a custodian, but different rules and standards apply to how assets are held. Sophisticated investors rely on banks for safe custody and broker-dealers for trade execution.
- Banks: Assets held in nominee name
- Assets held in nominee name don’t require insurance because they aren’t leveraged by or comingled with the assets of the underlying financial institution.
- Your securities aren’t included in the bank’s balance sheet.
- Brokers: Assets held in street name
- Regulations require broker-dealers to be insured by the Securities Investor Protection Corporation (SIPC) for assets held in street name. (The SIPC was created specifically to protect investors from the endemic risks of using broker-dealers to custody assets.)
- Your assets may be comingled with and held in the name of the broker-dealer as an asset included on the company balance sheet.
- Securities are often lent to other financial institutions or short sellers.
Freedom and flexibility
When you choose to use a broker-dealer for custody, they’ll almost always require you to use them for trade execution as well. Banks typically offer custody as a stand-alone product, which means more freedom to choose products and providers.
- Agility is one of the key benefits to separating trade execution from custody. You (or your advisor) are welcome to trade with any broker-dealer you’d like, and all trades are settled into your custody account free of charge. You’ll benefit from your advisor’s flexibility to do the following:
- Execute block trades that settle into multiple custody accounts, eliminating countless transaction fees
- Utilize multiple broker-dealers to find the best execution on every trade
- Create a broker-dealer network of strategic partnerships to maximize the soft-dollar benefits of trading.
- The investing world is moving toward more alternative investments and securities that aren’t traded on an exchange. Broker-dealers, because of their connection to the exchanges, are generally less willing to hold alternative assets. And when they do, it’s usually with one or both of the following caveats:
- They’ll charge a higher fee.
- They’ll require investors to submit their alternative asset for approval on the platform – a tedious, time-consuming process.
- At U.S. Bank, we take pride in our ability to hold almost any asset type and to charge, generally speaking, the same rate for alternative assets as for exchange-traded holdings.
Whether you’re currently weighing your custody options or looking for additional products and solutions, you’ll benefit from our broad resources, our deep expertise and our expansive service capabilities. Our team of professionals is here to help, so contact us today.
To learn more about the custody services we offer at U.S. Bank, contact us or visit our website.