# Custodian: What It Means in Banking and Finance

> **Definition**
>
> A custodian maintains assets for safekeeping and provides various other securities-related services.

## What Is a Custodian?

A custodian is a bank or other financial institution that holds and safeguards customers' securities to prevent theft, loss, or damage.

Custodian banks may store assets such as stocks, bonds, or other securities, either physically or electronically.

These banks are crucial in ensuring the protection of financial assets and are often used by investment advisors to manage the assets of their clients.

### Key Takeaways

*   A custodian bank holds financial assets for safekeeping to minimize the risk of theft or loss.
*   Investment advisors are required to arrange for a custodian for assets that they manage for their clients.
*   These assets may be stored in physical or electronic form.
*   Custodian banks can also manage financial accounts, handle settlements, and deal with compliance and tax issues.
*   Custodian banks can serve as mutual fund custodians.

![Custodian](https://www.investopedia.com/thmb/LvRG3hK-php_RfehGqyMXG4EtV0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/custodian-v1-f4a5b18c072541fa92244c05e8352fd5.png)

*Customers include investment managers, mutual funds, insurance companies, corporations, private bankers, and more. — Investopedia / Lara Antal*

## How a Custodian Bank Works

Custodian banks are typically large and reputable firms, often banks, responsible for managing assets worth hundreds of millions or even billions of dollars.

[Investment advisory firms](https://www.investopedia.com/terms/r/ria.asp) use these institutions to protect client assets and perform a variety of related services.

### Services in Addition to Safekeeping Assets

In addition to safekeeping assets, a custodian bank may also handle other tasks:

*   They may settle transactions and ensure regulatory compliance.
*   They may provide accounting services, report on assets' status, and facilitate compliance with [tax laws](https://www.investopedia.com/tax-laws-4689794).
*   A custodian also may be appointed to maintain control of the assets of a minor child or an incapacitated adult and manage them on their behalf.
*   Most custodians offer related services such as account administration, collecting and distributing [dividends](https://www.investopedia.com/terms/d/dividend.asp) and interest payments, and foreign exchange management.
*   A custodian bank may handle customers' investment activities. This could involve placing orders with a [brokerage](https://www.investopedia.com/terms/b/brokerage-company.asp) to buy or sell securities, transferring funds to and from accounts, and reporting account activity to customers.
*   Custodians may also provide tax support and prepare the necessary tax filings related to customers' investment activities.

The fees for their services depend on exactly what they provide and can be based on the value of assets held.  

> **Important**
>
> A custodian bank may have the right to take possession of assets if required, often in conjunction with a power of attorney. This allows the custodian bank to perform actions on behalf of a client, such as making payments or altering investments.

## Custodian Banks vs. Traditional Banks

The difference between custodian banks and traditional banks is their primary roles.

Custodian banks are responsible for, above all, the safekeeping of financial [assets](https://www.investopedia.com/terms/a/asset.asp) belonging to individuals or institutions.

They may also offer services related to that primary role. However, they don't offer the same types of services provided by traditional banks.

Traditional banks are financial institutions whose primary role is to hold deposits for customers and extend loans to them. Bank customers should be familiar with these activities and the products that banks offer them.

These products include checking and savings accounts, [certificate of deposit accounts (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), money market accounts, personal loans, car loans, and mortgage loans. All are related to a bank's primary role.

Traditional banks may offer other related and beneficial services, such as check cashing, credit cards, investment services, and business banking. They may also offer custody services and, therefore, function as custodians.

## Custodian Banks vs. Mutual Fund Custodians

As noted above, a custodian bank safeguards the financial assets of individuals and institutions. It may provide additional, related services, as needed.

Mutual fund custodians are third-party institutions that protect the securities in which mutual funds invest. A mutual fund custodian [is often a custodian bank](https://www.investopedia.com/ask/answers/052715/what-difference-between-custodian-bank-and-mutual-fund-custodian.asp), but mutual fund custodians are focused on mutual fund company assets.

The separation between mutual fund and mutual fund custodian is important. Should a fund's management declare [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp), the mutual fund custodian, which has maintained control over the fund's assets, will return investments to the shareholders.

In addition to safeguarding the assets, mutual fund custodians can handle settlements, track investors' transactions, and ensure that money is deposited in the custodial account or sent to investors (or their brokerages).

The mutual fund custodian also pays fund expenses related to share transactions and monitors the companies in which the fund invests to ensure that the mutual fund companies are in compliance with U.S. [Securities and Exchange Commission (SEC)](https://www.investopedia.com/articles/investing/112914/understanding-sec.asp) regulations.

The mutual fund custodian must also maintain transaction records and report activities to the SEC, as required.  

## Other Custodian Banking Cases

In cases where investment advisors are responsible for customer funds, the advisor must follow custody rules set forth by the SEC.

In particular, the person or entity must be considered a qualified custodian. That limits the field to banks, registered brokers, registered dealers, and certain other individuals or entities.

Notices must be provided to customers when certain activities are conducted on their behalf. Regular account statements must also be provided to the customers.

### Note

JPMorgan Chase & Co. is one of the oldest banking institutions and one of the largest custodian banks in the U.S.

## Custodians for Minors

If an account beneficiary is a minor, a custodian is often required (i.e., a [custodial account](https://www.investopedia.com/terms/c/custodialaccount.asp)). In such cases, the custodian may be a responsible individual rather than an institution.

The custodian has the authority to make investment decisions regarding the assets in the account, but the funds are ultimately intended for use only by the named [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) by a certain age.

Such custodial accounts can have only one beneficiary, the minor accountholder, and one custodian, a designated adult representative. The custodian remains in place until the beneficiary reaches adulthood.

Other people can contribute to a minor's account, but they have no authority over how the funds are managed once they are deposited.

## What Purpose Does a Custodian Serve?

A custodian financial institution keeps the securities owned by individuals and organizations safe. It may also offer other services, such as clearing and settling transactions, and meeting various regulatory and accounting procedures. These activities are often far too complex or time-consuming for investors or traders.

## What Other Services Do Custodian Banks Offer?

Custodians today do more than maintain the security of assets. They also provide accounting and settlement services, manage [dividends](https://www.investopedia.com/terms/d/dividend.asp) or interest that has been distributed to the account, and manage stock splits. The custodian bank performs such actions in the client's name, and the SEC ensures that custodians will notify customers when certain activities are conducted on their behalf in addition to sending regular account statements.

## What Are Some of the Largest Custodian Banks?

Bank of New York (BNY) Mellon, JPMorgan Chase, State Street, and Citigroup are among the largest custodian banks in the U.S. Some of the best-known custodian banks overseas include the Bank of China, UBS (Switzerland), Deutsche Bank (Germany), Barclays (England), and BNP Paribas (France).

## Why Are Custodian Banks Important?

Custodian banks are important because both individuals and institutions need the security services they offer. They can be of valuable assistance to holders of financial accounts and assets who don't want to (or can't) participate in the day-to-day management of their accounts' transactions and other securities activities. Custodian banks can also manage assets, handle reporting, ensure compliance with regulations, and address tax management goals.

## Are There Custodians Other Than Banks?

Yes, while banks are the most common type of custodian, other institutions, such as law firms or accounting firms, can also act as custodians for certain assets. Individuals can also serve as custodians for minors' custodial accounts.

## The Bottom Line

Custodians play an important role in protecting the financial assets owned by individuals and institutions. They also handle a variety of other crucial, securities-related activities.

Custodians can be appointed to aid in the oversight and management of financial accounts held by minors and adults unable to care for their affairs due to age, illness, or physical debilitation.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Custody of Funds or Securities of Clients by Investment Advisers](https://www.sec.gov/rules/final/ia-2176.htm)."
>     
> 2.  HelpWithMyBank.Gov. "[What Is a Bank Custodian? What Services Do They Provide?](https://www.helpwithmybank.gov/help-topics/investments-trusts/bank-custodians/bank-custodians.html)"
>     
> 3.  U.S. Securities and Exchange Commission. "[Division of Investment Management: Report on Mutual Fund Fees and Expenses](https://www.sec.gov/news/studies/feestudy.htm)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Custody of Your Investment Assets](https://www.sec.gov/investor/alerts/bulletincustody)."
>     
> 5.  J.P. Morgan. "[Custody Services](https://privatebank.jpmorgan.com/nam/en/services/portfolio-management/custody-services)."
>     
> 6.  Fidelity. "[Custodial Account](https://www.fidelity.com/open-account/custodial-account)."