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What is a Financial Custodian? Thumbnail

What is a Financial Custodian?

Tim breaks down what a financial custodian is and their role in holding client assets. He discusses why his firm chose to partner with Altruist as its primary custodian.

I’ve found that there is often confusion over how and where your assets are actually held when you have an investment account in general, or when you have an account with a registered investment advisor (RIA) firm, like mine.

Here, I will cover what a custodian is, what they do, and why we have chosen to partner with Altruist Financial as our primary custodian.

What is a Financial Custodian? 

A financial custodian is a financial institution that holds customers' securities and/or other assets in electronic or physical form, mostly electronic these days, for convenience and security, in order to minimize the risk of their theft or loss. 

A custodian is sometimes referred to as a "custodian bank." Custodians also send notices to customers when certain activities are conducted on their behalf or their assets are moved in any way. So, if I make a trade or do a rebalance or something similar for a client, they receive a notification. 

Also, account statements are supplied to the customers to keep them informed of the current holdings associated with their assets. And of course, clients can always log into their own accounts to get an overview of what they have.

While my firm, which is an RIA or registered investment advisor, may manage client accounts, we have no direct access to your money! And believe me, I want it that way as much as you do. I don’t ever want to have a misappropriation of funds where there is any possibility the fault could lie with myself or my team. 

Types of Custodians

Some examples of custodians are any of the big banks  like JP Morgan, Citibank, Bank of America, Wells Fargo, and Morgan Stanley. These firms only provide in-house financial advice, meaning that advisors or brokers either work for these firms or they are some type of subcontractor for them. 

There are also custodians like Schwab, TD Ameritrade, Fidelity, Vanguard, Bank of NY Mellon, Pershing, and of course Altruist, which I am going to go into. These firms also have their own advisors, but they also allow RIAs like mine to custody assets with them.

There has been a great deal of consolidation over the years, and just within the past few years, Schwab purchased TD Ameritrade, and Morgan Stanley purchased E*TRADE.

My firm used to use a couple of the old-school custodians, but we now use a newer custodian called Altruist. It was specifically built for RIA firms, like mine.

What Else Does a Custodian Do?

Most of these custodians have some powerful tools for advisors, but advisors often have to source other software for rebalancing portfolios, client billing, aggregating, etc.

These other services can add great costs to an RIA. Plus, many of the tools offered by these older custodians use software that has been built on top of older software, causing it to be less than intuitive and often clunky and sometimes a straight-up pain in the… you know.

Altruist has combined much of this software into one, seamless platform while also making the client and advisor user experience much more pleasant and certainly more efficient.

One of the main goals for Altruist is to “Empower RIAs to drive better client outcomes.” We have certainly found this to be true!

A fundamental goal of ours is to deliver an exceptional client experience. To achieve this, we have chosen to work with Altruist because they enable us to do our best work for our clients.

Introduction to Altruist

Altruist stands out as a cutting-edge custodian, offering state-of-the-art financial technology. Their platform enhances our efficiency and lowers expenses, empowering us to offer our clients a higher level of service. 

Also very important, Altruist provides an experience our clients find intuitive and user-friendly. One advantage of owning an independent RIA is I can choose the best technology out there, and we are not stuck on whatever platform those old, large firms might be using.

It’s also important to note that most custodians are insured the same. And Altruist is no different. As a member of the Securities Investor Protection Corporation (SIPC), securities held in your brokerage account are protected up to $500,000 (including $250,000 for cash).

Custodians all typically have an additional policy with Lloyd’s of London, which extends the per-account coverage by an additional $40 million (with a cash sub-limit of $2 million), subject to an aggregate limit of $150 million across accounts.

However, if you own stocks, bonds, ETFs, mutual funds, or any other investments, then you actually have ownership in that asset. So, if something crazy were to happen to the custodian, your money would be fine.

Bottom Line

Altruist has more than met our expectations for us, at the firm level, and for our clients, and their customer service has been far superior to what we’ve experienced in the past. 

Thanks to Altruist's cutting edge technology, enhancing efficiency and lowering costs, we are empowered to offer higher service levels to clients through an intuitive platform. 

Now that I’ve covered what a financial custodian is and does, in the next video I will explain why it is important to make sure there is a separation between your advisor and your custodian. Have you ever heard of Bernie Madoff?

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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