Custody normally means the protective care of someone or something. In the financial world, custody is a service offered by a brokerage house or other financial organization to hold securities on a client’s behalf. The goal is to reduce the risk of the client losing their assets or having them stolen.
How Does Custody Work?
For a fee determined at the time of the request, a financial institution can collect the dividends, interest, and other proceeds from the sale of securities. This would be something like a series of stocks. The brokerage firm or other organization would then distribute that revenue to the customer per their instructions.
In simpler terms, custody is related to the way regular banks handle the distribution of funds. They are assigned the tasks of maintaining monies through deposits or withdrawals. Interest is calculated and added to a savings or checking account instead of being released.
However, assets in custody are not fungible. In other words, they aren’t interchangeable like cash. The reason is the securities these financial organizations hold are in the name of the user.
Not Used for Other Assets
Custody is simply for securities. These firms don’t hold any other investment assets like antiques or personal possessions. Those are still handled by banks that work with safe deposit boxes.
Securities aren’t protected like cash by the Federal Deposit Insurance Corporation (FDIC). Should a stock certificate or similar item be destroyed or stolen, the brokerage firm or financial institution works with the distributors to come up with a solution. Normally, they work to track the certificates and block them from the sale.