Keeping Investor Assets Safe – The Custodian’s Role

By Mark Barnicutt on April 7, 2011

I firmly believe that the accumulation of wealth for most people is primarily driven by the need for comfort, independence and their desire to pursue their goals and aspirations.   This applies equally to both family and institutional wealth such as group retirement plans, foundations & endowments.

As the accumulation of such wealth requires hard work, patience and perseverance, investors should not have to accumulate their wealth twice!   I strongly believe that Financial Advisors operate from a position of trust in which clients seek their advice to help them reach their financial goals.  When this trust is violated, not only has a client been hurt but the wealth management industry – and everyone who works in it – has been tarnished.  The stories of Bernie Madoff’s and Earl Jones’ victims are recent examples — both of which involved outright fraud — but others quietly exist which are not fraud related but professional negligence.  Now, I’m NOT saying that fraud and professional negligence are running rampant in the Canadian wealth management industry – because they are clearly not, despite media perceptions — but like any profession……there are good practitioners and, unfortunately, not so good practitioners.

So what should an investor do to protect their hard earned, accumulated wealth? Investors do not need to be “investment gurus” to protect their wealth BUT they do need to be educated on some basic concepts.  The role of a custodian – the firm that ‘holds the investor’s assets’ – is the foundation of any investment management relationship.

The Custodial Relationship:

I believe that an investor’s best defence against advisor fraud is to NEVER (1) Write a cheque, and/or (2) Transfer their assets to their individual Advisor directly. Specifically, ALL cheques should ONLY be written to, and ALL assets should ONLY be transferred to the client’s own NAMED & NUMBERED account held at a CUSTODIAN that is INDEPENDENT of their individual financial advisor.  A custodian is a financially secure and well-respected financial organization who holds and safeguards an investors assets.  The purpose of a custodial relationship is to separate the “holding and safeguarding” of an investors assets from an individual Advisor so that nobody can get access to the investor’s assets without their consent.  Also key to a true custodial relationship is the “segregation” of the investor’s securities, separate from the custodian’s general corporate assets.

Custodians In Canada:

In the Canadian wealth management industry, there are two broad types of custodians: Trust Companies [regulated by the Federal Government through the Office of The Superintendent of Financial Institutions (OSFI)] and Investment Brokerage Firms [regulated indirectly by the various provincial securities commissions and directly by the Investment Industry Regulatory Organization of Canada (IIROC)].  While Trust Companies tend to provide their services completely independent of any financial advisory firm (ie: Canadian Western Trust, Scotia Trust, CIBC Mellon, RBC Dexia), Investment Brokerage Firms (ie: Richardson GMP, Canaccord, BMO Nesbitt Burns) tend to provide custody as an integral part of their overall investment advisory offering BUT the individual Advisors do not have access to deposit/withdraw assets from an investor’s custody account.

It’s important to note that for clients seeking the complete separation of duties between advice and custody, they should hold their assets at an independent custodian (either a Trust Company and/or Investment Brokerage Firm – subject to certain asset size limitations & securities segregation such as Pinnacle Correspondent Services, NBCN, TD Waterhouse) which is INDEPENDENT of their financial advisor as the division of duties between “custody” and “advice” are always separated.  This service will cost investors (typically 0.1 – 0.25% of their asset values per year on the first $1 MM of assets) but for investors concerned about absolute separation of duties, it’s a small “insurance premium” to pay!  If investors custody their assets at an Investment Brokerage Firm who is also providing the investor with Advice, they should select financially strong advisory firms with sterling reputations.

Custodial Reporting:

One of the key elements of the custodial relationship with the investor is the “asset reporting” service.  Specifically, an investor should ensure that the custodial reporting — which will show each investor’s security holdings and transactions (ie: purchases & sales) — is issued DIRECTLY to the investor (and not through the hands of the individual Advisor) on a regular basis. For all custodians, these assets reports are designed to be an advisor-independent reporting of a client’s assets and transactions.

Mark Barnicutt
See Beyond

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