W E A LT H M A N A G E M E N T
To many people in the financial services industry custodial
services remain a mystery. So, what do custodians do?
What value do they add to the investment chain?
ThE work oF CusTodIANs has been described assets and settle transactions on those assets
as ‘the oil that keeps the great financial engines (e.g. cash, securities) on behalf of their clients,
working – without us the industry would grind to based on the clients’ instructions.
a halt’. 1
Custodians are an integral part of Australia’s Why financial organisations
financial infrastructure and play a critical role in use custodians
administering and safekeeping Australia’s investment Investors use custodians for a number of reasons.
and superannuation sector. Under superannuation legislation and ASIC
licensing requirements, custodial arrangements are
Custodians – yesterday and today required to protect investors.
Whereas, traditionally, custodians held and Investment managers make investment decisions,
safeguarded financial assets on behalf of third parties, but do not control the underlying assets. A client,
as financial markets have become more sophisticated, such as a superannuation fund, can remove a
custody is ‘no longer characterised by physical particular investment manager without any delay in
safekeeping (of financial assets) but by a range of gaining access to the assets for which the investment
information and banking services’.2 manager was previously responsible.
Today, the primary work of the custodian is about Custodians ensure that assets are held securely
managing information – information about investors’ and will only be released or exchanged for value with
financial assets and the rights attached to those proper client instructions. They can generally provide
financial assets. Financial assets are not solely their services at a lower cost than what investors
physical assets or listed securities; they range from would have to pay to undertake these activities
unlisted securities to alternative investments. themselves.
Investors can benefit from the specialised
Non-discretionary power expertise of custodians in market practices and the
Custodians do not make investment decisions on management of investors’ rights and entitlements.
the investment assets. They act only on the proper Because they hold the securities for investors,
instructions of the owners of the assets, or their custodians can also provide access efficiently to a
agents such as investment managers. They hold range of specialised reporting (e.g. for investment
funds) and banking services (e.g. securities financing
and providing liquidity, by making short-term loans).