Carnegie Investment Counsel Blog

Safeguarding Your Assets: The Role of Third-Party Custodians

Posted by Richard Alt on Apr 6, 2023 8:45:00 AM

Safeguarding Your Assets The Role of Third-Party Custodians

With the recent bank failures, we have received inquiries as to the strength of the financial firms holding the assets of our clients. As a fiduciary advisor, we have maintained an arms-length approach to the selection of a client’s custodian, preferring to remain impartial and allowing the client to decide. Since there is a wide variety of options: banks, brokerage firms, discount brokerage firms, etc., there is also great variance in the quality and cost of services. We have historically suggested using Charles Schwab, TD Ameritrade, or Fidelity due to their size, low cost, service teams and independence. While clients still choose to use US Bank, Raymond James, PNC and others, with the preponderance of the assets we manage at Schwab and Fidelity, we will focus on these two custodians for this discussion. (Charles Schwab bought controlling interest in TD Ameritrade in November of 2019 and will transition accounts to Schwab by October of this year.) 

While Carnegie is your investment advisor, we have always used third-party custodians as do all reputable investment advisors. The custodian will hold your assets, report on your holdings, execute the trades and send you monthly reports. Our task is to manage your assets in accordance with your objectives and send you a separate quarterly report. As a check and balance, our quarterly report should match the monthly statements sent from your custodian. 

Both Schwab and Fidelity are very large; Schwab is the custodian for over $8 trillion and Fidelity serves over $10 trillion. To put this in perspective, Merrill Lynch is the custodian for $2.3 trillion. Schwab and Fidelity spend tens of millions of dollars in defense of your assets from cyber-attacks, and they both eliminated trade charges for stocks and exchange-traded funds a few years ago. Charles Schwab and Fidelity are the two largest custodians serving independent Registered Investment Advisers. They are both protected by SIPC which provides protection of up to $500,000 per customer, which includes $250,000 of cash. Schwab offers a sweep bank deposit account which provides up to $250,000 FDIC insurance. Schwab also has additional insurance coverage above SIPC through an agreement with Lloyd’s of London for an aggregate amount up to $600 Million. Keep in mind your assets are invested in other companies via stocks or bonds and the custodians are merely recordkeepers. Your securities are segregated from the brokerage firm’s assets and held at third party custodians.  

Schwab makes money managing billions of dollars on the money market accounts they manage and securities lending. Also, the firm has directed nearly $380 Billion of client cash balances to its’ bank. Charles Schwab Bank is structured differently than typical banks. Most banks take deposits and make loans with those deposits earning the spread between the loan rate and the interest rate they pay on the deposits. While Schwab does make loans, it is usually via their” Pledged Asset Line” offering. It loans money using the securities held in a taxable account as collateral. Only allowing borrowers to receive up to a fixed percent of the account value means they have plenty of collateral to back the loans. Its credit risk on these loans is very low. Furthermore, loans only represent 10% of deposits at Schwab Bank while for most banks it is normally 70-80% of deposits. CEO Walt Bettinger commented recently that they could lose their entire deposit base and have enough liquid assets to pay those depositors. This contrasts with Silicon Valley Bank which could not raise cash fast enough to handle over $50 billion in withdrawals in one day. 

While Fidelity was founded as a mutual fund company, they have expanded into serving retirement plans, independent advisors, banks, and a very large mutual fund complex. Their income is diversified, but primarily from the management of billions of dollars invested in mutual funds and plan assets. Both Schwab and Fidelity have a retail presence across the country to serve investors who desire to self-manage. A fair amount of our organic growth over the last decade has been from investors who formerly self-managed and have determined it is not as easy or fun to battle the investment markets. 

While we remain agnostic about whom you should choose as the custodian of your assets, the latest bank volatility attests to our confidence in both Schwab and Fidelity. These two firms have become the premier custodians by keeping costs low with superior service teams. Safeguarding your assets is job one for your custodian and in difficult times we are glad to have these strong partners. If you have other assets held at a bank or brokerage firm you are not comfortable with, let your Carnegie advisor know and we can assist you with a smooth in-kind transfer. Not all custodians are created equal; however, both Charles Schwab and Fidelity Investments continue to serve you well.  


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Topics: Investment Management

Richard Alt

Written by Richard Alt

Richard Alt is Principal and Chief Investment Officer where he oversees the investment process of the firm. In this position, Richard works with select clients to understand their financial objectives, then customizes and manages an investment portfolio to help them reach their goals.

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