Preparing for your custodian conversion

Discover tools and insights on how to prepare and what to expect when transitioning to a new custodian.

In an ever-evolving financial landscape with increasing regulations and compliance requirements, the thought of converting to a new custodian can be daunting, but it doesn’t have to be. With some minor preparation and the right choice in custodian, your transition can be simple, efficient and successful.

Finding the right custody partner for your specific needs can put you in a better position for long-term success. In this article, we’ll explore key conversion considerations to help you make smart, well-informed decisions, including what factors to consider when choosing the right custodian and how to prepare for the transition. 

Choosing the right custodian

When it comes to invested securities, your advisor can use one of two platforms to manage your assets: a brokerage firm or a bank custodian. To make an educated decision, you should be aware of the following facts:

• First, bank custodians hold six times more assets than brokerage firms. Banks are generally the choice of institutions, municipalities and sophisticated high net worth investors. 
• Second, while discount brokerage firms present a strong attraction to cost-conscious retail investors, their advertised claims of “zero fees” or “lower rates” don’t always paint a complete picture of what to expect.

Here are several other items you should consider when weighing the risks and benefits of a custodian vs. a brokerage firm.

Fee transparency

If a service is free, you’re not the customer; you’re the product.

Most banks charge a market-value or transaction-based custody fee. At U.S. Bank, we believe this fee should be straightforward and simple to calculate. 

Broker-dealers may or may not charge a custody fee. In addition, they can generate compensation from numerous activities associated with your account. Some of these include: trade order routing, bid-ask spread, margin lending, sub-transfer-agent fees, “trade away” fees, fees from proprietary mutual funds and ETFs and more. Sometimes these fees are visible, and other times they’re obscured into a lower investment return.

As a general rule, banks won’t do the following:

• Require you to purchase other revenue-producing products 
• Earn revenue by making a market in the securities you’re purchasing and selling 
• Lend your securities to other clients or firms

Asset safety

Both banks and brokers can act as a custodian, but different rules and standards apply to how assets are held. Sophisticated investors rely on banks for safe custody and broker-dealers for trade execution. 

Banks: Assets held in nominee name

• Assets held in nominee name don’t require insurance because they aren’t leveraged by or comingled with the assets of the underlying financial institution.
• Your securities aren’t included in the bank’s balance sheet.

Brokers: Assets held in street name

• Regulations require broker-dealers to be insured by the Securities Investor Protection Corporation (SIPC) for assets held in street name. (The SIPC was created specifically to protect investors from the endemic risks of using broker-dealers to custody assets.) 
• Your assets may be comingled with and held in the name of the broker-dealer as an asset included on the company balance sheet. 
• Securities are often lent to other financial institutions or short sellers.

Freedom and flexibility

When you choose to use a broker-dealer for custody, they’ll almost always require you to use them for trade execution as well. Banks typically offer custody as a stand-alone product, which means more freedom to choose products and providers.

Agility is one of the key benefits to separating trade execution from custody. You (or your advisor) are welcome to trade with any broker-dealer you’d like, and all trades are settled into your custody account free of charge. You’ll benefit from your advisor’s flexibility to do the following:

• Execute block trades that settle into multiple custody accounts, eliminating countless transaction fees
• Utilize multiple broker-dealers to find the best execution on every trade
• Create a broker-dealer network of strategic partnerships to maximize the soft-dollar benefits of trading

The investing world is moving toward more alternative investments and securities that aren’t traded on an exchange. Broker-dealers, because of their connection to the exchanges, are generally less willing to hold alternative assets. And when they do, it’s usually with one or both of the following caveats: 

• They’ll charge a higher fee. 
• They’ll require investors to submit their alternative asset for approval on the platform – a tedious, time-consuming process.

Preparing for your transition

The first, and most important, step when preparing to convert to a new custodian is to review the contracts and agreements you have with your current custodian. These documents may include stipulations or legal ramifications that could prohibit you from converting to a new service provider. Make sure to involve your legal counsel in reviewing these documents before you begin a transition. This will help ensure your new custodian won’t have to stall or suspend your conversion.

After reviewing your contracts, you should collect any information needed to transfer your assets. There are multiple regulations and due diligence obligations imposed by the U.S. government on financial institutions that require the collection of certain information from organizations and individuals that custodians serve. These regulations include Anti-Money Laundering (AML) laws, the Bank Secrecy Act (BSA) and the Know Your Customer (KYC) guidelines, among many more. You shouldn’t have to worry about these; a proactive custodian will be aware of all of the federal regulations with which they must comply. They’ll clearly communicate what information they’ll need to gather from you throughout the conversion process.

The checklist below includes items you’ll want to prepare and analyze before the conversion to help ensure a smooth and successful transition. Make sure you determine and gather the following:

• Up-to-date contact information for your current custodian 
• Contact information for all individuals at your organization who will be involved in the conversion process 
• Contact information for all of your investment managers and alternative asset providers or issuers 
• File interfaces and transmissions protocol with your organization, separate from information retrieved from the custodian’s website, that may need to be established with the new custodian 
• A target conversion date or any conversion deadlines you’d like to meet 
• Any relevant organizational information about your company (i.e., multiple entities, subsidiaries, affiliates, etc. that will be involved with the conversion, any tax reporting requirements, etc.) 
• Information regarding the assets or portfolio being transferred, including: 
• Lists of current holdings and assets 
• Details on the makeup of the portfolio (i.e., mutual funds, commingled funds, ETFs, etc.) 
• Any involvement of an investment manager(s) 
• Current or future needs for global custody and trading 
• Copies of current statements

It may also be helpful to spend some time thinking about what you and your organization truly want from a new custodian. Identify your reasons for converting, then, be sure to make those reasons known to the new custodian at the outset of the transition process. This will help ensure the custodian creates a conversion plan that prioritizes the implementation of the products and services that are most important to you.

What to expect from the conversion process

An experienced custodian will handle the majority of the work involved in the conversion process. Once you’ve been introduced to the personnel who will be handling your conversion, they’ll guide you through each step in the process until your transition is complete. You should share the information you prepared during the initial stages of the conversion, as the new custodian will need this to successfully transfer your assets. While there may be new account forms that you are required to fill out, the conversion team should assist you in completing them quickly and accurately.

Many custodians also initiate the contract drafting and signing procedures at the beginning of the conversion. This is because the custody agreement and any other necessary agreements and documents will need to be in place before your assets can be transferred. This is often the component of the conversion that requires the greatest dedication of time from the client. To help progress this phase smoothly and efficiently: 

• Alert your legal team or attorney to these incoming documents.
• Communicate the status of the contracts to the personnel in your organization who must sign off on the agreements.

Once the required information has been gathered and the agreements are in place, you should be able to dictate your level of involvement. There is always a chance that something is discovered during the conversion that will require your attention, but this can be addressed on a case-by-case basis. A proficient custodian will keep you updated throughout the rest of the process according to your preferences. This may involve scheduling weekly update calls or simply sending email updates on relevant items, allowing you to participate at the level you prefer.

The time it takes to complete a custodian conversion will vary based on several factors, including the size and complexity of your portfolio. With the proper preparation and responsiveness from all parties involved, you can successfully convert to a new custodian in a matter of weeks.

The importance of dedicated resources

When evaluating potential new custodians, it is critical to consider the resources the custodian will make available to you both during the transition and post-conversion. This is particularly important when transitioning a large or complex portfolio. When a conversion involves multiple professionals, departments and parties from both the client and the custodian, it can be easy for critical tasks to fall through the cracks and delay the conversion. A dedicated conversion team will manage the overall transition and keep all parties accountable for their assigned tasks. This way, you can rest assured that the conversion will progress smoothly and according to schedule.

Additionally, working with a dedicated point of contact or conversion team allows the custodian to become familiar with your organization and your unique requirements. This helps ensure that the right products and services are implemented at the outset. It also mitigates confusion or last-minute changes that are sometimes necessary when new client information or requirements are uncovered later in the conversion process.

Having access to dedicated conversion resources also helps ensure that any questions or concerns you have during the transition will be addressed in a timely fashion. The amount of new information and direction you receive during a conversion can be overwhelming. It can be frustrating if you are passed around to various employees or departments when trying to get your questions or concerns answered. With a dedicated conversion contact, you will have one central person to reach out to for process updates and information. This will help you keep your focus where it belongs – on your organization and your day-to-day business.

Conclusion

Transitioning to a new custodian should be a simple and efficient process, and it shouldn’t be burdensome to you or your organization. By dedicating time prior to the transition to review your current legal contracts, gather basic organizational and financial information, and outline your requirements for a new custody provider, you can set your company up for success.

At U.S. Bank, we prioritize seamless delivery of our products and services so that you can focus on achieving your goals. We also take pride in our ability to hold almost any asset type and to charge, generally speaking, the same rate for alternative assets as for exchange-traded holdings.

Whether you’re currently weighing your custody options or looking for additional products and solutions, you’ll benefit from our broad resources, our deep expertise and our expansive service capabilities.

To learn more about the custody services we offer at U.S. Bank, contact us or visit our website.