Custodian investing and own name investing are two ways people can own shares in the share markets. Whatever your investment goals, it’s important to know the different types of share ownership and how each can impact the way you manage your investments. We look at the difference between them in terms of share ownership, trading, administration, fees and the overall investing experience.

What is a custodian in investing?

A custodian in investing is an entity - typically a bank, financial institution, or brokerage firm - that holds and manages assets, such as cash or securities, on behalf of investors. The custodian's job is to safeguard the security and integrity of these assets.

How is a custodian different from a broker?

Put simply, a broker facilitates transactions (your buying and selling) on your behalf, while a custodian holds your investments securely (like a vault or safe). Some entities can do both of these, meaning a broker can also be a custodian.

How custodial investing works

When you buy shares (assets) of a company through a broker, the custodian holds those shares in your name. Information about your ownership is recorded in a sub-register. This clarity of ownership ensures your assets are secure and protected, and always yours. 

A custodian also looks after administrative tasks for your investments. These can include:

• Settling trades by transferring ownership from the seller to the buyer
• Informing investors about corporate actions
• Collecting and distributing dividend payments
• Providing statements and reports on your holdings

Custodians operating in New Zealand must meet obligations under the Financial Advisers Act 2008. This includes meeting safety and reliability standards, and being audited each year by independent custodial auditors. These auditors make sure the custodian uses robust systems to protect investors’ assets. 

What is the difference between direct ownership and custodial investing?

Direct ownership of shares and custodial ownership are two different ways retail investors can hold and manage their share market investments. Let’s explore the differences:

Buying and selling shares

An investor has full control over their investment decisions with both direct and custodial ownership. This includes buying, selling or holding onto shares.

• In direct ownership, you buy shares of a company through a brokerage account held in your own name. A record is kept in your name at the share registry. You (the investor) are the legal owner of those shares, with all the benefits of share ownership, which we talk about next.
• In custodial investing, you buy shares of a company through a brokerage account held in street name. While you still own the shares, the custodian acts as a middle person between you and the company whose shares are held, as well as between you and the registry (where the custodian is registered as owner) and street name (where you are registered as the owner).

Share ownership

With both custodial and direct ownership, you get the benefits from owning your investments. That is, whether they are held in your own name or held in street name. This means if you make a profit selling your shares, or your shares earn dividends, they are yours to keep. You can also vote on company decisions at shareholder AGMs (annual general meetings), such as electing board members. And you can transfer your shares between brokerages. 

There are legal differences in each method of ownership you need to be aware of:

• In direct ownership, you have the legal and beneficial ownership of the shares you purchase. This means you’re registered directly with the stock exchange (such as the NZX, ASX or NYSE) as the legal owner of the shares.
• In custodial investing, your broker or fund manager uses a custodian or nominee company to hold the shares on your behalf. This means your shares are not registered directly in your name but in street name, which we talked about above.

Specific details on custodial ownership may vary between markets. Read our help centre FAQs for more information on custody for US share market investments through Hatch.

Tracking your portfolio

Whether you’re the set-and-forget type of long term investor, or more actively trading, tracking your portfolio is an important part of managing your investments.

• Owning shares through a custodian means that if you invest in multiple markets - like the US share markets, the NZX, and the ASX - you can track all your investments in one place. 
• If you invest in multiple markets but own your shares directly, this means you need to track your entire portfolio using (and paying for) different services or platforms. There are tools available to help investors with this, including Sharesight, Yahoo Finance, Morningstar Direct, Unity and Seeking Alpha

Portfolio administration

If you haven’t ever directly owned shares, it might come as a surprise just how much admin is going on in the background. Understanding the tasks involved with direct share ownership can help you decide which investing ownership approach you might like to take.

• With direct ownership, you receive communications directly from the companies you invest in. This includes invitations to shareholder meetings and AGMs, and information about dividends. You’ll receive information about your administrative tasks related to the shares you own, such as dividends or corporate actions, and will need to manage them yourself.
• Using a custodian to invest means they’re responsible for carrying out these admin tasks related to each investment, like processing trades and collecting dividends. You’ll need to be aware of the finer details of your custodian as custody may limit some of your ability to take part in a specific corporate action.

Many investors choose custodial ownership because it can be more convenient and give them a more seamless investing experience. If you prefer to hand over your investment management tasks to a pro, or you don’t have the time or expertise to manage your investments on your own, a custodian could be worth considering.

Fees

Fees are an important part of investing. The amount you pay can have a significant impact on your returns over the long-term, especially when fees are high. 

When you’re deciding which type of share ownership suits your financial goals, consider the impact of fees on your investments. Here are some factors to look at:

• Direct ownership cuts out the need for a custodian, so you won’t be paying any custodial fees. However, in some cases direct ownership can mean higher fees. Because custodians can take advantage of economies of scale, many can broker cheaper deals for their customers.
• Custodial ownership may mean you benefit from the custodian’s economy of scale. This is when a custodian with a large number of customers or accounts can be more efficient, and their costs per account decreases. This can result in significantly lower fees for you to buy and sell shares.

Safety and Security

If your broker goes bankrupt and is a member of the Securities Investor Protection Corporation (SIPC), you are protected against the loss of cash and shares. The limit of SIPC protection is US$500,000, which includes a US$250,000 limit for cash.

• If your broker or fund manager goes bankrupt, owning your shares directly means it doesn't impact your investment.
• If you own shares through a custodian, and the custodian gets into financial difficulty, your investing platform would appoint a new custodian. It is unlikely to have an impact on your holdings, however, as the custodian does not mix investors assets with day-to-day business activities. The Financial Markets Authority (FMA) requires custodians to be audited annually to ensure  that robust systems are in place to protect investors’ assets.

So which is better, direct ownership or custodial investing?

Direct ownership may provide you with more hands on control and clarity over your portfolio. You know exactly where your shares are held, and can participate as an active shareholder. However, you’ll need to be comfortable doing your own admin when it comes to things like dividends, updating information across multiple registries, and corporate actions like voting in AGMs.

Custodian ownership can offer you more convenience, a single centralised management system, and may come with lower trading costs making your access to share markets more accessible. However, it adds an extra layer between you and your shares. 

The choice between direct ownership versus custodial investing comes down to your preferred investing style and goals, and your ability and willingness to stay on top of your investing admin.

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