Qualified Custodians and Safety of Assets

Qualified Custodians and Safety of Assets

The first quarter of 2023 saw stress erupt in the banking system. That has led to some questions about the safety of client accounts and assets held at qualified brokerage custodians – for JFS those firms are primarily Fidelity and Charles Schwab. We thought it would be helpful for a quick overview of custodians and their role in your wealth management.

A “Qualified Custodian” is a term used by the Securities and Exchange Commission (SEC) to define a firm (not your advisor) that “maintain(s) client funds and securities in a separate account for each client under that client’s name, or in accounts that contain only client funds and securities under the name of the investment adviser as agent or trustee for the clients”. In other words, your accounts and the portfolio securities are held in your name and registration, never commingled with other assets, and reported to you in monthly statements. This ensures safety and transparency with your assets.

Fidelity and Schwab are both long-tenured industry leaders, large and well-respected. Their core business lines are offering branded mutual funds and ETFs, facilitating clients’ transactions on their brokerage platforms, and offering custody to investment advisors. Schwab does offer banking services (Fidelity does not), and they report the bank has seen withdrawals by clients in search of yield. Yet the data reflects that funds leaving Schwab Bank have moved into their brokerage accounts primarily to money markets or other interest-bearing offerings. They are not leaving the company. So, while Schwab may see a drop in profits as its asset mix changes, the impact is to the stock price, not to the safety and security of custodied brokerage accounts.

Lastly, for both Fidelity and Schwab, there is significant insurance in place. Brokerage assets are protected by SIPC coverage of $500,000 on securities and $250,000 on cash awaiting investment, and in addition, both firms have additional “excess” SIPC coverage of well over $100 million per customer. In the rare case of a brokerage failure, the insurance in place has always led to full customer recovery.

In summary, JFS takes our role as a fiduciary and the safety of client assets most seriously. That is expressed by our use of two of the industry’s most respected and utilized custodians. We will, as always, regularly review these firms, engage with them on your behalf for all aspects of service, and monitor any issues. We remain confident that custodied assets are safe.


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