How Secure Are Your Investments?

Safety of assets is a chief concern for all investors, particularly in these uncertain economic times. Registering assets through a trust bank or broker-dealer not only provides protection but increases efficiencies and cost savings as well.

Winter 2012

Advantages of a Master Global Custodian

For ultra-high-net-worth investors embarking on more complex and sophisticated investments, using a trust bank as a global asset servicer– or a master global custodian (MGC) – can alleviate some of the responsibilities of the family while increasing operational efficiencies, accuracy and protection.

“It’s about maximizing the operational efficiency of what you are trying to put together, improving access to the data necessary to make key decisions and minimizing the risks in overseeing such complex portfolios,” says Shannon Kennedy, global director of wealth services for The Wealth Management Group® at Northern Trust.

Improved Efficiency: When using a global asset servicer, the family has access to customization and reporting tools. This enables them to pull customized reports and access current portfolio and tax data 24 hours a day, seven days a week, including balance sheets and net-worth summaries, performance reporting and cash-flow forecasting for alternative investments.

Access to New Global Markets: A global asset servicer with professionals on the ground in emerging and frontier markets can advise clients on the type of legal entity a family needs to gain access, Kennedy says. By being inside the country, the global asset servicer has the knowledge and resources to assist with administrative and regulatory complexities of filing global tax reclaims, whereas a smaller brokerage firm would not.

True Book of Record: While technology solutions on the market today advertise their ability to consolidate a family’s financial data across multiple financial institutions, they cannot serve as the official book of record from the perspective of the Internal Revenue Service (IRS). This includes data aggregators and broker-dealers. Only a trust bank global asset servicer can serve as the official book of record in an IRS audit. Further, if an aggregation firm is not using consistent pricing, a client could make an investment decision based on incorrect information, Kennedy says. A trust bank global asset servicer facilitates accuracy of pricing, as mandated by federal regulation.

Business Continuity: If a client’s data were affected by a major disaster like an earthquake or terrorist attack, the business continuity planning of a global asset servicer could enable quick recovery, according to Kennedy. They may even house clients’ data at redundant data centers.

The right global asset servicer can make assets easier to report on and manage – and easier for investors to sleep at night.

In choosing a financial provider, understanding the safety of your assets is paramount. High-net-worth investors are more sophisticated and their investment opportunities have become more varied and complex than ever. And as the rate of change increases in the investment arena and the regulatory environment continues to tighten, investors need ready access to comprehensive and real-time information about their investments.

Most securities today are registered in the name of the global asset servicer or investment broker (“nominee”) rather than the name of the individual investor. Whether through a trust bank or a broker-dealer, using street name “nominee” registration has many benefits over direct ownership registration, including:

Efficient security execution
Timely trading/transferring of securities between parties
Simpler and more timely dividend income collection
Reduced cost of trading, transfers and deposits
Protection against loss or theft of stock certificates

However, there are several differences between trust banks and broker-dealers that should be considered.

Trust Banks vs. Broker-dealers

Both trust banks and broker-dealers typically hold client assets registered in nominee name. But should a broker-dealer or trust bank become insolvent, clients might be more insulated with a trust bank. Their assets held in trust, investment or custodial accounts are completely separate from the financial conditions of the trust bank and not subject to bank creditors’ claims. If a trust bank were to become insolvent, clients’ assets are secure because they are not assets owned by the bank and therefore are protected.

In contrast, if a broker-dealer were to become insolvent, the Securities Investor Protection Corporation (SIPC) would handle asset transfer to the beneficial owners or as directed by the owner. Client securities are not subject to the rights of general creditors, and client claims for their funds and securities are senior to other claims on the broker-dealer. If a broker-dealer does not have sufficient assets or cash to cover clients’ claims, which should not happen absent violations by the broker-dealer of the rules regarding segregation of client assets, SIPC provides asset protection for up to $500,000 for securities inclusive of $250,000 for claims in cash. However, many broker-dealers have additional asset protection coverage.

All that said, investment assets are not necessarily less safe with a broker-dealer. The size, financial strength and business activities of the broker-dealer all impact the safety of assets.

The type of account and agreement entered into with a broker-dealer also affect the length of time that may elapse before a client receives a return of securities. For example, if a client signs a margin agreement with the broker-dealer, it may be able to lend the client’s securities, which could cause delays in the event of insolvency.

A Secure Foundation

During this period of market volatility, investors are focused particularly on transparency and protecting their assets. Whether using a trust bank or broker-dealer, it is essential for investors to understand and have confidence in how their investment assets will be held.