Lee Goggin, Co-Founder of findaWEALTHMANAGER, explains how wealth managers provide additional security of assets through their use of custodians and nominee accounts, and the costs these safety features naturally involve.
The safety of your assets is always paramount, and so you should always ensure that any institution you place money with is covered by the Financial Services Compensation Scheme, which protects £85,000 per depositor per institution.
The FSCS is a great thing and not something some other jurisdictions offer (which is why you should be very wary about investing offshore), but there is another level of security wealth managers’ client enjoy: the backing of their custodians.
What custodians are and how they work with wealth managers
Wealth managers work in tandem with custodians (or custodian banks). These are institutions charged with the safekeeping of clients’ securities, generally in electronic form, but sometimes with them also taking care of physical share certificates, gold and so on.
In addition to their safeguarding role, custodians also often maintain the assets the investment firm manages. This means handling account administration, the collection of dividends and interest, providing support for tax documentation and so on.
Wealth managers that are part of a banking group may offer custodial services in-house, but those which only manage investments will choose a custodian (or perhaps a small selection of custodians) to hold and maintain their clients’ assets.
Looking after billions in assets, custodians tend to be very large, reputable firms with very strong balance sheets that make the risk of financial failure vanishingly small
Looking after billions in assets, custodians tend to be very large, reputable firms with very strong balance sheets that make the risk of financial failure vanishingly small. Naturally, they also invest heavily into security capabilities that minimise the risk of theft or loss of assets as well as systems that make trading more efficient — and cheaper — generally.
As custodians are often global organisations, it is easy for them to use local subsidiaries to hold investors’ overseas assets. Otherwise, a third-party custodian may be appointed by your investment manager (here, it is vital to check that local investor protections match those of the UK).
Fee transparency is a regulatory obligation as well as good practice. Wealth managers’ fee schedules can be complex by their nature, however, due to the many moving parts – like custody – involved in managing investment portfolios. Read our fee guide to better understand proposals or ask our expert team for guidance.
What is a nominee account?
Nominee accounts are another key concept for investors to understand. These are the most common way of holding securities, as this approach makes trading far more efficient and cost-effective.
Under this arrangement, rather than the end-investor having to be registered with the relevant electronic securities settlement service (in the UK, CREST), their securities are instead registered in the name of a nominee firm while leaving them as the actual owner with all rights (as the “beneficial owner”).
Nominee accounts are another key concept for investors to understand. These are the most common way of holding securities, as this approach makes trading far more efficient and cost-effective
A nominee firm is typically a non-trading subsidiary of a wealth manager, creating a legal separation which means clients’ assets are sheltered from creditors in the event of the firm’s insolvency and protected up to the FCSC limit.
Your custodian and nominee checklist
Custodial and nominee fees are very much part of the cost of doing business in wealth management and will form part of the charges of any provider. They are, however, among the “hidden” fees that clients all too often don’t understand. They should be clearly presented and explained in full.
- Read our guide to What to expect from wealth management fees to get a firm handle on all the costs that are likely to apply and ask for clarification of anything that is unclear in any fee schedule presented to you.
Part of being a good wealth manager is getting the best possible deal for your clients (you may not know, for example, that they can access better-value institutional share classes rather than the retain ones DIY-investors are limited to).
Your provider should therefore be making sure that you pay the most reasonable fees for custody possible, while still getting the best service (for example, if you are using a private bank, you can expect to be charged custody fees on deposits in the range of around 0.2% a year.)
Some of the world’s biggest custodians are hardly household names and so you shouldn’t necessarily insist on a well-known brand as the custodian for your assets. Many factors are at play alongside financial strength and global reach, such as the quality of technology and reporting on offer
The same goes for costs associated with nominee accounts. Remember that these are often charged on a per transaction basis (or for a set amount each period) so make sure you are making fair comparisons here.
- As ever, comparing several providers’ proposed fees for a service package unique to you really is the only way to effectively assess what the best value for money might be. Ask for a Total Expense Ratio (TER) estimate to get a handle on the total costs of having your portfolio run by each firm.
Some of the world’s biggest custodians are hardly household names and so you shouldn’t necessarily insist on a well-known brand as the custodian for your assets. Many factors are at play alongside financial strength and global reach, such as the quality of technology and reporting on offer.
- A good wealth manager will have chosen their custodian very carefully and so should be happy to explain their rationale to you. Question security of assets as robustly as you wish.
Finally, remember that it is your right to ask as many questions as feel necessary when carrying out due diligence and that any reputable wealth manager will be able to satisfy any concerns easily.
- Always ensure that any prospective wealth manager and their custodian are regulated and covered by the FSCS, and that client assets are held in a segregated account separate to the business.
Get peace of mind, and better value, through us
Of course, one of the best ways that affluent individuals can quickly find a wealth manager guaranteed to have all the “safety features” they could wish for is to go through us.
The panel of leading wealth managers we represent are all very well-established, fully regulated and manage very significant amounts of client money. We also know the teams we refer our users to personally.
Our service shines a light on a previously opaque market. Fast-track your way to a shortlist of advisers perfectly suited to your profile and needs, and then compare service, fees and performance track records on a like-for-like basis.