8 Considerations When Picking a Custody Bank

In the world of finance, trust is paramount. When it comes to safeguarding your assets, selecting the right custody bank is a decision that requires careful consideration and due diligence. A custody bank is entrusted with the responsibility of holding and managing your financial assets, and the consequences of making the wrong choice can be dire.

Before selecting a custody bank, it is highly recommended that you talk to an expert to discuss your options. 

Here are 8 factors to consider when choosing a custody bank:

1. Reputation. One of the most important factors to consider when selecting a custody bank is their reputation in the industry. A bank’s reputation is built on its track record of providing quality custody services, integrity, and reliability. For example, a custody bank with a history of successfully navigating market turbulence and maintaining client satisfaction is likely to be a trustworthy choice. Look for a bank with positive reviews, industry accolades, and a solid reputation among its peers.
2. Financial stability. The custody bank should be financially stable and have a strong balance sheet. A strong balance sheet is characterized by healthy liquidity, low debt levels, and robust capital reserves. These attributes enable a bank to weather economic downturns and take advantage of opportunities that arise. This is crucial because custody banks hold significant amounts of assets on behalf of their clients, and if the bank were to go bankrupt, clients could potentially lose their assets. To assess a bank’s financial stability, review its financial statements, credit ratings, and industry analyses.
3. Security measures. Robust security measures are essential to protect clients’ assets from theft, fraud, or cyber-attacks. Look for a bank that uses advanced encryption and authentication technologies, such as multi-factor authentication and secure socket layer (SSL) encryption. Additionally, the bank should have physical security measures in place, such as secure data centers and surveillance systems, to safeguard against unauthorized access.
4. Regulatory compliance. The custody bank should be fully compliant with all relevant regulations and have a strong track record of regulatory compliance. Investment compliance software can help ensure that clients’ assets are held in accordance with industry standards and best practices. Regulatory compliance also demonstrates the bank’s commitment to transparency, accountability, and ethical conduct. Review the bank’s regulatory filings, audit reports, and any public disclosures of regulatory actions.
5. Service quality. High-quality service is a key differentiator for custody banks. Look for a bank that is responsive, efficient, and proactive in addressing any issues or concerns. A bank that values customer service will work diligently to meet your needs and exceed your expectations. Consider factors such as the bank’s communication channels, responsiveness to inquiries, and the availability of dedicated relationship managers.
6. Fees and charges. Consider the fees and charges associated with custody services. Look for a custody bank that offers transparent pricing and competitive fees. To determine if fees are excessive, compare the bank’s fee structure with industry benchmarks and the fees charged by other custody banks. Avoid banks that have hidden or excessive charges, as these can quickly erode the value of your investment.
7. Advanced services. When looking for a partner, consider the additional services or products the custodian offers that are above and beyond standard custody services. Do they offer or partner with best-in-class vendors for perks like software that provides investment accounting, reporting, and other important capabilities? These advanced services can enhance the value of your custody relationship and provide a more holistic financial solution.
8. Consider sharing the wealth. Finally, multiple variables determine whether companies choose to use one or many custodians. While there is no one-size-fits-all approach, it’s important to understand and be comfortable with diversification risk and have a strategy for managing relationships with partners and vendors. For instance, some investors may choose to diversify their assets across multiple custody banks to mitigate concentration risk. Managing multiple relationships and partners can take work, but the benefit of mitigating risk might be worth it for investors.

Overall, selecting the right custody bank is an important decision that requires careful consideration. By evaluating key factors such as reputation, financial stability, and security measures, investors can make an informed choice that aligns with their needs and goals.

Remember, the right custody bank can provide peace of mind, as you know that your assets are secure and well-managed. Take the time to research and compare different banks before making your decision, and seek advice from trusted financial advisors.