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Have you ever wondered who keeps an eye on the shares you invest in? Walking into the world of shares, you may have stumbled upon the term 'custodian'. Understanding the role of a custodian can be a real game-changer.

Imagine understanding this term so clearly that it feels like basic maths (1+1=2, right?). That's what this article aims to do for you today. We're going to discuss what a custodian is, what the custodial role involves, and why you might consider going down this investing route.

Ready to see how having a custodian can impact your investing journey? Let's get to it.

What is a custodian in the context of shares investing?

Think of investing like putting together a big jigsaw puzzle. At first glance, all you see are random pieces. Most investors might focus on the obvious parts: buying a share through an online investing platform or investing in a managed fund. But there are many smaller yet crucial pieces. One of those pieces is the custodian.

Say you've got a special (and expensive!) piece of jewellery you want to keep safe. Instead of stashing it under your bed or in a drawer, you might put it in a safe deposit box.

In the investing world, a custodian is like that safe deposit box. They're a trusted entity, often a big financial institution or bank, responsible for safeguarding investors' shares (or mutual funds). A custodian doesn't make decisions on buying or selling; they just ensure your investments are safe and secure.

In Australia, custodians need a financial services licence. So they have to follow rules set by the Australian Securities and Investments Commission (ASIC). This gives you peace of mind that the one guarding your investment has the right credentials and is under a watchful eye!

The multifaceted role of a custodian

When you start investing there are a number of things to manage. From keeping your shares safe to making sure every transaction gets completed to having a say when big company decisions are made.

Now, imagine doing all these on your own. It can be time-consuming and complicated for investors. This is where experienced experts like custodians come into play. Let's break down their multi-faceted role:

1. Safekeeping of assets : Think of them as the guardians of your treasures. They ensure your shares or any investment stays secure and untouched, like a digital vault.
2. Settlement and clearing : Whenever you want to buy or sell shares, custodians ensure the whole process is smooth. They work in the background, making sure every penny is in its right place.
3. Record keeping and reporting : Forget the hassle of tracking every move. Your custodian does that! They provide you with account statements, like a detailed diary of your investment journey.
4. Corporate actions & voting : Big things happening in a company you've invested in? Your custodian is there, ensuring you get a say or benefit from the changes.

Distinguishing a custodian from other entities

We now know a custodian is like a security vault for your investments. But how can we distinguish a custodian from other entities in shares investing? Let's look at two other entities that play key roles:

• Investment adviser: This is someone who helps you make smart investment choices. They provide guidance on what shares to purchase, based on your goals and circumstances.
• Broker : A broker is your gateway to the investment world. Want to buy or sell shares? You go through a broker. They facilitate your transactions on markets like the Australian Securities Exchange (ASX). They're the middleman in your investing journey.

So, next time you log into your investment platform or app, remember this: while you're the captain of your investing ship, there's a whole crew working behind the scenes. They're working to ensure smooth sailing - and custodians are some of them.

Why invest through a custodian?

Without a little help, keeping up with your investments can get overwhelming. There's the risk of missing important information and great opportunities. Besides safeguarding your investments, here are some advantages of having a custodian:

1. Streamlined transactions . The process of buying or selling shares is optimised with a custodian. They handle the ins and outs, making sure your transactions are smooth.
2. Stay updated . Custodians track all your share movements and keep you updated. You receive regular account statements to know where you stand.
3. Corporate decisions are made easy . If there are big decisions to be made regarding the companies you've invested in, your custodian ensures you're informed and involved if necessary.
4. Investing beyond borders . Let's assume you've decided to widen your investment horizon and are looking into investing in US shares . Having a custodian makes this easier for you as some custodians offer services that allow foreign residents to invest without hurdles.

Custodial investing can be a powerful tool that makes the world of shares investing more accessible and manageable. When there's a lot to handle, having a dedicated professional making sure your investment journey is smooth can be helpful.

What are the potential risks of investing through a custodian?

So, you're intrigued by the convenience of custodial investing. But with ease comes a need to be wary. Here are some potential risks of custodial investing you should know about:

1. Less control . With custodial investing, the custodian holds the reins. This means you might not have direct ownership or the same level of control as having your own trading account.
2. Hidden fees . Some custodians might charge extra fees that aren't clear upfront. Always read the product disclosure statement and ask questions!
3. Potential delays . Want to buy or sell shares? With a custodian, there might be a delay, as they manage requests from many investors.
4. Different legal protections . If the custodian is based overseas or operates under different rules, you might not have the same protections as investing through the ASX.

Custodial investing can offer convenience, but it's essential to understand the pros and cons. The best way to navigate through this is by equipping yourself with knowledge. And that is what you're doing by reading this article so well done you!

How does custodial investing work?

When trying out a new hobby, you start by understanding the basics, right? Investing is no different. So let's look at the basics of custodial investing and how it works:

1. Buying shares : Let's say you've figured out what to do before you start investing . You now understand the stock market and decide to buy shares. The typical path is to use a broker or an investment platform. This is your gateway to the financial market.
2. HIN and identification numbers: When you start investing in places like the Australian Securities Exchange, you get a special number called an HIN (Holder Identification Number). It's like a unique ID tag that says, "Hey, these shares are mine!" With custodial investing, the custodian might hold one HIN for many investors. But don't worry, they keep track of your individual shares on their own systems.
3. Storing the shares : Instead of holding the shares directly in your name, a custodian steps in. This custodian is like a specialised bank for investing. They hold and protect your shares on your behalf. It ensures your investments are safe and separated from the assets of the broker or platform you used.
4. Tracking and reporting : The custodian keeps a detailed record of all your investments. They'll note down every purchase, sale, and dividend you earn. Typically, you'll get periodic account statements detailing all these activities.
5. Corporate actions : Sometimes, companies in which you own shares might make significant decisions, like issuing dividends or splitting their stock. The custodian manages these details for you, ensuring you get your rightful share.
6. Selling shares : Now, let's say you're ready to sell your shares and you decide to sell. This is when you notify your broker or platform. The custodian then releases the shares from their "vault" to be sold in the market.

Custodial investing vs. alternatives

Using a custodian is just one way to invest in shares. But, what if you want more control? Or want to try something different? Here are a couple more ways:

CHESS-Sponsored Investing

CHESS? Nope, it's not the board game we're talking about. CHESS stands for Clearing House Electronic Subregister System. Sounds complex, but it's just a system used by the Australian Securities Exchange to track share ownership.

When you get on board with CHESS, you're handed a unique HIN. By having your own HIN, it recognises your direct ownership of the shares. They’re registered in your name, not tucked away with a custodian.

Although a number of shares are registered with the ASX CHESS, some companies choose to give out shares directly to their owners. How your shares are registered can affect how they can be used, shared and managed.

Micro investing

Imagine you want to buy some cake, but you're not quite ready to commit to the whole thing. You're happy with just a taste so you buy a tiny slice to start with. That’s what micro investing is like but for your money!

With micro investing, you don't need big bucks to get started. It's about taking those small amounts and investing them. And over time, all those little bits can grow into something much bigger. This is because micro investing allows you to buy just a portion of a share, instead of owning the entirety of it.

Looking to start micro investing? Pearler's micro-investing is one of many platforms you can consider to start your micro investing journey.

Remember, every investor's journey is unique. Whether you lean towards custodial investing, CHESS-sponsored investing, or micro investing, the world's your oyster. Just ensure you're informed, and your investment type is tailored to your investment goals and preferences.

Is custodial investing the right option for me?

Custodial investing can be a neat choice for many, especially if you're considering overseas shares investing. By understanding how custodial investing works, you can assess if it's the right way to achieve your investment goals.

While going the custodian route can have its perks, it's not without its risks. Keep in mind there are other options available to support your investing journey. There's no singular approach that fits all investors. But with the right knowledge, you'll be on the path to achieving your financial goals.

Happy investing!