One of the oddities about the American financial marketplace is how so many consumers prefer to keep their assets at the large Wall Street firms—which famously have sales cultures driven by multi-million dollar bonuses to their brokerage sales agents, and whose BrokerCheck reports read more like rap sheets than profiles. (Don’t believe us? Type a famous brokerage firm name into the second box in the BrokerCheck website—https://brokercheck.finra.org/—and you’ll get hundreds of thousands of listings of specific broker transgressions, fines, and examples where customers received arbitration awards after various kinds of financial abuse.)
The reason, of course, is that many people feel safer keeping their assets at a very large firm that they have heard of, rather than a smaller financial planning firm; even if that smaller firm often provides more customized service and has renounced predatory sales activities and commissions. But the interesting thing is that this may be a false comfort; the funds may actually be safer with the smaller planning office than with the larger multinational firm that buys Super Bowl advertisements.
How can that be? Simple: The vast majority of financial planning firms and investment advisory offices custody client assets with a custodian —meaning that the actual investments and money is housed, not in the basement of the advisory firm or in its computer system, but, most often, at a large financial firm whose sole purpose is to safeguard the money, keep close track of it, and provide statements directly to clients showing that the money is where it is supposed to be. A financial planning firm could hypothetically custody the assets on their own. This is not common however, given the rather stringent regulations imposed by the U.S. financial system, and the mandatory audits such firms would be subjected to.
Planning firms outsourcing custody of client assets to a custodian is a very strong “check-and-balance” that is embraced and supported by the smaller financial planning offices and the public at-large. The planning or advisory firm does not ever have direct access to your money, and therefore would be unable to take it out or otherwise steal or misplace it.
Who are these custodians? The largest and most commonly used include Bank of NY/Mellon/Pershing, TD Ameritrade Institutional, Charles Schwab & Co. and Fidelity, each of which has between $500 billion and $1.5 trillion in advisor assets under custody. In contrast with the large Wall Street firms, which have been accused of defrauding customers and routinely appear in the news for regulatory fines, you can Google “examples of institutional custodians losing client money,” and see that there no examples, famous or infamous, large or small, of this important check-and-balance failing retail clients.
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