Custodian bank.

In plain English

A custodian bank keeps client assets legally separate from its own, so if the custodian fails those assets are not part of its estate, and it also collects income, processes corporate actions, and reports positions. Its clients are usually institutions such as funds, pension plans, and endowments, though retail brokerage accounts rely on the same function behind the scenes. Regulated funds are generally required to place their assets with a qualified custodian, which is a structural protection against theft by the manager. Custodians also handle currency conversion, tax reclaims, and securities lending when clients authorize it. They earn fees on assets held and on the services layered on top.

01Why it matters

Separating the person who manages your money from the institution that holds it is one of the strongest protections in investing, and its absence is a common feature of investment fraud.

02The math, step by step

Say a fund holds $2 billion in securities at a custodian and pays 2 basis points a year for custody. That is $2,000,000,000 times 0.0002, or $400,000 annually. If the fund manager tried to move assets out improperly, the custodian is a separate party that has to approve the transfer.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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