How safe are your assets when investing in US stocks?

This is another area that causes a lot of confusion, mainly because the Australian share market operates differently to the rest of the world.

In Australia, the stockbroker executes the transaction and a computer system called CHESS (Clearing House Electronic Subregister System) sends you certificates noting that you hold the shares. CHESS is used by the ASX to manage the settlement of share transactions and to record shareholdings. In the U.S. there’s no such thing as CHESS. Rather the stockbroker performs this function.

To answer the question, yes, the shares are held in your name, however, the way it works is slightly different.

I have come across investors who mistakenly believe that because they don’t receive a CHESS statement for U.S. shares, it means the shares are not in their name. This is incorrect as it just operates differently to what we’re used to. But you do need to be careful and ask your broker if they use a custodian.

A custodian is a financial institution that keeps assets safe on behalf of its customers. In a way, you could think of a bank as a type of custodian that keeps your cash safe for you. A true custodian will look after all types of assets including cash, shares, options and managed funds.

Remarkably, you’ll find that some trading companies in Australia don’t use a custodian, instead, they keep their client’s assets in the company name. This practice carries a huge risk for the investor as seen in recent times in the case of one such company that went into voluntary administration and had its assets (including investor’s assets) frozen.

Needless to say, our practices are vastly more secure to avoid such a predicament and we use a custodian for maximum security of your assets. As these custodians are holding funds, they are held to a very high standard by the regulators. In Australia, all custodians must be approved by the Australian Securities and Investments Commission (ASIC). A major benefit of using a custodian is that you can hold all types of assets in the same account and they will often take care of the paperwork involved in investing for you, reducing the overall workload in this area.

In Australia, custodians are underutilised by retail investors but used all the time by institutions and government bodies. If you’ve ever seen a list of the top 10 shareholders in a stock like BHP, you’ll have noticed that the top holders are XYZ Nominees, ABC Nominees etc. These nominees are in fact custodians. If they’re the top holders in a stock like BHP, you can imagine just how much money has been entrusted to them. That amount of money is usually smart, well-informed money. If they view a custodian as being safe, it’s fair to say they’ve done their homework first, and as individual investors, we can feel safe about custodians as well.


This is an excerpt from the book ‘An Australian’s Guide To Investing In U.S. Stocks‘ by Matthew Jones.

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