How Do You Custody Investments?

investment-advice2According to Wisconsin law, mutual insurance companies must hold all their investment securities themselves or in the custody of a bank or bank trust department. This rule is designed for the protection of the company and its policyholders. Assets held by a brokerage firm, for example, are done so as part of that brokerage firm’s own assets. However, if the brokerage firm should find itself in financial trouble, your assets could be at risk. Additionally, brokerage firms often generate revenue from the practice of securities lending, meaning that your assets may not “actually” be held by the brokerage firm because they have been lent to someone else.

If the company holds investments itself, they are typically kept in a vault or other secure site. However, it has been our experience that companies that are custodians of their own assets sometimes lose track of their investments and spend an inordinate amount of time locating important investment details or the actual investments on occasions when that is necessary. The dual control over assets designed to protect against mishandling also adds an administrative burden.  This burden is typically not adequately assessed as a cost when deciding to handle investments in this manner.

We strongly encourage mutual insurance companies to maintain custody of their assets with a qualified bank trust department. This arrangement complies with state law because it is safer than holding assets with a brokerage firm. Client assets are held apart from those of the bank trust department own, meaning they are protected if the bank or trust department falls on hard time (and does not engage in securities lending practices). You do have to pay a fee to obtain these custodial services (although we’ve found that these fees have a wide range), but we would assert this cost is worth every penny because assets don’t get lost and records are quickly and easily obtained, saving precious time and money.  Moreover, because trust companies are in the business of asset administration, the controls they have in place greatly diminish the risk of fund mishandling when compared to a company doing it themselves.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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