What is a Custodian?
A custodian is a firm that holds your money and your securities in an account for you. The custodian is in possession of your money and your investments.
For example, if you open a brokerage account with a discount broker such as TD Ameritrade you will send your money directly to that brokerage firm, and they will hold the money in your account, or if it is a margin account, they will hold the money in their account. They hold the money and the securities you purchase unless you order the certificates to be delivered to you. In that case, you hold the securities and your ownership is recorded on the books of the underlying company or companies.
Banks can also be custodians. For example, we use Trust Company of America (TCA). They are not a brokerage firm, but a bank trust, which is owned by a brokerage firm called E-Trade. Your money is held in a trust account with TCA. TCA is a bank trust specially designed and managed to hold your money, stocks, bonds, and other securities in a safekeeping trust account for you.
In recent years we've heard news stories of investors that were defrauded by money managers and brokers. Investors thought their money was safe but were surprised to find it wasn't. The common element was that the investment managers who defrauded their clients had possession of the money rather than a qualified third-party custodian. Since these investment managers controlled and had possession of the money, it was much easier for them to run off with it. There are legitimate examples of managers that need to hold and control the client's assets, but generally, clients rarely need to give an investment manager possession of their funds or securities.
A qualified custodian will not send money to your investment manager unless you give them permission to do so, and then it will be limited to the manager's fees. The custodian will take investment instructions to buy and sell securities from the investment manager but only if you authorize them to do so. This structure creates a useful barrier between your money and the manager. Most managers prefer this structure because it provides safety for them too.
Garrett Capital does not act as a custodian. We use other custodians but have authority to trade your account. We don't hold your money or securities. Using a qualified third-party custodian is the safe way to manage your money.
Which Custodians Does Garrett Capital Use?
Currently Garrett Capital manages client funds at five different Custodians:
Trust Company of America
TD Ameritrade Institutional
Would Garrett Capital Use Other Custodians?
Yes. We have used other custodians in the past and would use other custodians again depending on executions, ease of use, convenience for clients, and customer preference.