You may have came across both terms and not really understood the difference, which is understandable as the investing world seems to have endless amounts of jargon but it’s important to know what the difference is if you’re investing in the stock market, especially if something were to go wrong (touch wood). Despite your trade being executed in seconds, some complex processes occur in the background, in some instances your brokerage firm may act as broker and custodian or two separate institutions may be involved in the trade. So what’s the difference between a custodian and a broker? Let’s find out below. 

A custodian is a bank and financial institution that holds customers securities and other financial assets to prevent them being stolen or lost in physical or electronic form. The custodian can also provide several different kinds of financial services such as tax support, admin or collateral management and interestingly a custodian also gets involved in ETF creation. What does this all mean and speaking of ETF creation when is this Bitcoin ETF coming that they’ve been talking about for 2 years? 

To give you a real world example of what a custodian is, think of a custodian like an electronic safe, which the broker has the key to (with your permission). Custodians used to store your stock certificates in hard copies although those days are long gone and everything is handled electronically now. When you sell your stock the custodian transfers the electronic stock certificate to the buyers account and accepts cash from the seller on your behalf.

A broker is the institution you interact with when you’re buying securities whether that be through a trading app or picking up the phone (it’s a bit weird picking up the phone to make a trade these days though unless you’re a professional). A broker can also act as a ‘fully integrated broker’ in other words the broker takes on the role of broker and custodian. The main reason for this is cost as the broker doesn’t have to pay for outside custodian services and can offer very competitive commission rates to customers, hence the rise of ‘commission free trading apps’. 

In summary, you buy a share from a broker and the custodian bank holds that share for you in case of dispute. Unless of course you’re using a fully integrated broker that also acts as the custodian. This is why it’s important to know whether you’re investing with a broker and separate custodian or a fully integrated broker so you know who’s door to kick down when you’re trying to claw your money back. It is an unlikely scenario that your money would disappear out of thin air but knowing it’s with a reputable custodian provides a bit more reassurance I guess. 

The views expressed in this post are the authors and should not be construed as financial advice

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Author

David is an Engineer and Finance Writer educated to masters degree level with sound knowledge in investing, the stock market and personal finance. We hope the information provided on this site can help you achieve your financial goals.

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