Forming an investment management strategy may often seem intimidating and complex. One of the reasons for this is the jargon and terminologies that often lead to misunderstanding and confusion. For instance, a common term that you may come across when setting your investment management strategy is ‘custodian’. Knowing the difference between a ‘custodian’ and your ‘investment manager’ is crucial for developing an understanding of how your wealth is managed.
First things first: Who is an investment manager?
Investment management services are a type of personalised service provided by advisory firms, broking firms, or banks where a dedicated investment manager is handed over your account. Your investment manager is responsible for determining and ascertaining your financial goals and needs for the future. Majorly, High Net-Worth Individual (HNI), Non-Resident Indian (NRI), Non-Resident External (NRE) FD or NRE account holders are the ones who work with investment managers to meet their crucial financial goals.
The investment manager works with their team to draft an investment policy statement to meet your financial goals. The investment policy statement contains your investment strategy and tactics, asset allocation strategy, and other crucial details that must be implemented depending upon your specific circumstances like your risk tolerance level, goal type, investment time horizon, etc. Your investment policy statement determines how and in which asset class and investment instruments your surplus funds must be invested.
As mentioned above, your investment manager is supported by an experienced team to design your money management strategy. Both the investment manager as well as the team work together to make sure your portfolio is in alignment with your investment strategy.
What is a custodian?
While your investment manager makes decisions regarding your investment management, it is crucial to ensure the investment management firm does not hold any of your portfolio assets. Here is where the custodian plays a significant role.
A custodian is a financial institution or bank that is responsible for safeguarding your assets. The assets that they protect are stocks, gold, bonds, funds, and other valuables. The custodian also manages the sale and purchase of your assets on your behalf. As a crucial market intermediary, custodians assist in lowering systemic risk prevalent in the capital market. They also make NRI banking simpler by allowing the swift issue of cross-border securities like Global Depository Receipts and American Depository Receipts.
By holding your assets and valuables as a separate entity from your investment firm, the custodian plays a key role in protecting your investment portfolio against discrepancies, misappropriations, and the insolvency of the investment firm.
Investment manager and custodian: Two separate entities
It is crucial to understand that the role of an investment manager is separate from a custodian’s duties. A custodian’s role is to hold and safeguard your money and prevent misdirection of your parked funds. This is why all your money transfers and cheques are payable to your custodian and not your investment management firm. Investment management firms just deal with providing personalised investment solutions with easy access to a fund manager to take care of your long-term and short-term financial goals and wealth management plans.