TIME TO RETHINK CUSTODY SERVICES?

Custodians: Who Needs Them?

For non-profit organizations, the question of whether to engage a custodian isn’t as straightforward as it may seem. A custodian, at its core, is a financial institution that holds and safeguards an organization’s assets, providing services such as consolidated reporting, audit facilitation, and cash movement oversight. But while custodians can streamline certain aspects of financial management, they also come with costs and complexities that may or may not align with your organization’s needs.

Here’s what you need to know to make an informed decision.

What Does a Custodian Do?

A custodian’s primary role is to hold and protect an organization’s financial assets. Beyond safeguarding, custodians often provide additional services:

• Consolidated Reporting: Custodians compile data from various investments, giving you a single, unified statement of your portfolio.
• Separate Account Reporting:  If an organization uses an investment manager who manages individual securities through a separate account, a custodian is essential. In this arrangement, the custodian physically holds the securities (e.g., stocks or bonds) on behalf of the organization, while the investment manager is responsible for making decisions and managing the portfolio.
• Facilitating Cash Movements: They manage wires and transfers, ensuring funds are received appropriately and sent to the proper institutions for investment.   
• Audit Support: By maintaining detailed records, custodians can simplify audit preparation and reduce discrepancies.

However, custodians aren’t a universal requirement. Organizations with straightforward portfolios or well-oiled in-house or third-party systems may find them unnecessary, particularly given their associated costs.

What Does It Cost?

Custodian fees can range widely, starting around $15,000 or 3-5 basis points on all assets under custody and climbing to minimums of $100,000 or more depending on the institution and services provided. For some non-profits, this could be the equivalent of hiring one or two additional staff members, or resources that could otherwise be directed toward mission-critical work.

Additionally, custodians can either impose line-item fees for each co-mingled fund or aggregate charges based on total assets, adding another potential layer of complexity to the cost structure. For smaller organizations or those with tight budgets, these costs might outweigh the benefits.

Do You Need A Custodian?

For some organizations, custodians may feel redundant or unnecessary:

• Streamlined Portfolios: Non-profits holding readily priced assets, such as mutual funds, may find that a custodian adds little value beyond what a bank or brokerage account already provides due to the minimal administrative complexity involved.
• Portfolio Complexity: Even if the organization holds more complex investments—such as private equity, hedge funds, or other commingled investments—the benefit of engaging a custodian can still be minimal. Custodians rely on "shadow" reporting, consolidating data provided by investment managers. However, these assets often involve delayed or “stale” valuations: for instance, private equity might report with a three-month lag, while hedge funds may release updated valuations several days into the following month. As a result, the reported values may not align with true month-end valuations, leading to inconsistencies and reports that are not always a reliable real-time reflection of broader portfolio performance.

• An internal team can have an edge over a custodian when managing complex investments by leveraging direct relationships with managers to access updates and interim estimates sooner, allowing for more accurate and timely reporting. Additionally, their ability to tailor reporting, incorporate contextual insights, and respond quickly to delays ensures greater alignment with the organization’s strategy and real-time portfolio performance.

• Strong Internal Processes: Organizations that have developed robust internal systems or work with consultants who already handle statement collection, reconciliation, and reporting may find custodial services unnecessary. These organizations often achieve the same level of accuracy and transparency without incurring the additional expense of a custodian. By leveraging existing workflows, they can maintain control and reduce costs while achieving comparable financial oversight.
• Cost Sensitivity: Smaller organizations or those with limited budgets might find that custodian fees outweigh the efficiencies they bring.

One alternative is maintaining an operating or cash account through a bank or brokerage. For some organizations, this approach provides the flexibility they need for cash movements without incurring custodial fees. However, it may require more manual effort in gathering and managing statements from individual managers—again, this is mitigated or made redundant if such a service is already provided by a third-party consultant or internal committee. For organizations with minimal investment needs, custodians may only add an unnecessary layer of administration.

Another item to consider is internal bank transfers. These occur when an organization chooses to have a custodian handle private equity portfolios; capital calls or distributions for private investments are harder to keep track of, as such transactions move within the same bank before being wired out to a manager. While custodians can centralize reporting, they don’t always solve the specific issues with internal transfers, which often show up in records simply as "cash outflows." This lack of detail can make it difficult to track where the money actually went, similar to trying to balance a checkbook without knowing where some of the money was spent.

What’s Your Objective?

Ultimately, whether a custodian is right for your non-profit depends on your goals and operational needs. Ask yourself:

1. How Complex Are Your Investments?
   • Are you managing commingled funds, private equity, hedge funds, or other illiquid assets, and are you able to provide comparably accurate reporting with existing resources?
2. How Fee-Sensitive Are You?
   • Can your budget accommodate custodian fees without compromising other priorities?
3. What Are Your Audit Requirements?
   • Will your auditors demand detailed, consolidated statements that you are otherwise unable to easily provide?

Making the Right Choice

Custodians can be an invaluable partner for some non-profits, offering efficiency, accuracy, and peace of mind. For others, they may represent an unnecessary cost or complexity, especially if internal processes or existing consultants already handle key tasks effectively.

At Crewcial Partners, we work closely with non-profits to evaluate these trade-offs, ensuring that every decision—including whether to engage a custodian or not—aligns with their mission and operational needs. The answer, as always, depends. But with the right guidance, you can make the best choice for your organization’s needs to ensure your investments not only support your mission today, but can also sustain your impact for generations to come.