Custodian Account: What Are You Giving Up In Exchange For Lower Commission Charges

Comparing brokerage commission fees is usually one of the first things you do when you start investing. Due to the competitive nature of the stockbroking industry, the commission rates are usually similar across the board even if the trading platforms used varies.

The “Min Fees” column shows the minimum fee brokerage firms would charge for transaction amount less than $50k. That is, if you were to invest in a stock for $1,000, the brokerage firm (say Maybank Kim Eng in this case) would charge a commission fee of $25 instead of the $2.75 (0.275% of the transacted amount).

Glancing through the column, we can see that Standard Chartered Bank (SCB) offers the lowest “Min Fee”. However, it’s worth noting that the stocks purchased from SCB would be held in custodian account instead of your own personal Central Depository account (CDP).

Having a custodian account means that the custodian (the brokerage firm) will hold the shares you bought under their name, rather than to deposit the shares into your CDP account.

Why Custodian Accounts Can Offer A Cheaper Rate

SCB is not the only brokerage firm that holds your stocks in the custodian account. In fact, stocks bought under pre-funded accounts are also held in the custody of the brokerage firms.

Stocks bought under custodian accounts are charged a lower commission rate because the brokerage firms can lower their expenses. CDP charges a fee to the brokerage firms for keeping the stocks under them. Hence, by holding stocks under their own name, they can strip off the expenses paid to CDP. For instance, Maybank Kim Eng charges a lower rate of 0.18% for KE Trade Prefunded compared to the usual 0.275% for a contract value of less than $50,000.

What Do I Have To Take Note

#1 Maintenance & Corporate Action Handling Fee

Most brokerage firms will charge a custody maintenance fee every quarter and handling fee for every corporate action. Usually, the maintenance fees can be waived off provided you hit a minimum number of trades for the quarter, depending on the brokerage firms you choose.

#2 Annual General Meeting (or Annual General Makan) Session Gone

As the stocks are bought under the name of the brokerage firm, you will not be invited to attend the AGM of the company you have invested in. Besides losing your makan session, this also means that you will lose your chance to vote during AGM and to interact with management. It is possible to contact your brokerage firm to arrange your attendance in AGM, however Singapore law currently allows the firm to appoint only 2 registered “member” as the proxies to attend the AGM.

#3 Corporate Actions Will Not Be Notified To You Directly

Companies that you have invested in will not notify you directly about their corporate action, which includes rights issue and dividend reinvestment plans. In this case, brokerage firms are the ones notifying you regarding the corporate actions.

#4 Cessation Of The Custodian Will Not Affect Your Holdings

According to SCB, in the event of the cessation of custodian account service, the Bank would return the stocks back to the investors, or transfer it to another agent of client’s choice. Therefore, you should not be so worried about your stocks holding if the brokerage firm were to close down (although you really should be choosing a reputable one in the first place).

You Need A Custodian Account When You Invest Overseas

CDP account is used to store Singapore stocks. For overseas stocks, you have to open a custodian account with your brokerage firm. In addition, the fees charged to maintain foreign custodian account is different from local custodian account. Hence, it is worth taking note of the difference in fee across the brokerage firms.

In many other countries, a Central Depository Account is not common and with most foreign brokerage firms holding the stocks of their client directly under custody.

Custodian Account: More Suitable For Investors Who Trade Frequently

In conclusion, we think that custodian accounts are more suitable for investors who trade frequently as they are able to enjoy the lower commission rates while waiving off the quarterly custody maintenance charges.

For investors who are trading less frequently, are adopting a buy and hold (forever) strategy, they might be better off paying a slightly higher commission rates to hold their stocks under CDP accounts. Fret not, you will be able to recoup the difference in commission rates between custodian and CDP accounts through your AGM buffet sessions.

Read Also: How Transaction Cost Can Affect Your Investment Yield

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