What Is the Difference Between a Trustee and a Custodian?

In this post we’ll clear up what the difference is between a trustee and a custodian, and lay out what each of them does to make a trust safe and effective.

Image placeholder By Vincent Chok on 12 December 2018

When making investments, the common actors you usually come across are trustees and custodians. Initially, it can seem difficult to tell them apart; in fact, they each have a clearly defined role in the global financial system value-chain.

Trustee vs custodian: the difference

A Trustee manages assets on behalf of the beneficiary of a trust, an estate or another party. A custodian is the entity that actually holds the assets in question for safekeeping.

Custodians physically secure assets, but don’t have the authority to make management decisions. Trustees have the authority to make management decisions, but don’t necessarily hold or secure assets.

Fiduciary responsibility and power of investment

The powers trustees have to invest are determined in part by statute, partly by the trust deed and partly by common law. In Hong Kong, trustee powers are regulated by the 1934 Trust Act, amended by 2013’s Trust Law (Amendment) Bill, as well as case law that "adheres closely to English and post-Commonwealth" case law.

Trustees typically have wide power of investment, along with a fiduciary duty to make investment decisions in the best interest of the beneficiaries.

By contrast, a custodian has to minimize the risk of their theft or loss, but the custodian does not have fiduciary responsibilities to the beneficiaries. Custodians act on instructions from the client or an authorized person like a trustee.

Authorization of trustees, selection of custodians

When a trust is first set up, its founding document is a trust deed. The trust deed names the trustee and confers on them authority over the trust assets. A trust deed is almost always a custom document, created for each trust depending on the purpose and scope of the trustee's powers. Trusts can be vested or non-vested, discretionary or non-discretionary; there are many options, and no such thing as a "standard" trust arrangement.

Subsequently, trustees select custodians, rather than the other way around. A trustee chooses the most appropriate custodian, and may move assets around from one custodian and another — for instance, by moving stocks and bonds between banks.

Conflicts of interest for trustees

It’s a fundamental principle of trust law that a trustee should never place themselves in a position where their personal interests conflict with their duties as a trustee. For instance, it couldn’t use money from a trust it controls to fund its own operations.

Typically, this is dealt with by maintaining two balance sheets, so that client money and the trustee's own money is not commingled, and by making suitable custodial arrangements.

While in some situations the trustee may also be the custodian — in the case of a trust company holding bearer instruments, for instance, there is no conflict of interest — in others, a third-party custodian can both make sure there is no conflict and deliver added value such as trade settlement.

Custodians are not responsible for conflicts of interest because they are appointed by the client or trustee and always act on their instructions, and have no other duties than to carry out transactions mandated by the client or an authorized person, and to keep assets securely.

Different types of trustee and custodian

Trustees can be individuals, companies, or any other entity that has the right to govern a trust. Trustees in Hong Kong are subject to the Anti-Money Laundering and Counter Terrorist Financing (Financial Institutions) Ordinance (AMLO), and to statutory due diligence and record-keeping requirements; recently a new licensing regime was introduced in Hong Kong, requiring registration at the registrar of Companies and a "fit and proper" test for individuals who control trust funds.

Custodians are usually depository banks and securities depositories, but are sometimes credit unions, or other organizations that keep money or financial instruments for their account holders. They are not affected by the new licensing regime: the selection of an appropriate custodian is a part of a trustee’s duty. However, a custodians in Hong Kong typically fall under the purview of the HKMA or the SFC, or when overseas, a similar regulatory body in equivalent jurisdiction, and thus be subject to regulations of their own.


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