When it comes to financial security planning, 2 terms hold significance: asset protection and asset custody. While not completely contradictory, these concepts entail the involvement of different experts:
- Asset protection falls under the purview of trustees.
- Asset custody is entrusted to custodians or depositories. While the profession is the same, the terminology may vary.
Exploring the main differences between asset protection and asset custody
To understand asset protection and asset custody, you should recognize their fundamental distinctions. These differences relate to the levels of responsibility and authority held by the specialists involved. Now, let’s take a closer look at the key factors that differentiate these 2 practices.
| Asset protection | Asset custody |
|---|---|
| When fulfilling their duties, the trustee uses special offshore funds, nominees, trusts, and other special-purpose customized institutions. Their main goal is to protect the beneficiary’s privacy and ensure their anonymity. | The custodian works for a specific organization like a bank or consulting firm and manages client affairs on behalf of that organization without creating separate entities. |
| The assets are owned by an irrevocable trust, and if needed, the trust can take on tax responsibilities upon request. | The custodian’s main job is to take care of the assets and keep them safe. The custodian handles all tasks on behalf of the client under a power of attorney, while the client remains the rightful owner of the assets. |
| The trustee handles the assets under the terms specified in the trust agreement. This agreement clearly states the trustee’s authority, rights, responsibilities, and permission to make investment transactions. | The custodian follows the client’s instructions when conducting asset transactions. Their main responsibility is to keep the assets safe by reducing risks, rather than focusing on making money or finding ways to minimize taxes. |
| The trustee has wide powers. They are responsible for making sure the terms of the trust agreement are met. The trustee’s fees usually depend on how well they manage the assets, and they earn a percentage based on the income generated. | The custodian is not responsible for any investment losses if a transaction doesn’t go well because they follow the client’s instructions. The main job of the custodian is to make sure the assets are kept safe and in the same condition, amount, and quality they were received. |
| When assets are transferred to a trust fund, they are safeguarded from claimants, creditors, or anyone trying to get financial compensation. This is especially true if the trust is registered abroad, making it even harder to reach the assets. | When assets are kept in custody, they are still considered the owner’s property. This means that creditors and other individuals who have financial claims against the owner may request that the assets be used to satisfy those claims. |
Does this mean that keeping assets in custody is less valuable and/or important for clients compared to asset protection because it has more limitations? In reality, both strategies are equally popular since people have different priorities and perspectives when it comes to managing their finances. Sometimes, it is enough to preserve assets as they are without earning any income, as this avoids taxes in the absence of profit. There are situations where assets do not generate passive income and can only provide returns if sold later, such as jewelry or artwork. In such cases, it makes sense to use the services of a custodian without the option of asset management.
Asset safekeeping services
As far as asset protection and security are concerned, 3 basic types of services are available to you.
1. Asset security
The term is commonly used in the field of information security, where experts focus on keeping digital assets safe. In today’s world, virtual possessions have significant value and require protection. Here are the valuable assets that fall into the above category:
- cryptocurrencies and electronic money
- confidential data and trade secrets
- sensitive information stored in different types of files
- information systems and software
- communication devices and equipment
- websites, domains, mobile applications, and access passwords
- logos, brand names, patents, trademarks, and other intellectual property
- other IT environment components.
These assets need to be shielded against cyber attacks, hacking attempts, data leaks, and copyright infringement, while ensuring their accessibility and recoverability for the owner.
2. Asset custody
The term asset custody is used when discussing the safe storage of valuable assets like stocks, bonds, and the like. Some countries have laws that regulate the security and availability of the above investment instruments. In the United States, for instance, investment managers and financial advisors who handle securities transactions on behalf of clients are obliged to entrust these assets to qualified custodians or depositories registered with the Securities and Exchange Commission (SEC). These rules protect investment asset owners from possible theft, unauthorized asset use, or other misconduct by consultants. Custodians ensure that investment transactions are legal, monitor outgoing transactions, and reduce risks.
However, if the owner of the assets doesn’t plan to engage in speculative activities or seek profits, they can deposit their assets for safekeeping. In such cases, the custodian’s responsibility is to return the assets in the same condition and quantity as they were received. Assets that can be placed in custody with no active investment activities provided for include derivatives, financial contracts, ownership shares in companies, cash deposits, agreements, ETFs, and other financial instruments.
3. Asset securitization
Securitization is not the same as asset security. It is a process that helps businesses improve their financial stability by increasing cash flow, restructuring assets, and attracting more working capital.
Here is a general explanation of how securitization works for various types of assets:
1. Accounts receivable. Let’s take an example: a private company secures a contract with a government organization. The government organization usually pays its debts at the end of the year, which is an unwritten tradition they follow. In this case, it makes no sense to expect any payments earlier. Meanwhile, the company has incurred expenses to fulfill its obligations, with work either in progress or completed. However, instead of receiving the expected profit, the company is left with unpaid debts from the government organization. A steady cash flow is essential for businesses. So, what can it do to improve its financial situation?
One option is to sell or transfer the accounts receivable to a specialized financial intermediary known as a special-purpose vehicle (SPV). An SPV is a legal entity specifically created to own these assets. The SPV promptly pays the full amount of the debt to the company, then issues bonds that are backed by the government organization’s debt, and sells these bonds to investors. As a result, the government organization’s liabilities are transferred to the bondholders. This arrangement benefits all parties involved.
2. Mortgage loans. In this situation, an illiquid asset refers to the long-term debt that a borrower owes to a bank. The borrower repays the loan slowly and in small amounts. If the bank faces a lack of funds, it can issue mortgage-backed bonds and sell them to a new owner. As a result, the borrower’s debt would shift from the bank to the investor. For the borrower, who is usually an individual, there would be no noticeable changes in the mortgage repayment terms. Government oversight of mortgage-backed bonds is crucial because they are inherently risky. The success of this approach depends on the borrower’s honesty and responsibility as a regular person dealing with financial difficulties and unexpected life events. For example, the 2008 crisis in the United States was caused by low-quality mortgage loans.
3. Securities. Here’s an example for you: an investor owns shares in a company and they are having trouble receiving dividends, which is common. However, the investor needs money to invest in more profitable securities. What can they do in this situation? One option is to find another investor who is interested in buying the distressed shares, not to make money, but for other reasons. For example, they might want to acquire a controlling stake in the company to have more influence over its BoD. This could be a nice deal for both parties.
To summarize, any liquid assets, including accounts receivable, can be securitized. In such cases, a custodian acts as an intermediary who purchases and redistributes the assets.
As you can see, it’s a good idea to get a professional evaluation for each asset to decide on the best way to protect, preserve, secure, or use it. This ensures that the owner gets the most benefit from their assets without worrying about losing them. If you require help with this, feel free to contact International Wealth consultants, and we will develop an effective plan to protect and keep your valuable assets safe.
