Custody of assets: Beyond the offshore legal and tax-planning objectives (Part 1)

Investors know that building an investment portfolio requires careful planning and extensive research on which companies and instruments to invest.  What is often over looked is the institution with which assets are entrusted or held in custody.  Institutions that hold assets are known as custodians and they are responsible for the secure holding of financial assets on behalf of clients.  Custodial institutions are regulated and licensed banks or investment houses.  All offshore custodians, including banks, must maintain counter party custodial relationships with onshore institutions to settle trades and other transactions in the relevant local markets.  The offshore custody of investment accounts and assets can provide long term benefits in estate planning and wealth protection.  (These points will be discussed in greater detail in a secondary article)

The legal structures and manner in which financial institutions hold and custody assets may differ considerably from one institution to another.  In the traditional banking model the bank will add your assets to their holdings and place them on to their balance sheet which will increase their asset base.  An opposing entry is made to the bank’s liabilities – increasing what is due to clients.

Another model, which is used by LOM, has a key difference in that it does not take client assets onto the company’s balance sheet but holds client assets ‘in trust’.   As a licensed custodian, LOM maintains relationships with onshore custodians similar to a bank, but there is a definitive legal separation of client assets from those of LOM’s.  As we hold assets ‘in trust’ on behalf of customers and have an additional fiduciary responsibility to ensure this separation and security of client assets.

Who has custody of your assets and how they are held is an important part of one’s overall financial and estate planning.   Your custodian matters; it was less than a decade ago that a number of large banking institutions were on the brink of failure if government bailout had not been forth coming.  Who your custodian’s counter parties are, are just as important as who your custodian is.  Look for these merits in your offshore custodian:

·         Licensed by a regulatory authority

·         Solid counter party relationships with a network of global financial institutions

·          Sophisticated accounting and software systems (for segregation and accounting of assets)

·         Experience and knowledge in finance and the settlement of international trades

·          Legal structures for security of client assets

·          Strong internal audit and compliance functions

·         External auditors

It is also just as important where they operate.  Jurisdiction of choice should have following traits:

·         Well-recognized and strong regulatory standards and laws

·          Stable and safe political environment

·         Advanced physical infrastructure and telecommunications

·         Accounting professionals and international law firms specializing in finance

·         Preferably an English common law jurisdiction

The right custodian will allow you to focus on global investments and trading without a thought for the complexities of global settlements and corporate actions.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.