Custodial Agreement

A custodial agreement is one where a third party contractually agrees to manage or hold an asset on behalf of the actual owner or beneficiaries in return for a fee.

This is often the case with retirement plans, such as IRAs and health saving accounts, which may be held at brokerage firms or banks, and 401-Ks, which an employer may have designated with an outside financial management or brokerage firm to collect and administer contributions and distributions. Institutionally, custodial agreements are often used when complex portfolios may contain asset classes unfamiliar to the primary managers.

An investment and commercial bank may be handling a portfolio of bonds and stocks, but may also have unusual real estate or art collections, for example, whose maintenance and management requirements are outside of its normal expertise. In those instances, a specialist firm would be contracted to administer those assets within the portfolio and the primary manager’s purview on a custodial basis.

Trustees administering funds for trust beneficiaries are, in effect, also operating under a custodial agreement arrangement. Trustees have a lot of responsibility over trusts and how the trust beneficiaries turn out. Gram Parsons inherited a trust fund, but was a heroin addict. However, as a member of the Byrds, he wound up creating Country Rock, with The Eagles being his most famous musical followers. Bruce Wayne inherited a trust fund and became an obsessed psychopath who would dress up like a bat and pick fights with random street thugs in alleys. Which trustee did the better job under the custodial agreement?