Guess what? Growing up, I often came across such words that I found intriguing: fiduciary, steward, faithfulness, ‘in trust for’, beneficiary, custodian and trusteeship. Except for ‘faithfulness’ which perhaps my elders would advise me of its importance, the others were quite ‘technical’ and my understanding only grew with use and practice.
For instance, I could say ‘a steward is required to show faithfulness in her fiduciary responsibilities’. Otherwise, ‘those entrusted with trusteeship take custody of duties on the behalf of a beneficiary’. My own way of making sense of the jargon.
The words ‘fiduciary’, ‘steward’, ‘custodian’ and ‘trustee’ have similar meanings. Actually, ‘custodian’ and ‘trustee’, in practice, refer to people with quite different roles in fund management. They all act as fiduciaries or stewards — entrusted with assets that belong to another, for proper management.
Custodians
Custodians are tasked with holding, for a fund or account, all assets and documentation of transactions on asset trades. The assets and documentations are held for safe-keeping (against theft or loss) and easy retrieval. By virtue of their business, custodians are usually banks- commercial banks, who offer custody services.
In Ghana, sixteen (16) banks offer custodian services to various investment products, funds and trusts. Their business (as custodians) is licensed by the Securities and Exchange Commission (SEC, the Commission) and they report regularly to the Commission on their activities. Their reports would typically show assets in their various categories by volume and value, who the issuers of the assets/securities are and, in the case of fixed income instruments, yields and times to maturity. Also, details of transaction for the acquisition or sale of any assets, and bank account transfers for settlements made would be spelt out.
The custodian is contracted by the owner of the fund or investment account, trustee(s) or a fund manager. A custodial agreement to govern the activities of the custodian in relation to the fund/investment account is signed between the custodian and the fund owners or their representatives. The agreement would also contain a fee or a fee structure (to determine fees) which would be deemed earned by the custodian in the performance of their duty.
Investment advisory and fund management firms routinely use custodians to safeguard the assets they manage for their clients. A fund manager would instruct or advise a custodian to settle a trade. The custodian would receive this advice or instruction in an agreed form (email, phone call, WhatsApp) with proper authorization and effect a transfer of funds to the issuer or seller of the security. Documents (electronic, paper or otherwise) to show the purchase are given to the custodian for the transfer in settlement to be effected. The custodian would maintain a register showing all investment assets, the dates they became effective, amount, value and any remarks pertaining to the investment account or fund.
In Ghana, the work of the custodian became even more prominent with the advent of the three-tier pension industry. A pension fund custodian receives contributions remitted by an employer under the National Pensions Act, 2008 (Act 766) on behalf of the Trustees.
The custodian would hold pension fund and assets in trust for the owner(s), settle transactions and undertake activities related to the administration of pension fund investments including the collection of dividends and related activities. Additionally, the custodian undertakes statistical analysis on the investments and returns on investments with respect to pension funds in their custody and provide data and information to the Trustee and the regulator.
Since the custodian is charged with the safekeeping of the assets, the full replacement cost, including any incidental costs, in the event of loss of pension fund assets resulting directly or indirectly from fraud, negligence, willful default, misconduct or error by the custodian or its employees shall be borne by the custodian.
Trustees
By law, a trustee is an individual person or member of a board given control or powers of administration of property in trust with a legal obligation to administer it, solely for the purposes specified. A trustee represents or acts in the interest of the owner. Where there is a trust, the trustee acts as the legal owner of the assets, and is responsible for handling any of the assets held in trust, tax filings for the trust, and for distributing the assets according to the terms of the trust. As a matter of fact, the trustee acts as a fiduciary entrusted with the management of the fund according to a certain set of laid-down rules set out in a document called the trust deed.
A trustee is expected to keep trust assets separate. A trustee cannot comingle trust assets with any other assets. Comingling occurs when a trust asset or property is mixed with property belonging to another. A trustee cannot use trust property for private gain, sell or misappropriate trust assets.
A trustee is supposed to be indifferent to any beneficiary and is expected to treat all beneficiaries the same. The trustee is also expected to invest trust assets in a conservative manner so as to reduce the risk of loss to the beneficiaries. It is important that the trustee keeps accurate records and make timely reports to beneficiaries, showing the assets owned by the trust as well as any obligations of the trust and what property or assets (if any) have been recently distributed.
Pension fund trustees play a pivotal role in our pension industry. Every pension fund is managed by a trustee. In Ghana, there are 25 corporate pension fund trustees in good standing, plus a number of individual persons. Additionally, there are quite a number of member-nominated boards of trustees in a good number of companies in Ghana.
Pension funds are entrusted in the hands of pension fund trustees who contract the services of pension fund managers to take investment decisions and select securities for purchase, holding or sale. The trustees also contract pension fund custodians to hold the assets (and documentation to them) of the fund. If the trustee does not have the capability, pension fund administration is contracted out to a pension fund administrator. However, invariably, corporate trustees have the systems in place to carry out this function themselves.
Administrators
A very important role is carried out by fund administrators of pooled funds (where many individual investors pool their investments together into a fund). The fund administrator does all the ‘back office’ financial paperwork processing, ensuring that clients have up-to-date information on their funds’ investment performance. In some cases, the fund administrator also ensures that the funds comply with all necessary legal requirements. Pension fund administrators are usually units or wholly owned subsidiaries of corporate trustees and carry out their functions as part of the overall function of the trustee.
In conclusion
Before the three-tier pension industry began, fund managers had the discretion and capabilities to carry out fund administration for pooled funds. They also held funds in their own custody accounts, though not comingles with their own funds. Where pension funds are concerned currently, however, the separation of roles and responsibilities allows for more openness, better reporting to beneficiaries (fund contributors) and better execution of the various duties associated with managing each fund. This proper practice transcends pension fund management. Any large funds may be managed in like manner to ensure that distinct firms carry out distinct roles and the client(s) is the beneficiary.
About the Writer
Kwadwo is a Senior Investment Analyst at OctaneDC Limited and heads OctaneDC Research. Prior to joining OctaneDC team, Kwadwo was a Fund Manager at Dalex Capital and has over a decade experience in fund management and administration, portfolio management, management consulting, operations management and process improvement. You may contact him at [email protected] or +233244563530
