Have you ever wondered where your investments are stored after buying them?
Brokerage in Singapore offers investors the option to store their assets in either a CDP or a Custodian account. These are two different types of accounts, with each having a unique set of pros and cons.
Here, we will find out more about the differences between the two accounts and which you should use.
What is a CDP account?
Short for Central Depository, CDP is a depository account under Singapore Exchange (SGX). This account provides a centralised location to safely keep your purchased Singapore-listed securities.
In other words, your CDP account serves as a safe to store all your purchased financial products.
Pros of CDP
Able to use different brokerage
As your CDP account is a centralised depository account, you will be able to use any brokerage that allows account linkage to your CDP account. This grants you the option and flexibility to invest on one platform and sell on another without being tied down to a fixed broker.
*Do note that not all brokerage firms offer a CDP-Linked Account.
Legal owner of your investments
For a CDP account, financial products such as stocks are purchased in your name. This means that you are the legal owner of the stock. Hence, you are entitled to the rights of being a shareholder of the company you invest in such as:
- Invited to attend the company’s Annual General Meeting (AGM)
- Notified of any announcement made or action was taken by the company
- Entitled to vote rights
- Receive annual earnings reports
*Fun fact: In the olden days, you will receive a physical certificate to prove that you are your stock’s legal shareholder.
Dividends credited directly to your bank account
CDP account holders can opt for Direct Crediting Services which allows you to credit your dividend payments or other cash distributions directly into your registered bank account. This reduces the reliance on one fixed brokerage.
Cons of CDP
In exchange for legal ownership, a downside of using a CDP account is the higher fees that could potentially eat into your return on investment. Here are some key fees to take note of when you consider using a CDP account:
- Clearing fee: 0.0325% of contract value
- Trading/Settlement fee: 0.0075% of contract value
- Processing fee of S$80.25 (Inclusive of GST) for each failed contract
- Brokerage rate: 0.75% of each buy-in contract
*CDP account does not protect you against short selling, which is selling a stock you do not own. Always make sure you own the amount of investment you want to sell, or you can potentially be heavily penalised for this mistake.
Limited to Singapore’s market
A CDP account only allows you to store your investments in the Singapore market. This is a limiting factor for investors who want to invest overseas. To buy foreign-listed securities, you would have to open a custodian account with your brokerage.
What is a Custodian account?
A custodian account, on the other hand, is usually operated and maintained by a financial institution.
When you purchase any form of securities, your investments are stored in a custodian account with your brokerage. The assets are not purchased under your name but instead held in custody on your behalf. Robo-advisors such as Syfe and Endowus are currently only offering custodian accounts.
Furthermore, custodian accounts do not keep your assets in a centralised location, unlike CDP accounts. As such, should you want to liquidate your holdings or add to your investment, you are only allowed to do so with the same brokerage firm.
Pros of Custodian
Lower brokerage fee
A custodian account is typically cheaper when compared to a CDP account. The main reason is that you are required to trade using the same brokerage account. This restriction reassures brokerage firms that you will use their services again in the future once you made an initial investment.
Furthermore, dividends paid by your investments are typically reflected in a cash wallet with your brokerage. This also incentivises you to continue to use the same brokerage’s services be it buying insurance or using their cash management services.
Retaining you as a client provides your brokerage with potentially multiple revenue streams (in the form of brokerage fees), hence they will be more willing to charge a lower fee as compared to a CDP account.
Option to invest in foreign markets
If you want to invest in the securities listed overseas, you have to use a custodian account. Custodian accounts can store both Singapore and foreign securities. This grants you the flexibility to build a diverse portfolio.
While there are countries that offer their own central depository account, this would mean you have to manage and keep track of multiple depository accounts. A custodian account removes this limitation and gives you the ease of convenience.
Protecting your personal information
Securities bought using a custodian account are registered under the broker’s name with you, the client, as its nominee. The companies that you invest in do not have your information directly. This provides a layer of privacy protection for larger investors.
Cons of Custodian
Securities purchased in broker’s name
As mentioned above, stocks that you invest in are not registered in your name. While they are not directly under your name, you can still sell off the stocks after you purchase them. The only implication is that you are not entitled to the rights of a legal shareholder.
Without the rights of a legal shareholder, you have to liaise with your broker for any announcement by the company as well as to receive their annual report or even attend the AGM.
*Do note that there are limited seats for custodian account holders to AGM and the procedure to procure a seat is relatively tedious for most.
Although investing via a custodian account is typically cheaper than using a CDP account, not all brokerage firms are fully transparent with their fees and charges. Here are some key fees to take into account when considering a brokerage firm:
- Custodian fee
- Account Maintenance fee
- Trading fee
- Transfer fee
Always make sure to do your research before deciding to use a brokerage to prevent any unwanted surprise.
What happens if your Custodian goes bankrupt?
Brokerages that offer custodian accounts do not mix the client’s assets with their own, hence, your investments would be safe and off-limits to creditors.
Every brokerage firm has its own procedures in place to handle your holdings if they go bankrupt. Depending on the personal claim process, it can take some time before your investments are transferred to another custodian account or returned to your ownership.
TLDR: Summary of Key Differences
Broker with the client as nominee
|Type of Investment||Singapore-listed securities only|
Both Singapore and foreign securities
|Fees and Charges||Standard fees|
Varies between brokers but is generally lower than CDP
|Communication with company||Information sent directly to the client|
Information is sent to brokers who then relay them to the client
|Dividend Payouts||Directly to the specified bank account|
Paid to the client’s cash wallet under the brokerage account
Which should you use?
As both CDP and Custodian accounts have their own pros and cons, it depends on your personal investment goals to decide which is the better option. However, you may not have a choice but to store your investments in a custodian account if you want to purchase foreign-listed securities.
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