CHESS sponsored vs custodian: Understanding investment ownership

Understanding how your investments in listed shares or exchange traded funds are held can be as crucial as choosing what to invest in.

In Australia, there are two primary models of investment ownership for listed shares and exchange traded funds: the CHESS sponsored model and the custodial model. This guide will seek to demystify both, highlight their key differences and help you understand how each approach works so you can make confident, informed decisions about your financial future.

The custodian model: Beneficial ownership and global access

In contrast to the CHESS sponsored model, the custodial model involves a licensed financial institution (the custodian) holding your investments on your behalf.

While the custodian holds the legal title to the assets, you as the investor, retain ‘beneficial ownership’. This means you are entitled to all the economic benefits of the investments, such as dividends, interest and capital gains.

How custodial ownership works

When you invest through a custodial platform, your shares and other assets are typically held in a pooled account under the custodian’s name. Instead of a HIN, the platform will provide you with a statement of your beneficial holdings.

The custodian or administrator of the platform is usually responsible for all the administrative tasks associated with your investments, including settlement, corporate actions and record-keeping.

Advantages of the custodial model

• Regulated and secure: Custodial holdings in Australia are tightly regulated by ASIC. Licensed custodians must hold client assets separately from their own, comply with strict capital and audit requirements, and provide periodic reports to ASIC. This structure helps protect investors even if the custodian itself (in its personal capacity) experiences financial trouble.
• Fractional investing: Some custodial platforms offer fractional share investing, allowing you to purchase a portion of a share. This makes highly priced stocks more accessible and enables greater diversification, even with smaller investment amounts.
• Lower fees and accessibility: Custodian models can offer more competitive brokerage fees and lower minimum investment requirements as they can pool multiple trades together and don’t incur CHESS related fees. Additionally, some custodial models allow fractional investing, which can allow platforms to drop their minimum investment amount. This makes investing more affordable and accessible for a wider range of investors, particularly those just starting out.
• Simplified administration: The platform operator, with the support of the administrator and/or custodian, handles the complex administrative burden of managing your investments, including processing dividends, managing corporate actions, record-keeping and tax statements. This simplifies the investment process for you.

Disadvantages of the custodial model

• ‘Indirect’ legal ownership: For some investors, the fact that the custodian, not the investor, holds legal title to the assets can be a consideration. While you, as the beneficial owner, still retain all economic rights, this structure may not suit everyone’s preferences.
• Corporate action limitations: While the custodian handles corporate actions, you may have less direct control or participation in shareholder voting and other corporate actions compared to direct ownership under a CHESS sponsored model.

The CHESS sponsored model: Direct ownership

CHESS, or the Clearing House Electronic Subregister System, is Australia’s electronic system for managing the settlement of ASX-listed shares and other exchange traded products.

The CHESS subregister, operated by the ASX, records the ownership of share or unit holdings. In a CHESS sponsored model, your investments are held directly in your own name on the CHESS subregister.

How CHESS sponsorship works

When you invest through a CHESS sponsored broker, you’re assigned a unique Holder Identification Number (HIN). This HIN acts like an account number, linking all your holdings directly to you. This means that the shares or units you purchase are registered in your name and you are the legal owner of those investments.

You can typically find your HIN on your CHESS statements, usually starting with the letter ‘X’ followed by 10 digits.

Advantages of CHESS sponsorship

• Direct legal ownership: With the CHESS model, you are the direct legal owner of your investments, with the relevant shares or units held in your name on the CHESS subregister.
• Corporate action participation: As a direct shareholder, you have the right to participate in corporate actions, such as voting at Annual General Meetings (AGMs) and participating in dividend reinvestment plans (DRPs).

Disadvantages of CHESS sponsorship

• Australian market limitation: CHESS sponsorship only applies to ASX-listed securities. If you wish to invest in international markets, you will need a different arrangement (such as a custodial holding).
• Higher brokerage fees: Historically, CHESS sponsored platforms have tended to charge higher brokerage fees compared to some custodial models. Having said this, the gap has narrowed in recent years.
• Minimum investment requirements: CHESS sponsored brokers often have minimum investment requirements, typically around $500 for Australian shares. This can be a barrier for some new investors.