HIN vs. custodial ownership: Who really owns your investments?

At last year's ASX Investor Day, I was asked an important question: "Which is better - HIN or custodial ownership?" 

It was a query I welcomed because, quite frankly, I suspect many investors either don't fully grasp, or are completely unaware of, the difference - and why it matters.  

To answer the question, let's take a look at what happens behind the scenes when you buy ASX-listed investments. 

The Holder Identification Number (HIN) model 

In Australia, you can own shares or ETFs in one of two ways - under your own Holder Identification Number (HIN) or via a custodial, 'co-mingled', structure.  

Under the CHESS-sponsored HIN model (CHESS being the computer system used by the ASX to record shareholdings), you are the legal owner of your shares or ETFs. 

The assets can be traced directly to you through a unique HIN. It works in much the same way as a bank account number that lets your savings be identified as belonging to you.  

You can find your HIN on a CHESS statement. It starts with the letter X and is followed by 10 numbers, for example, X0001234567. 

The pros of a HIN 

The main benefit of the HIN model is that your shares and ETFs are held separately in your name, and you are clearly identified as the legal owner of those investments.  

This provides valuable protection. If your broker goes bust, your ownership of the investments isn't impacted, and the shares and ETFs can be directly traced to you through your HIN.   

While it won't be a selling point for everyone, your HIN also gives you voting rights at a company's annual general meeting and the option to participate in a company's dividend reinvestment plan. 

These advantages explain why InvestSMART uses the HIN model. Your investments are held in your name under your individual HIN (or the name and HIN of your chosen entity such as a self-managed super fund).  

The cons of a HIN 

There are a couple of downsides. Platforms that use the CHESS-sponsored (HIN) system may charge higher brokerage.  And, as an investor, you are bound by the ASX's $500 minimum trade rule. 

The custodial ownership model 

Not every broker or investing platform uses the HIN approach.  

Some prefer a custodial system where the assets and trades of multiple customers are pooled together in an account under the name of a single custodian.  

Unlike the HIN system, the custodian is the legal owner of the shares. You, the investor, have 'beneficial' ownership, meaning the dividends and/or fund distributions all flow your way. 

The pros of custodial ownership

As a custodial model typically comes with lower costs, investors can often save with cheaper brokerage and/or fees. This can make it more affordable to get into the market. 

In addition, minimum investment requirements can be very low. 

'Fractional' investing may also be possible, letting investors purchase part of a share, which can make expensive shares more accessible.  

The cons of custodial ownership 

Under the custodial system, you won't have the ability to participate in shareholder votes though that's hardly going to be a deal breaker for a lot of people.  

The key downside, however, is that the custodian - not you - is the legal owner of the underlying investments. As the Moneysmart website notes, this gives investors fewer protections if something goes wrong. 

In 2018, for instance, Halifax Investment Services, an Australian broker that used a custodial model, went into liquidation taking $211 million of its 12,000 investors' co-mingled money with it.  

The whole thing took a long time to sort out (with several court battles along the way). It wasn't until mid-2022 that money began to flow back to investors. Some are still waiting for their final instalments.   

Weighing it up 

To be fair, if a CHESS-sponsored platform went belly up, the process of getting their money back wouldn't be entirely painless for investors. Ultimately, though, the CHESS ledger would provide clear details of who owns what, allowing investors to be readily matched with their assets via their HIN. 

For me, the greater certainty of ownership is an advantage of the HIN model that's hard to overlook. You may feel differently. What matters is that you understand how your shares/ETFs are held.  

This can call for a deep dive into a platform's product disclosure statement. If there is anything you're unsure of, ask to speak to a real person who can provide a clear explanation of the ownership system being used. 

The bottom line is that as investors, we face a variety of risks. It's worth thinking carefully about whether you are prepared to add an extra layer of risk around who is the legal owner of your shares and ETFs.