CHESS vs custodian: what’s the difference?
Written by Glen James
Host of the Retire Right & money money money (formerly my millennial money) podcasts & author of The Quick-Start Guide to Investing.
I’m passionate about educating anyone and everyone on the topic of investing, so today I want to unpack what the CHESS and custodian models are. Over the years I’ve seen a lot of confusion and bias towards CHESS, leading to a lot of heated debate. Whether you invest in shares in your own name, or continue to pump your superannuation, understanding these terms will give you greater clarity around investing more broadly, but also why you invest the way that you do.
The difference between CHESS + the custodian model
CHESS (Clearing House Electronic Subregister System) is the ASX’s record-keeping system. With a CHESS-sponsored broker, you get your own Holder Identification Number (HIN) and the shares sit directly against your name. With a custodian model, your shares are pooled under the broker’s HIN and they keep track of which shares are yours. Purists argue that CHESS equals safety and true ownership. But if you buy ETFs, you don’t actually own the underlying shares anyway, the ETF provider does. You just own units.
A common tax reporting myth
I’ve often heard people say that investing with CHESS makes tax time easier. But neither CHESS nor custodian brokers ‘do your tax’ for you. You’ll still need either:
a tool like Sharesight,
a spreadsheet, or
an accountant.
Both models give you statements. Custodian models provide a consolidated report of all movements throughout the year whereas your shares or ETFs held directly via the ASX system does not give you consolidated tax reporting.
Why obsessing over CHESS misses the point
Most Australians already have the bulk of their investments in super, and super funds operate under the custodian model. Many low-cost brokers also use the custodian model to keep fees down and offer fractional investing. If you buy international shares, you’re out of CHESS as well. So, unless you’ve got a very specific reason (like running a self-managed super fund with direct equities), there’s no real need to be a CHESS zealot.
My view
Stop letting Facebook threads scare you into thinking you’re ‘doing it wrong’ if you’re not CHESS-sponsored. The real question isn’t CHESS vs custodian, it’s ‘do you understand how your investments are structured, and does that align with your goals?’ If yes, then relax. Pick the platform and investing option that fits your needs (fees, reporting, features) and get on with it. Because at the end of the day, obsessing over CHESS doesn’t grow your wealth. Actually investing does.
Community question
Community member says: I’m 46 years old and have my money well under control. Investing in shares is something I’ve always been curious about and I’ve seen others in the Facebook group talk about it. But I’m completely new to it. Is it too late for me to start investing?
Glen says: Not at all! I know we talk about investing as early in your life as you can, but you could live well into your 80s! So there’s a big runway there for your investing to have an impact. Even those who are retired are still investing, because they have potentially 20 years of retirement years ahead of them. My focus is always on investing for the long term, and long term is anything 5+ years.
The key is to start where you are, start small and grow your knowledge over time. It’s important to give your investing a purpose: why do you want to invest? Where would you use the funds? From there ensure your money management system and emergency fund is solid and you have a set amount you can invest each pay cycle without it causing drama with your everyday bills etc.
From there investing in your own name is usually the simplest option and start with something as simple as micro-investing. This gets you some runs on the board to see how it all works and builds the habit of investing regularly. Don’t forget you’re likely also investing via your superannuation so get to know how that money is invested and ensure it’s set up the way you want. You could begin by simply adding more to your super.
I will say just be aware of how share ownership might impact your tax or pension situation, but this goes for any financial decision you make as you get closer to retiring. The important thing is you know what you’re doing, why, and the flow on effects of your decisions.
In my book, the quick start guide to investing, I touch on everything you’ll need to know. Grab a copy! It’s a short and easy to understand read and I promise investing will make sense once you’ve read it.