Nobody sets out
to have custody.

Most advisors know they do not have custody in the obvious sense. Custody attaches to authority, and arrives through arrangements that feel entirely routine.

Custody is broader than holding assets

Most advisors know they do not have custody in the obvious sense — the assets sit at a qualified custodian and the firm never touches them. Custody attaches to authority, not possession, and a firm can acquire it through arrangements that feel entirely routine.

The common ways it arrives unintentionally

Standing letters of authorization. Authority to move client money to a third party generally constitutes custody. There is a well-known set of conditions under which the SEC will not require a surprise examination for these arrangements — but the conditions are specific, and the relief depends on meeting all of them.

Client login credentials. Holding a client's username and password for their custodial account gives the firm the ability to move assets, whatever the intention. This one catches firms who did it purely as a convenience.

Acting as trustee or holding power of attorney. Serving in these roles for a client, including a related one, generally brings the assets into the custody analysis.

Fee deduction. Deducting fees directly from client accounts is custody, though it comes with its own well-trodden path for handling it.

Receiving checks or securities. Even briefly, even forwarded promptly, depending on how it is handled.

Why it matters more than it sounds

Custody drives the surprise examination requirement, changes what you report on your Form ADV, and is a standard early question in any examination. Getting the answer wrong on the form is its own problem independent of the underlying arrangement.

The review worth doing once a year

List every arrangement in which the firm or anyone at it has authority over client assets: standing instructions, credentials held, trustee and attorney roles, fee arrangements, related-party accounts. Then check that list against what your Form ADV says.

The mismatch, when there is one, is almost always something that accumulated rather than something anybody decided.

The point at which to get help

Custody analysis is one of the areas where the rule is more specific than intuition and the consequences of a wrong answer are procedural rather than obvious. This is a question for compliance counsel, not for a search result — including this one.

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