Who Has Custody of Your Assets?

By Brad Harvey on June 5, 2024

If you work with a financial advisor, do you know who holds your invested assets? Is it your advisor, a bank, or a separate custodian? There are many reasons why everyone needs to understand who maintains custody of their assets.

The Custody Rule

A little-known Custody Rule was adopted in 2009 after the Madoff crisis. The Rule requires advisors operating under the Investment Advisors Act of 1940 to use a qualified custodian to safeguard client assets. Under the Rule, these custodians agree to random audits by accounting firms. Additionally, they must send client statements at least quarterly.

Who are these custodians? Think of them as large banks, including such veritable firms as Charles Schwab, Fidelity, and TD Ameritrade. These institutions hold client assets in electronic form. When your advisor (based upon your goals and needs) decides to make a trade, they contact the custodian, who processes, keeps a record of, and notifies you of the trade.

Why is this Important?

Here is why all investors must know who is holding their assets: Bernie Madoff was a fiduciary under the Investment Advisors Act of 1940. Yet, he did not have a separate custodian for his clients’ assets – the assets were sent instead to his company’s bank account. No separate statements were sent to clients, and the investors’ funds were co-mingled into the same company account. 

Custodians have custody of client assets and are responsible for keeping those assets safe. A separate custodian provides an added level of asset safety for investors. They say that “hindsight is 20/20”, but if Madoff’s clients had known, they would have asked for a separate statement from their custodian. Doing so would have provided them with the information that all their funds had been pooled with other investors’ funds into the same Madoff company account.

The Bottom Line

Each investor should ask questions of their wealth advisor to make sure they fully understand the process and the companies involved. Investors should know who their custodians are and why they were chosen. Several factors go into deciding which custodian to use, including what the funds will be used for, how much the custodian may charge for each transaction, and where the funds will be held (U.S. or otherwise). Knowing the answers to these questions will help you better protect the money you’ve worked so hard for.

If you want to learn more about the vital role of custodians, please get in touch with us today.

About Harvey Investment Management, Inc.

We aim to empower and support investors no matter where they are on their financial journey. Like us on Facebook, follow us on LinkedIn and X, and watch our informative videos on our YouTube channel. In addition, we invite you to learn more about our team and how we can help you reach your financial goals by emailing or calling us at 719.960.0969.

Brad Harvey, President and CEO