RIA Compliance and Practice Management Blog

Does my RIA have custody due to direct fee deduction of investment advisory fees?

Posted by RIA in a Box

Mar 24, 2014 9:03:06 AM

Does your RIA firm have custody?

The answer for the majority of registered investment adviser (RIA) firms is yes. In 2010, the SEC updated the RIA custody statutes and in many ways redefined what is considered “custody.” In particular, they noted that RIA firms that directly deduct their investment advisory fees from clients' accounts do in fact have custody.

While the various state and SEC definitions do differ slightly, custody is generally defined as having possession of, or access to a client’s funds or securities.

Here are some common custody “issues” from an RIA regulatory perspective:

As you can see, regulators are taking investment adviser custody issues very seriously.

All RIA firms are required to implement certain safekeeping provisions. While there may be additional record keeping and independent auditing requirements for firms who acknowledge that they have custody, below are some safekeeping provisions for RIA firms that only have custody due to direct fee deductions and are trying to avoid the additional RIA custody compliance requirements:

  • Obtain written client permission to directly deduct investment advisory fees.
    • Typically this is contained in the RIA firm’s advisory contract and/or the limited power of attorney (LPOA) section of the custodian's account opening paperwork.
  • Verify that the qualified custodian sends at least quarterly statements directly to the client which clearly indicate the investment advisory firm's fee deductions.
    • How can you verify this? Ask the client if they are receiving these statements or many RIA firms receive duplicate statements.
  • Depending on your jurisdiction's requirements, send a separate billing statement to the client concurrently with the billing statement that the investment adviser forwards to the custodian.

Download Our Free How to Prepare for an RIA Regulatory Exam Checklist Be sure to check back next week for a deeper look at the common RIA compliance deficiencies found during recent registered investment adviser regulatory examinations. As RIA compliance consultants, we continue to see an increased emphasis on RIA compliance issues related to custody and encourage the Chief Compliance Officer (CCO) of every investment advisory firm to be focused on potential custody issues.

 

Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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