How to Choose an RIA Custodian: What Custodians Do and What to Ask

Short answer

The custodian is the firm that holds your clients' money and securities. Under the SEC's custody rule, an adviser with custody must keep client funds and securities with a qualified custodian, either in a separate account for each client in the client's name, or in accounts that hold only clients' assets in the adviser's name as agent or trustee. [1] Beyond holding assets, what a custodian offers (trading, rebalancing, billing, reporting, technology, support) differs by firm, so ask. AdvisorIQ does not rank or recommend custodians.

What the custody rule requires

• A qualified custodian. A bank or savings association with FDIC-insured deposits, a registered broker-dealer holding client assets in customer accounts, a registered futures commission merchant (for limited assets), or a foreign financial institution that customarily holds financial assets for customers and keeps advisory clients' assets segregated. [1]
• Notice to clients. When you open a custodial account for a client, notify the client in writing of the custodian's name and address and how the assets are held. [1]
• Statements. Have a reasonable basis, after due inquiry, to believe the custodian sends each client a statement at least quarterly showing each security and all transactions. If you also send statements, urge clients to compare them with the custodian's. [1]
• What counts as custody. Holding assets, or having authority to obtain them. That includes any arrangement, such as a general power of attorney, that lets you withdraw client assets by instruction to the custodian, which is how fee deduction counts. [1]
• Surprise examination. An independent accountant must examine client assets at least once a year, unannounced, unless your only custody is authority to deduct advisory fees. [1]

What you must disclose about the custodian you choose

Form ADV Part 2A asks for: [2]

• Item 12.A: the factors you consider in selecting or recommending broker-dealers for client transactions and judging the reasonableness of their compensation.
• Soft dollars: research or other benefits you receive in connection with client transactions, and the conflicts they create.
• Referrals: if you weigh whether a broker-dealer or third party sends you client referrals when selecting a broker-dealer, say so and discuss the conflict.
• Directed brokerage: if you routinely recommend or require a specified broker-dealer, describe the practice, any affiliation, and that directing brokerage may cost clients more.
• Item 14.A: any economic benefit from someone who is not a client for providing advice to clients, including sales awards and other prizes, the conflicts, and how you handle them.
• Item 15: an explanation that clients will receive statements from the qualified custodian, with a statement urging them to compare those with any statements you send.

Examiners ask for information on third-party service providers such as custodians. [3] Your selection factors are the ones you will describe in the brochure, so decide and write them down before you collect proposals.

Questions to ask, in writing

1. Who is the legal entity that will be the qualified custodian, and how are accounts titled?
2. What is every fee: account, transaction, trade, wire, transfer out and closing? Ask for the written schedule.
3. What are the minimums, and what happens if your assets or a client's fall below them?
4. Which services are included and which cost extra: trading, rebalancing, billing, reporting, tax lots, onboarding, e-signature?
5. Which software can connect to the custodian's data, how often does it refresh, and who fixes it when a connection breaks? See your technology stack.
6. Does the custodian offer you benefits that depend on assets or activity? Anything you receive may need to be disclosed under Items 12 and 14.
7. What does the custodian's agreement require of you, including any insurance requirements?
8. Who answers when something goes wrong, and when are they available?
9. What does it cost and take to move accounts away later?
10. What are the security controls, and how quickly will the custodian tell you about a breach? Regulation S-P expects you to oversee service providers so they notify you as soon as possible and no later than 72 hours after becoming aware of a breach of a system they maintain that holds your customer information. [4] See RIA cybersecurity.

How to compare

1. Write your selection factors before you request proposals. Cost, service, technology, security, and the client experience are common; the point is that they are yours and you can describe them in Item 12.
2. Send the same questions to every custodian and keep the written answers.
3. Score each custodian on the same factors, with the weights you chose.
4. Read the account agreement and fee schedule yourself, then have counsel review it.
5. Record the conflicts you find and how you will disclose them.

For how a custodian fits with your other software, see the technology stack guide. For policies that cover custody and billing, see building a compliance program.

This guide is educational, not legal advice. Custodians publish their own pricing and terms; get them in writing.