April 14, 2009
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Reporting on held-away assets is a way of life for many wealth managers as they position themselves to be the “trusted advisor” by collecting information for the full range of their clients’ assets. Cost-effective account aggregation solutions, interfaced with portfolio management systems, make this eminently possible and practical.
Account aggregation is a powerful tool, but it raises important questions for advisors: Will they be considered custodians of their clients’ assets and, if so, what duties does that impose?
Tim Simons, Senior Managing Director of the Jacksonville, Oregon-based compliance firm Ashland Compliance Group, has researched this issue on behalf of advisors. “Advisors may be classified as custodians,” he says, “but the requirements are not onerous and, more importantly, there are several easy ways to avoid taking custody.”
Advisors have a fiduciary responsibility to report accurately on their clients’ overall financial holdings under the advisor’s management. Some accounts are available to the advisors through a direct feed into their portfolio management system, but many accounts do not support direct access, particularly 401(k), 529 and other qualified accounts. To obtain information on held-away accounts, advisors often ask for their client’s login and password credentials to access data on custodian websites. Advisors then turn to account aggregation tools when the number of held-away accounts grows beyond what can be managed by manual processes.
Account aggregation tools allow advisors to meet their reporting obligations efficiently, by automating the collection of data for those accounts. Advisors’ use of client login credentials, however, may cross the line from having discretion over assets to having custody over assets.
Custody versus discretionary control
Understanding the distinction between discretion and custody is critical:
- An advisor has custody if it directly or indirectly holds client funds or securities, has any authority to obtain possession of them, or has the ability to appropriate them.
- An advisor has discretion if it has the authority to decide which securities to purchase and sell for the client or what investment advisors to retain on behalf of the client.
- If an advisor has custody, it almost always has discretion, but if it has discretion it does not necessarily have custody.
- An advisor has custody when it has possession of client funds, even if temporarily. There are exceptions:
- Inadvertent receipt of client assets, if returned to the sending party within three business days.
- Inadvertent receipt of client assets from a third party, if forwarded to the client or custodian within five business days.
- An advisor has custody when it has the authority to withdraw funds/securities from client account, authority such as:
- Power of attorney
- Directly debit fees
- An advisor has custody when it has legal capacities that provide ownership or access to funds/securities, capacities such as:
- General partner of limited partnership
- Managing member of limited liability company
- Trustee of a trust
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