- written authorization from the client to deduct advisory fees from the account held with the qualified custodian
- Each time a fee is directly deducted from a client account, the investment adviser must send the qualified custodian an invoice of the amount of the fee to be deducted from the client’s account and send the client an invoice itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee.
So, the adviser does have custody if he can obtain his advisory fee directly from the custodian. But, he can avoid the usual hassles related to custody by following certain safeguards. What's the big deal about custody? Well, Bernie Madoff would not have made off with people's money if they would not have let him have custody of those assets. Since their "adviser" was able to send account statements, with no independent oversight, he was able to show clients any numbers he thought they'd believe, even after all the money was gone. If the custodian is independent of the adviser, there is no reason to doubt the veracity of the account balances. When the adviser can show you whatever numbers he thinks you'll believe he can A) overcharge your account or B) mislead you into thinking that you actually have an account when, in fact, all the money was drained years ago.