Custody

Lesson

Custody refers to the responsibility of a financial professional to safeguard and manage a client's assets. This includes ensuring that client funds and securities are properly held, accounted for, and protected from potential risks such as fraud or theft.

Practice Question #1

Which of the following best describes the concept of custody in the context of client funds and securities?

A) The ability of a financial professional to make investment decisions on behalf of a client without obtaining their prior approval.

B) The responsibility of a financial professional to safeguard and manage a client's assets.

C) An account held at a brokerage firm that allows clients to buy and sell securities.

D) The practice of keeping client funds separate from the financial professional's own funds.

Select an option above to see an explanation here.

A) Discretionary authority, not custody. B) Correct answer. C) Brokerage account, not custody. D) Segregation of funds, a component of custody but not the overall concept.

Terms

Custody:: The responsibility of a financial professional to safeguard and manage a client's assets.
Segregation of funds:: Keeping client funds separate from the financial professional's funds.

Practice Question #2

Which of the following is NOT a component of ethical practices and fiduciary obligations when handling client funds and securities?

A) Segregation of funds

B) Recordkeeping

C) Discretionary authority

D) Risk management

Select an option above to see an explanation here.

A) Segregation of funds is a component of ethical practices. B) Recordkeeping is a component of ethical practices. C) Discretionary authority is separate from ethical practices and fiduciary obligations when handling client funds and securities. D) Risk management is a component of ethical practices.

Real-World Example

A financial advisor is responsible for managing the investment portfolio of a retired couple. The advisor has custody of the couple's funds and securities, held in a separate account at a brokerage firm. The advisor must ensure that these assets are properly safeguarded and managed in accordance with the couple's investment objectives and risk tolerance.

Practice Question #3

What is the primary purpose of maintaining accurate and up-to-date records of client funds and securities?

A) To ensure compliance with laws, regulations, and guidelines governing the handling of client funds and securities.

B) To provide clients with regular updates on the status of their funds and securities.

C) To identify, assess, and mitigate potential risks associated with handling client funds and securities.

D) All of the above.

Select an option above to see an explanation here.

A) Recordkeeping helps ensure compliance with laws, regulations, and guidelines. B) Recordkeeping allows financial professionals to provide clients with regular updates. C) Recordkeeping is part of the risk management process. D) Correct answer, as all of the above are purposes of maintaining accurate and up-to-date client funds and securities records.