Investment Professionals
Custody Relationship Mapper: Who Holds Your Assets?
Map the chain from adviser to custodian to SIPC and FDIC.
Your investment adviser manages your money. Your broker-dealer or custodian holds it. A clearing firm settles trades. SIPC and FDIC each cover different assets under different conditions. This diagram maps how those relationships connect, and what each entity actually does.
Direct Answer
Your investment adviser directs trades but typically does not hold your assets. A broker-dealer or custodian holds your securities in book-entry form, often through a clearing firm. Cash may sit in a money-market fund or a bank sweep. SIPC covers securities and cash at broker-dealers if the firm fails; FDIC covers bank-swept cash. Neither covers investment losses.
The Custody Chain
Select any entity in the diagram or cards below for details on its role and what protections apply.
Note: Some broker-dealers self-clear (combining broker and clearing roles). Others use a separate clearing firm ("introducing broker" model). Click or tap any node or card below to expand details.
Entity Details
Investor (You)
Account ownerThe beneficial owner of the assets. You instruct your adviser or broker directly and receive statements and disclosures.
You are the beneficial owner, meaning the legal rights to the assets ultimately belong to you even if they are registered in street name at a custodian. You have the right to transfer your account to a different custodian and to receive account statements directly from the custodian, not only from your adviser.
Key action: verify that your account statements arrive directly from the custodian (not routed exclusively through your adviser), and that the custodian's records match what your adviser reports.
Investment Adviser
RIA or adviser repDirects investments on your behalf under a written agreement. Registered with the SEC (assets over $100M) or state regulators (under $100M). Typically does not hold your assets.
Investment advisers are fiduciaries under the Investment Advisers Act of 1940: they must act in your best interest. When a Registered Investment Adviser (RIA) holds client assets, the SEC's "custody rule" (Rule 206(4)-2) imposes additional safeguards, including surprise independent audits and qualified custodian requirements.
Most RIAs use a third-party qualified custodian and direct trades there rather than holding assets themselves. The adviser's authority to move money is documented in a limited power of attorney or a trading authorization, not outright ownership of the account.
Verify: the adviser should be registered on the SEC's IAPD or your state regulator's database. Check for any disciplinary history.
Broker-Dealer
SIPC memberExecutes trades and holds client accounts. Registered with FINRA and the SEC. SIPC membership covers customer assets if the firm fails, up to $500,000 per customer ($250,000 cash).
A broker-dealer may be both the introducing broker (customer-facing) and the clearing firm (back-office settlement) if it self-clears, or it may introduce customer orders to a separate clearing firm. In either case, customer securities are held in "street name" at the custodian (often at DTCC) in a segregated customer account, not mixed with the broker's own proprietary assets.
SIPC coverage: $500,000 per customer per member firm, including up to $250,000 in cash. SIPC covers only the failure of a SIPC-member broker-dealer, not investment losses, fraud committed by someone else, or securities held outside the firm. Verify SIPC membership at sipc.org.
Clearing Firm / DTC
Back-office settlementSettles and clears trades. Holds securities in book-entry (electronic) form at the Depository Trust Company (DTC). Often invisible to investors but critical to trade finality.
After a trade is executed, the clearing firm confirms, matches, and settles the transaction: the buyer receives securities and the seller receives cash, typically within two business days (T+1 for most U.S. equity trades as of 2024). The clearing firm holds securities at the Depository Trust Company (DTC), the central securities depository for U.S. equities and most bonds.
Introducing brokers send trades to a clearing firm under a clearing agreement. If the clearing firm fails, its own SIPC membership (most clearing firms are SIPC members) provides coverage for customer assets, separate from any coverage at the introducing broker.
Bank Sweep Program
FDIC (per bank)Uninvested cash is swept to affiliated or partner banks. FDIC insurance applies at the receiving bank, up to $250,000 per depositor per bank.
Many brokers automatically sweep uninvested cash into a bank sweep program, depositing it at one or more FDIC-insured banks. FDIC insurance is per depositor per institution: if the same depositor has deposits at the same bank through multiple brokers, all such deposits count toward the $250,000 limit at that institution. Some brokers spread cash across multiple bank partners to provide more total FDIC coverage.
Bank swept cash is not covered by SIPC; it is a bank deposit covered by FDIC at the receiving bank(s).
Money-Market Fund
Not FDIC-insuredA regulated mutual fund investing in short-term, high-quality debt. Used as a cash alternative. Not insured by FDIC; not guaranteed to maintain $1.00 per share NAV.
Money-market funds are regulated by the SEC under Rule 2a-7 of the Investment Company Act of 1940. They aim to maintain a $1.00 per share net asset value (NAV) but this is not guaranteed. A government money-market fund investing only in U.S. government securities carries a lower credit risk than a prime fund investing in commercial paper.
Money-market fund shares held in a brokerage account are subject to SIPC coverage as securities (up to the $500,000 limit), but this covers the scenario of broker-dealer failure, not a decline in the fund's NAV ("breaking the buck").
Common Custody Scenarios
Scenario A: Independent RIA with a Third-Party Custodian
Scenario B: Full-Service Broker-Dealer (Self-Clearing)
Scenario C: Introducing Broker with Separate Clearing Firm
Frequently Asked Questions
Who actually holds my securities if I use an investment adviser?
In most arrangements your securities are held at a separate custodian (a broker-dealer or bank), not by the adviser itself. The adviser has authority to direct trades in your account but does not physically hold the assets. Verify by checking your account statements: they should come directly from the custodian, not only from the adviser.
What is SIPC coverage and when does it apply?
SIPC (Securities Investor Protection Corporation) covers customer securities and cash up to $500,000 (including up to $250,000 in cash) per customer per broker-dealer if that broker-dealer fails. SIPC does not cover investment losses, fraud, or a decline in the value of securities. Coverage applies only to securities held at SIPC-member broker-dealers, not at advisers, banks, or money-market funds directly.
Is cash at a brokerage covered by FDIC or SIPC?
Cash held in a brokerage account is covered by SIPC up to $250,000 per customer per member firm. Cash swept into a bank sweep program is typically covered by FDIC insurance at the receiving bank(s) up to $250,000 per depositor per bank. The two protections are separate: FDIC covers bank-held deposits; SIPC covers securities and uninvested cash at broker-dealers. Read your account documents to understand where swept cash is held.
What is a clearing firm?
A clearing firm (also called a clearing broker) settles and clears trades after they are executed. Many broker-dealers use a separate clearing firm rather than self-clearing. The clearing firm holds customer securities and cash in book-entry form at a depository (such as DTCC). An introducing broker takes orders and maintains the customer relationship; the clearing firm handles the back-office settlement and custody.