Why asset management firms shouldn't be custodian of its own funds?

External question — Quantitative Finance Stack Exchange Author: Hunter Original post: https://quant.stackexchange.com/questions/15671 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I am reading the Madoff case. One of the issue is BMIS Firm (Bernie Madoff Investment Securities) were acting as a Asset Management Firm, broker as well as Custodian. Why is it an issue? What sort of conflicts of interest did it create?

External answer — Quantitative Finance Stack Exchange Author: Nikos Original post: https://quant.stackexchange.com/a/15691 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Well I think the main issue is that the BMIS had no external party acting as an official holder of the books and records. The Asset Manager utilizes a broker to get access to the market, and the Custodian (and the Administrator) to be the official keepers of the books and records of the trades, by validating and confirming the execution of each trade. Both are independent and their records should reconcile with the Asset Manager's portfolio. Some (I would say most of the) Funds have multiple brokers, but usually one custodian. Both the broker and the custodian are respectable institutions in the area like Banks, or others. It is something you check during your ODD. In this case it is like saying, I bought 100 shares of Google, I bought them myself at this amazing price, and please trust me because I hold the trade contract. The investor has no way of knowing if this is true.