Final answer:
Securities managed by investment advisors must be held with a depository institution, which provides security and liquidity for clients' assets. These institutions are crucial in financial intermediation, offering services like demand deposits and are protected by the FDIC.
Step-by-step explanation:
For an investment advisor maintaining custody of clients' assets: Securities must be deposited with a depository institution. A depository institution is an institution that accepts money deposits and then uses these to make loans. This aligns with the need to safeguard financial assets, such as certificates of deposit, checking accounts, savings accounts, and to diversify risk. Depository institutions help ensure liquidity, facilitate transactions like demand deposits, and provide checkable deposits which customers can access through cash withdrawals or writing checks.
By maintaining clients' assets with a depository institution, an investment advisor can also leverage the protection offered by the Federal Deposit Insurance Corporation (FDIC), which insures deposits against the risk of bank failures, thus offering an additional layer of security to the client's assets.