Custody means holding, or having the authority to take, a client's money or securities, and for an investment adviser it brings safeguards the SEC requires.
Under the SEC's custody rule, custody includes holding client funds or securities directly or indirectly, and any authority to obtain possession of them. An adviser that can deduct its fee from your account has custody in that limited sense.
An adviser with custody must keep your assets with a qualified custodian, such as a bank or registered broker-dealer, and have a reasonable basis to believe the custodian sends you a statement at least every quarter showing your holdings and every transaction. Most advisers with custody also need a surprise examination by an independent accountant each year; one whose only custody is deducting fees does not.
In practice, a legitimate advisor doesn't hold your money. It sits in an account in your name at the custodian, and the advisor has limited authority to trade and take the agreed fee. Being asked to pay money to invest to the advisor personally is a warning sign.
How to check
Item 15 of the firm's Form ADV Part 2A brochure covers custody. Log in to the custodian's own website, and compare its statements with any report the advisor sends.
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