September 10, 2020

The 2021 Annual Amendment Process

As the summer is coming to an end, AdvisorAssist is beginning to prepare for the 2021 Annual Amendment season! 

We have created an Annual Amendment dashboard accessible via AdvisorCloud360®, our proprietary compliance technology. We have also implemented deadlines and reminders to ensure timely completion of each step in the process. This allows the team to thoroughly review and analyze responses well in advance of the regulatory deadlines.

Below is an outline of AdvisorAssist’s step by step process to assist with the management of the 2021 Annual Amendment. 

  1. Client Geography Review We request that firms complete a breakdown of clients (households) by each state. This enables us to proactively address any registration or notice filing needs and process any withdrawals to avoid paying unnecessary fees before year end.

  2. Annual Renewal Fees The registration of firms and its investment advisor representatives expires on December 31st of each year. To maintain these registrations, firms must pay all applicable renewal fees assessed on its preliminary statement to ensure continued eligibility to do business in the coming year. Preliminary statements will be initiated by FINRA in the second week of November. Once your firm’s preliminary statement is available, we communicate a breakdown of the fees owed along with instructions on funding your FINRA e-Bill account.

  3. Review Forms We request that firms confirm and update ADV information via review forms that are made available through the AdvisorCloud360® Annual Amendment Dashboard.

    1. Firm Information - General information about the firm, its owners, officers and personnel.

    2. Advisory Services - Information about the advisory services offered by the firm (eg. Investment management services, financial planning and consulting services, retirement planning services, etc.).

    3. Branch Office[s] - All locations, aside from the firm’s primary place of business, in which advisory services are performed.

    4. Website[s] and Social Media - Active websites (including those used for DBA names) as well as social media pages for the firm (not your supervised persons individual pages)

    5. Fees and Compensation - Advisory fees and billing methodologies for your various advisory services.

    6. Assets, Clients, and Accounts - Fiscal year end information related to the firm's assets under management, client breakdown, and discretionary and non-discretionary accounts.
Once all of the review forms are completed, the AdvisorAssist team conducts an analysis of current filings to ensure consistency across disclosures and amendments to ensure adherence to regulatory expectations.

If you’d like to obtain more information about AdvisorAssist's Annual Amendment process and how we can assist your firm, please contact us at  info@advisorassist.com.


January 13, 2020

Calculating Regulatory Assets Under Management


Let’s break down the key components to calculating RAUM:
(i) Qualifying a Securities Portfolio
An account is a securities portfolio if at least 50% of the total value of the account consists of securities*. For purposes of this 50% test, you may treat cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments) as securities. You must include securities portfolios that are family or proprietary accounts, accounts for which you receive no advisory fee and accounts of non-United States persons.
For purposes of regulatory filings, Advisors must qualify and quantify the number of assets they manage and report them on Form ADV Part 1 and Part 2A. This calculation might be slightly different from other asset calculations you are used to. The calculation should include the securities portfolios for which you provide continuous and regular supervisory or management services (“Regulatory Assets Under Management” or “RAUM”).
Calculating Regulatory Assets Under Management
(ii) Quantifying a Securities Portfolio
Include the entire value of each securities portfolio for which you provide continuous and regular supervisory or management services over (see definition of continuous and regular below). If you provide continuous and regular supervisory or management services for only a portion of a securities portfolio, include as RAUM only that portion of the securities portfolio for which you provide such services. For example, exclude, the portion of the securities portfolio that consists of real estate or businesses whose operations you “manage” on behalf of a client but not as an investment.
RAUM Calculation Example
 
Consider the following example when calculating your value of RAUM.

The client's portfolio consists of the following:
*Under Section 2(a)(1) of the Securities Act, the term “security” is defined as any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
(iii) Determining Continuous and Regular Supervisory or Management Services
The following factors should be considered in evaluating whether you provide continuous and regular supervisory or management services to a securities portfolio:
The Advisory Contract. If you agree in an advisory contract to provide ongoing management services, this suggests that you provide these services for the account. Other provisions in the contract, or your actual management practices, however, may suggest otherwise.
Compensation. If you are compensated based on the average value of the client’s assets you manage over a specified period of time that suggests that you provide continuous and regular supervisory or management services for the account. If you receive compensation in a manner similar to either of the following, that suggests you do not provide continuous and regular supervisory or management services for the account:
  • You are compensated based upon the time spent with a client during a client visit; or
  • You are paid a retainer based on a percentage of assets covered by a financial plan.
Management practices. The extent to which you actively manage assets or provide advice bears on whether the services you provide are continuous and regular supervisory or management services. The fact that you make infrequent trades (e.g., based on a “buy and hold” strategy) does not mean your services are not “continuous and regular.”
Below are a few examples of instances that do NOT meet the definition of continuous and regular supervision:
  1. providing market timing recommendations (i.e., to buy or sell), but have no ongoing management responsibilities;
  2. providing only impersonal investment advice (e.g., market newsletters);
  3. making an initial asset allocation, without continuous and regular monitoring and reallocation; or
  4. providing advice on an intermittent or periodic basis (such as upon client request, in response to a market event, or on a specific date (e.g., the account is reviewed and adjusted quarterly)
(iv) Determining Discretionary vs Non-Discretionary RAUM
You provide continuous and regular supervisory or management services with respect to a securities portfolio if:
  1. you have discretionary authority over and provide ongoing supervisory or management services with respect to the account; or
  2. you do not have discretionary authority over the account, but you have ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sale and, if such recommendations are accepted by the client, you are responsible for arranging (i.e. communicating to the client) OR effecting the purchase or sale.
$6,000,000 -- stocks and bonds
$1,000,000 -- cash and cash equivalents
$3,000,000 -- non-securities (collectibles, commodities, real estate, etc.)

$10,000,000 -- Total Assets
Let’s run through some key questions to consider:
Qualify the securities portfolio: The account is a securities portfolio because securities as well as cash and cash equivalents (which you have chosen to include as securities) ($6,000,000 + $1,000,000 = $7,000,000) comprise at least 50% of the value of the account.
Quantify the securities portfolio:  The entire value of the account ($10,000,000) is included in the calculation of the adviser's total RAUM.
Determine continuous and regular supervisory or management: The entire account is managed on a discretionary basis and is provided ongoing supervisory and management services, and therefore receives continuous and regular supervisory or management services.
CONTACT US TODAY:
(617) 800-0388 | support@advisorassist.com | www.advisorassist.com

November 27, 2019

How to Count Accounts and Clients for Purposes of Regulatory Filings


What is an Account?
Accounts are distinct (segregated) groupings at the client’s designed custodian, trust company, transfer agency or administrator (collectively the “custodians”). This makes it relatively easy to determine (as opposed to calculating clients) since custodians maintain and report on an account-level basis, with each being specifically identified. During examinations, regulators will check the accuracy of your firm’s reported figures in your Form ADV 1.
Quick tips:
  • Only include accounts over which there is ongoing, continuous and regular supervision or management services over.
  • Firms must segregate and report separately discretionary from non-discretionary accounts.
  • Accounts that are excluded from billing should be included provided there is ongoing, continuous and regular supervision or management services over.
  • A pooled investment vehicle (i.e. hedge funds and private equity) is considered one account.
For purposes of regulatory filings, regulators expect accuracy when breaking down an investment advisor’s clients and accounts. This element often generates a lot of confusion amongst investment advisors when translating the firm’s data into the Form ADV Part 1. Let’s take a deeper dive into (i) what is an account and (ii) who is a client?
How to Count Accounts and Clients for Purposes of Regulatory Filings
Who is a Client?
Per the U.S. Securities and Exchange Commission (“SEC”), there is no one prescribed method for calculating the number of clients. Some investment advisors may look to calculate clients in terms of households (i.e distinct relationships), while others determine clients based on each individual that maintains an account with the firm. Some firms may also choose to refer to rule 202(a)(30)-1 under the Investment Advisers Act of 1940 when counting clients for purposes of Item 5.D. 

While there is no one right method, it’s important to ensure that you remain consistent with your calculation method.
Investment advisors should exclude the following from accounts:
  • accounts with a zero balance;
  • closed accounts;
  • accounts established to allow a client self-direct investments; and
  • accounts that do not have ongoing, regular and/or continuous management or supervision over (unmanaged accounts).
Best Practice:
As noted above, there is no prescribed method, but our guidance is to think of a “client” as: to whom does the firm owe a fiduciary duty? If multiple individuals, accounts and entities are serviced as a single contractual engagement, the investment advisor does not need to count each as an individual “client”. Ultimately it depends on the overall relationship and whether the investment advice, decisions, and reporting are inclusive of all individuals, accounts, and/or entities under the engagement.


Let’s break down a few scenarios:
Scenario
Facts and Circumstances
Client Count
1.Mr. Smith has a taxable account and a corporate account with the investment advisor where Mr. Smith is the sole owner of the corporation.One client (Mr. Smith is the only person engaged in this fiduciary relationship)
2.Mr. and Mrs. Smith have their own individual accounts where the investment advisor considers both of their interests in making investment decisions.One client (both adults should be parties to the client agreement)
3.Mr. and Mrs. Smith have two individual accounts and a UGMA account for their minor child.One client (both adults should be parties to the client agreement)
4.If Mr. and Mrs. Smith have one joint tenant account and a corporate account that is wholly-owned by both.One client (both adults should be parties to the client agreement)
5.If Mr. and Mrs. Smith have one joint tenant account and a corporate account that is partially-owned by both and some external shareholders.Two clients (the couple and the corporation are each a separate client)
6.If Mr. and Mrs. Smith has one joint tenant account and an adult child with an IRA who lives separately from the parents.Two clients (the couple and the adult child are each a separate client)
7.Mr. and Mrs. Smith have one joint tenant account and each trust where they are the sole trustee.One client (both adults should be parties to the client agreement)
8.Mr. and Mrs. Smith have one joint tenant account and trust where a third party is a trustee on the trust.Two clients (the couple and the trust are each a separate client)
9.Mr. and Mrs. Smith have one joint tenant account as well as a trust account where an adult child is a trustee.Two clients (the couple and the trust are each a separate client)
Quick Tips:
  • The definition of "client" for Form ADV states that firms must count clients who do not compensate the advisor.
  • Firms should include clients who are not U.S. residents (and also report these separately on Form ADV 1).
  • Each pooled investment vehicles should be viewed as one client.
  • The underlying investors of pooled investment vehicles (i.e. hedge funds and private equity ) should not be counted as individual clients unless the investors are separately engaged with the investment advisor to provide advisory services.
  • If a firm’s principal office and place of business outside the U.S., the firm is not required to count non-US residents as clients.