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:
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.

November 7, 2019

FINRA IARD & CRD Security Updates

This is an update for all users of FINRA Entitlement tools, including IARD and CRD: Effective Saturday July 20, 2013 you are now required to select three security questions and they will be used during your login process. To avoid interruption of using the FINRA website it is recommended that you save these security questions and answers to your files.

FINRA has implemented a new login security feature for users of FINRA Entitlement applications/systems including IARD and CRD. Effective July 20, 2013, the first time a user logs onto IARD/CRD, the user will be required to select three security questions and provide a response to each question. On subsequent logins, a user may be asked to provide the responses to his/her selected security questions. See the frequently asked questions for details on how to complete the new security process. (

This new security process will impact all users, including Super Account Administrators, Account Administrators and regular users (including public accounts).

After your initial login and configuration of the three security questions, subsequent logins to the system will trigger one of the three questions being asked if any of the conditions occur:
  1. During log in, if you did not check the box “Remember this computer (Choose this option only if this is your personal computer and you trust this device/computer).”
  2. You log in from a different computer or use a different browser.
  3. The system detects a change in how you typically interact with the application.
  4. A year has passed since you have been presented with a security question.
  5. Your computer’s cookies were deleted since your last login.

We recommend saving your security questions and answers to your files, however, if you get locked out of your account you should first contact your Super Account Administrator (SAA) or Account Administrator (AA) to unlock your account. If your account is locked because of multiple incorrect responses to your security questions, your SAA/AA will unlock your account and require you to reset your security questions. If you are an SAA and your own account is locked, or if you do not have an SAA or AA to go to for assistance, contact the FINRA Gateway Call Center at 301-869-6699 and they will assist your request.

October 31, 2019

CCO Series - Trade Errors

What You Need to Know

In developing policies and procedures for a Registered Investment Advisor ("RIA") a topic that must be addressed is trade errors. To uphold the fiduciary duty owed to clients of your RIA, your policies and procedures must cover how you handle errors that may occur when trading in a client's account. If a trading error occurs in a client's account managed by an RIA there are critical response items to consider in order to uphold your fiduciary duty. Implementing these compliance components can demonstrate to a regulator that you are satisfying your regulatory requirements.

What is a Trade Error?

The most common trade error is buying the wrong security or the wrong amount. Here are a few other examples of events that are considered trade errors:
  • Trading in the wrong client account
  • Trading in the wrong direction (buy vs. sell)
  • Trading at the wrong price (limit orders, etc)
  • Incorrect block trade allocation
  • Violation of client account restriction (tobacco, oil, military)
  • Violation of client account suitability (aggressive vs conservative)
  • Delayed execution of trade instructions
  • Duplicate execution of trade instructions

How to Handle Trade Errors

Even if the error does not fit into one of these examples you must discuss any potential or actual trade errors with your CCO to ensure compliance. CCOs should document the event within their trade error log and save all related documentation for the RIA's books and records. Consider communicating with the clients as needed to explain events in their statements or other irregular trading activity. Most trade errors can be resolved prior to settlement by the custodian if they are promptly discovered and communicated.

Reviewing Policies and Procedures

Advisors must ensure their policies and procedures require the disclosure of trade errors to the CCO and that trade errors are documented in the Advisor's trade error log. The log must also include any related backup or other documentation, that the trade errors are resolved in a way that makes the client whole and absolves the client of consequences of the Advisor's error. Additionally, trade errors should be reviewed at least annually by the CCO or delegate to ensure that any reasonable changes to the Advisor's business practices that could eliminate future errors are considered for implementation. During this annual review, the CCO or delegate must also update the Advisor's trade error policy as needed to ensure it accurately reflects how trade errors are resolved.

What are the Next Steps for a CCO?

Sample review transactions from your firm’s trading blotter to ensure trades are placed accurately in accordance with documentation and client objectives. Ensure any and all trade errors are documented in your firm's trade error log. Confirm that trade error files maintain documentation related to the specifics of the trade error as well as documentation substantiating the resolution. Consider reasonable changes to business practices that could eliminate the potential for future errors. Finally, remain aware of any changes to trade error policies and procedures that may be imposed by your custodian and ensure your internal policies remain accurate. Ensure proper communication of trade error policies and procedure to supervised persons.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

CCO Series - Client Suitability

As a fiduciary, an RIA firm is required to make investment decisions in the best interests of its clients. When making decisions regarding the investment options for accounts an RIA firm needs to be able to defend such decisions as being reasonably suitable to the goals and needs of its beneficial owners. Regulators will seek to ensure that decisions made by the firm during the course of providing its services primarily benefit the client and are suitable for a particular account's objectives. Documentation that define a fund's investment objectives or a model portfolio strategy will be compared against the trading history and the decisions made for clients to validate whether or not the firm is making suitable investment decisions when providing its services.

RIA Client Suitability In a Nutshell

Client suitability starts with information about how the RIA firm's investment managers will provide its advisory services and the information about the client or fund that will be relied upon to guide those decisions. For a typical retail RIA situation, this may include your client profile, risk tolerance questionnaire, investment policy statement (IPS), or client notes capturing similar information. For structured investment products this may include the operating agreements, offering documents, and similar information about the funds, parties and entities involved. As these documents are executed, modified, updated or amended the advisor should keep and maintain this additional documentation for their firm's books and records.

Risks related to strategies used by an RIA firm must be disclosed to clients through Form ADV. Specifically in Form ADV Part 2A, the Disclosure Brochure, Item 8 Methods of Analysis, Investment Strategies and Risk of Loss should contain information regarding how the firm's investment management services will be applied to the client's accounts and the potential losses that can occur due to the way the firm will invest the client's assets. It is important for firms to review these disclosures and ensure they accurately reflect the firm's investment methods and cover the risks related to the firm's advisory services.

Confirming Suitability

After collecting a client's information, having them sign an advisory agreement and providing a copy of your ADV and other new client paperwork, suitability becomes a compliance matter for the relationship as you move to digest the information and start making investment decisions for the client's account(s). While your documentation may tell the client to notify your firm of any changes to their profile, goals or objectives, every RIA firm still has an obligation to reach out to the client and confirm the information you have is still accurate and that ultimately to confirm your current understanding of what is suitable for that client.

Confirming suitability can take the shape of having the client complete a new risk questionnaire, sign a new IPS, or to have a meeting with the client where you discuss the management of their account and address suitability matters. Documenting this confirmation is critical to the firm's books and records for compliance purposes on this topic, and can take the form of client notes indicating suitability was discussed and the results of that discussion, or the updated formal documents such as the questionnaire or IPS. For fund managers, this activity means ensuring that the decisions being made for the fund are reasonably accomplishing the objectives of the fund as described in its documentation and ensuring that due diligence documentation is retained for various non-public investments. By having this documentation in your firm's books and records you can demonstrate that your firm has upheld their fiduciary duty when making investment decisions for its various clients.

Through the Regulator's Eyes

Regulators expect RIA firms to maintain documentation on each advisory client to support the investment decisions made for their account(s). During an examination, regulators will typically ask firms to provide their risk questionnaires or similar documents used to obtain information about their clients, and will also request information about trades in client accounts, and will reconcile the two to ensure that decisions made for clients are suitable and that there is a rational basis between the documentation, analysis, and investments. Further, regulators will review the information in your firm's disclosure brochure to reconcile to the types of investments to ensure that the strategies and risks are properly and fully disclosed to clients.

CCO Best Practices

Conduct a random sampling review of client files to verify that suitability is appropriately documented. Run a comparison between the client's trading history and the suitability documented to ensure investment decisions are in line with investment objectives. Validate that the last outreach attempt to each client is within one year. Additionally, review your firm’s client intake/onboarding and ongoing review process to ensure you are capturing adequate information to make, or continue to make, appropriate investment decisions in client accounts and provide advice that is in the client’s best interest.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

October 18, 2019

CCO Series: The Race to Zero Commissions

Wrap Fee Programs
A program that investment advisors once utilized to offer their advisory services for a single combined fee, now has a new wrinkle. As you have heard from us many times, part of an investment advisor’s fiduciary duty is to recommend services that are in the best interest of the client. Given the industry shift to no transaction fees for stocks and ETFs, if you currently offer a wrap fee program to clients where you charge a higher advisory fee to take into account transaction costs, have you asked yourself if wrap fee programs really are in the client’s best interest?

It is our belief that regulators will be asking you this question the next time you are visited. Historically wrap fee programs have been scrutinized by regulators to ensure their appropriateness. Specifically, under the microscope were reverse churning and high cash balances. Zero commission on certain securities will certainly draw the attention of examiners as they determine if a wrap fee program is in a client’s best interest.
Action Item:
If you sponsor or recommend the use of a third party wrap fee program, we strongly urge you to conduct a review of the underlying investments utilized to build client portfolios. Items to consider include:
In the last month, we have seen an old fashion pricing war between brokerage giants across the industry. Things kicked off in late September with Interactive Brokers and the introduction of IBKR Lite, followed by Schwab, TD Ameritrade, ETrade and most recently Fidelity moving to zero commissions on all U.S. stock and exchange-traded fund (“ETF”) trades. The initial news sparked positive reactions from your average investor. Zero commissions for stocks and ETFs, what could possibly be wrong with that?
After the dust has started to settle, it got us thinking about the future of wrap fee programs and custodial partnership due diligence. Below we discuss both elements to get you thinking as well.
The Future of Wrap Fee Programs and Custodial Partnership Due Diligence
CCO Series: The Race to Zero Commissions
What is the composition of underlying investments in the wrap fee program (percentage allocated to stocks, bonds, ETFs, mutual funds, options, etc.)?
Do you primarily invest in individual exchange-traded securities such as stocks and ETFs?
Do you primarily invest in mutual funds and if so, are they generally transaction fees or no transaction fee funds?
As you complete your review you may determine that staying the course with your wrap fee program is appropriate. However, if you determine that after your review a change is necessary you should begin to map out how that change will need to be implemented. You may decide that a wrap fee program is no longer necessary for clients. Or you may decide that the fee you previously were charging is no longer appropriate. Whatever the change is, you are urged to put the plans in place to see through a timely and accurate change.
Custodial Partnership Due Diligence
Whether you have brokerage discretion or recommend custodians to clients, these new incentives should be evaluated when considering your existing institutional relationships with your custodians. Although there is no immediate action needed, it’s certainly something worth staying on top of, as changes continue to unravel forcing increased competition in the brokerage space. It’s unclear where all of this is headed as there is already some speculation about potential changes to custody fees to make up for lost revenue and the layering of additional restrictions on zero commission accounts. Needless to say, it seems as though zero commissions are just the beginning.
We encourage all investment advisors to leverage this opportunity to document these reviews and as you complete your due diligence efforts, remember to document! This documentation can be captured either within AdvisorCloud or your own books and records.
What does AdvisorAssist Recommend?
Please contact us at or through your AdvisorCloud if you have any questions.