February 7, 2013

A Regulatory AUM Primer for RIAs

The SEC and states are aggressively reviewing the reported regulatory AUM of advisors. Calculating your regulatory AUM (“RAUM”) under this new definition often requires a close inspection of the service you are providing, the role you play for clients, and how you receive compensation

The SEC (and states) define “regulatory assets under management” as assets where the advisor provides “continuous and regular supervisory or management services.” Here are some guidelines to help you determine which of your clients’ assets should be counted towards your RAUM under this new definition.

  1. How do you describe your services in advisory agreements?
  2. If your advisory agreement for a particular client indicates that you provide ongoing management services, this suggests that these assets should be counted towards “regulatory AUM.” But before doing so, advisors should read on to be certain.

  3. How are you compensated for your advisory services?
  4. If your advisory fees are calculated based on your client’s average market value over a specific time period, this suggests continuous and regular supervisory or management services. Other advisory fee arrangements, however, would suggest otherwise. For example:
    • Time-based. If your advisory fee is based on the amount of time spent with a client
    • Project-based. If you charge a one-time financial planning fee based on the assets covered under a plan
  5. How do you manage your clients’ assets?
  6. In the following instances you would likely count these assets as regulatory AUM:
    • If you have discretionary authority to allocate client assets among third-party asset managers
    • If you allocate client assets to other managers (as a “manager of managers”), but only if you have discretion to hire and fire these managers and/or reallocate among these managers or if you recommend that clients hire/fire or reallocate among managers.
    • If you do not have discretionary authority (but otherwise satisfy the definition of “continuous and regular supervisory or management services”) and provide recommendations to your clients on their holdings, you should count these assets as regulatory AUM if you are responsible for arranging or effecting transactions after your client accepts your recommendations.

    The key here is the extent to which you monitor your client’s portfolios, needs and objectives. Infrequent rebalancing or trading (in and of itself) does not necessarily mean that your advisory services are not “continuous and regular.” According to the SEC, you do not provide continuous and regular supervisory or management services for clients where you provide:

    • Market timing recommendations (but have no ongoing management responsibilities)
    • Impersonal investment advice (like a newsletter)
    • Guidance on an initial asset allocation (without continuous and regular monitoring and reallocation)
    • Advice on an intermittent or periodic basis (i.e. upon client request, in response to a market event, or just at pre-specified points in time, like quarterly or annual reviews, or employee education seminars for defined contribution plans)

What about “held away” accounts?
Accounts that are “held away” follow the same logic. If you provide “continuous and ongoing” services for these accounts (and your advisory agreements and services are consistent with the tests noted here) then they may be counted towards regulatory AUM. This includes situations where you serve as a 3(21) or 3(38) fiduciary on ERISA (e.g. 401(k) or other defined contribution plans) assets. If you provide plan-level recommendations or are charged with implementing changes to the plan, you should count these towards your regulatory AUM.

Brian Lauzon


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