September 8, 2014

How to Properly Count Advisory Clients for your RIA Firm's Form ADV

Most advisors view their client base in terms of households (i.e distinct relationships), which often makes it challenging to translate into the “clients” and “accounts” data that regulators expect to see accurately reported in Form ADV 1.

Regulators care about two things: clients and accounts. They do not recognize or ask for any data related to households [Note: In some instances a household may equal a client.] During examinations, regulators will check the accuracy of these numbers in your Form ADV 1, so it is important to understand the logic that goes into calculating them.

In another post, we discuss some tips on how to determine your firm's total accounts.

Who is a Client?

A "client" is any natural person, along with their children (minors) and relatives or spouse with same principal residence. This includes any accounts or trusts where a natural person(s) are the only primary beneficiaries or any entity (corporation, general partnership, limited partnership, limited liability company, trust) where you provide investment advice based on the entity’s investment objectives.

Sometimes it helps to think about this way: to whom do I owe a fiduciary duty? If multiple accounts all roll up to one individual, then typically they count as just one client because your are maintaining one fiduciary relationship between you and that one individual.

Confused yet? Me too. So let’s go through a few scenarios.

If Mr. Smith has an IRA, a taxable account and a corporate account where he’s the sole owner, that’s ONE client because Mr. Smith is the only person engaged in this fiduciary relationship.

If you manage accounts for Mr. and Mrs. Smith and consider both of their interests in making investment decisions, they are generally considered ONE client. (In this case, you should have both spouses as a party to your client agreement.)

If Mr. and Mrs. Smith has two individual accounts and one UGMA, this is ONE client.

If Mr. and Mrs. Smith have one joint tenant account and a trust where they are the sole beneficiaries, this is ONE client. Now if the trust had one additional beneficiary outside of their family, then the trust becomes a separate client (that’s TWO clients).

If Mr. and Mrs. Smith have one joint tenant account and a corporate account that is wholly-owned by both, then that is ONE client. But...if that corporate account had external shareholders (outside their family), then it is TWO clients--the couple and the corporation are each a separate client.

If Mr. and Mrs. Smith have one joint tenant account and an adult child with an IRA, that would generally be TWO clients. But if it were a minor child with a 529 plan, it would be ONE client.

If Mr. and Mrs. Smith have one joint tenant account as well as a trust account for the sole benefit of Mrs. Smith, you can still consider this ONE client. But if trust is for an adult child, it would be counted as TWO clients.

When determining your RIA firm’s total number of clients:

  • You may (but are not required to) include clients where you do not receive no compensation for your services.
  • Include clients who are not U.S. residents (and also report these separately on Form ADV 1).
  • For pooled vehicles (hedge funds and mutual funds), the underlying investors are generally not counted as clients (but this may vary by state). So the fund is considered one client.
  • If you have your principal office and place of business outside the United States, you are not required to count clients that are not United States residents. But if your principal office and place of business is in the United States, you must count all clients.

Please also click here see the definition of a Client in the Adviser's Act.

Brian Lauzon


Post a Comment