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.

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