The most controversial and confusing part of calculating assets under management is the third level, when trying to determine what constitutes continuous and regular supervisory or management services. When a registered investment advisor is provided trading authorization over a client account, it can be one clear indication of assets under management, particularly when done on a discretionary basis. However, the frequency of reviews is an integral part of assets under management. In order to include client assets, the registered investment advisor must provide active and frequent service. A buy-and-hold strategy or reviewing accounts and holdings quarterly or less will likely not meet the frequency test.
There are two other factors to consider when calculating assets under management: (1) What does the client agreement say? Does it provide for ongoing management services? (2) How is compensation received? If the investment advisor firm is compensated on a per-transaction basis or solely on the time spent with a client, such compensation would not suggest assets under management. However, if the investment advisor firm is compensated based on the average value of client assets over a specified period of time, it would suggest assets under management.
While what to consider as assets under management can be confusing, it is clear that the following should not be considered assets under management: (1) assets reviewed as part of a financial plan; (2) assets managed by a third party money manager where the registered investment advisor firm does not have discretion to hire or fire the money manager; (3) assets held in an account where the registered investment advisor firm is paid a commission and is not responsible for ongoing management services; (4) assets reviewed or consulted on by the registered investment advisor only at the specific request of the client and the final implementation decision is left to the client.
It is important to note that a conflict of interest is not necessarily a prohibited activity. There are often good business and operational reasons to implement a certain arrangement, but still be considered a conflict of interest. The key is to disclose the conflict of interest so that the client can make an informed decision before retaining the registered investment advisor. In addition, the registered investment advisor should develop and implement supervisory procedures to monitor such conflicts of interest.
Finally, Rule 206(4)-4 of the Advisers Act addresses “financial and disciplinary information registered investment advisors must disclose to clients.” In addition to the disclosure information required on Form ADV Part 1A and Part 1B, certain events that fall under Rule 206(4)-4 of the Advisers Act must be disclosed all clients. This is a significant difference from disclosure in Form ADV Part 1A and 1B. While the public is able to view Form ADV Part 1A and Part 1B through theInvestment Adviser Public Disclosure website, a registered investment adviser is not required to provide details of such events to each client. However, disclosures required under Rule 206(4)-4 must be provided to all clients. For simplicity, such disclosure can generally be provided in the Form ADV Part 2A as long as all requirements of the rule are met.
RIA Compliance Consultants provides a Form ADV drafting service as part of its turn-key Investment Advisor Registration Service for new investment advisor applicants. Additionally, we also offer a Form ADV Review and Revision service to existing registered investment advisors. For more information, please call us at 877-345-4034.