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  • Writer's pictureRita Rhodes

Preparing for Your Form ADV Part 1 Annual Amendment

Registered investment advisers are required to file an annual amendment to their Form ADV Part 1 within 90 days of their fiscal year end. For advisers whose fiscal year end is December 31, the annual deadline is March 31 (or March 30 in leap years). Here are some helpful tips for completing sections of the ADV Part 1 that often present questions.

 

Websites and Social Media Channels

 

Review the sites that are currently included in Item 1.I. to make sure the list is up-to-date and accurate. When conducting an examination of your business, regulators will look at your ADV Part 1, and you can be pretty sure that they will be looking at your website and social media channels listed here. They will sometimes also do Google searches to see where your name pops up. Regulatory deficiency letters often note discrepancies in this area. For example, noting that the website includes links to social media channels that aren't listed on the ADV, or indicating that an Internet search turned up a site that isn't listed here.

 

Location of Books and Records

 

Item 1.L. of ADV Part 1 asks for information regarding the location of your books and records, outside of your principal office. In today's electronic document storage environment, what do you need to include here? Think of this in terms of what third-party service providers you would rely on to obtain records in the case of a regulatory exam or to recover records in the event of a disaster. Common providers would include your electronic cloud storage provider (e.g., Amazon Web Services, Google Workplace, Microsoft), your custodian, or web-based software applications used to provide advisory services (e.g., financial planning software, portfolio management software).

 

Counting Clients

 

In Item 5.D., you are asked to parse your clients by client type, and provide the number of clients and AUM for each category. For purposes of completing the ADV Part 1 (as well as for registration purposes), you should generally consider a "client" as a "household." Count as one client an individual and:

 

  • (a) any minor child, regardless of residence;

  • (b) any spouse, relative, or relative of the spouse that resides at the same address;

  • (c) all accounts of which the individual and/or the persons included and (a) or (b) are the only primary beneficiaries; and

  • (d) all trusts of which the individual and/or the persons included in (a) or (b) are the only primary beneficiaries.

 

As you are counting clients, take a moment to also check the state residences of your clients to see if it's necessary to register (or notice-file, for SEC-registered advisers) in other states where you're approaching the de minimis threshold.

 

Who is High Net Worth?

 

Also related to Item 5.D. is the question of how you determine who is a high net worth client. This is defined as a client who (a) has at least $1.1 million in investment assets under management, or (b) has a net worth of at least $2.2 million, excluding their primary residence. It's pretty easy to substantiate (a), but determining (b) may be more difficult. If a client does not have AUM of $1.1 million or more, I would recommend not including them in the count of HNW clients, unless you can reasonably substantiate their net worth. For example, if you provide financial planning services and have evidence of their assets that show a net worth of $2.2 million or more, then they can be considered HNW. But if you just have a vague inkling that the client may have a significant net worth, I'd leave them off the HNW list. A high net worth client is generally considered more sophisticated than an individual client, so it's more conservative to understate your HNW clients than to understate your individual clients.

 

Calculating Assets Under Management

 

Items 5.D., 5.F., 5.I., and 5.K. ask for data regarding your AUM. This can be a tricky area, so here are some important things to remember:

 

  • Regulatory Assets Under Management (RAUM) are those over which you (a) provide continuous and regular supervisory or management services, and (b) have trading authority. This is dependent on the terms of your advisory agreement with the client. Does it state that you provide ongoing monitoring of assets? Does the client grant you trading discretion?

  • Discretionary RAUM include assets for which you have the discretion to make investment decisions and implement transactions without prior client approval.

  • Non-Discretionary RAUM includes assets for which you can implement transactions after you have obtained the client's approval to do so.

  • If you provide advice on assets for which the client is responsible for implementing the transactions (e.g., held-away 401k accounts), these cannot be counted as RAUM and are not reflected on ADV Part 1. However, if you wanted to show these assets as part of your business, you could include a description of them in Item 4 of your ADV Part 2A.

  • How you reflect assets that are managed by third-party asset managers (outside managers, sub-advisers, TAMPs) depends on the circumstances of the engagement. If you engage with the third party and have the discretion over the hiring, modification, or replacement of its services, then the assets can be included in your RAUM. However, if the client is the party that engages with the third party, typically the third party will have discretion and will claim the AUM on its ADV.

 

Be aware that your total AUM in Item 5.D. needs to match the total AUM in 5.F. exactly, or you will get an annoying error message that prevents you from completing your filing. Sometimes the discrepancy is a dollar or two due to rounding errors, so check your math and adjust accordingly.

 

Categorizing Asset Types

 

In Section 5.K., you are required to provide information regarding your AUM by asset type. Previously, there wasn't published guidance on the definitions of the categories listed here, and there has been some confusion, particularly around how to categorize exchange-traded funds. Are they "(i) Exchange-Traded Equity Securities" or "(x) Securities Issued by Pooled Investment Vehicles"? I have always advised that ETFs be placed in (x) because their risk profile is typically more similar to a mutual fund than an individual security. But there have been differing opinions on this point. Fortunately, in October, the SEC published some updates to its FAQs on Form ADV which provided clarification that ETFs should be listed in category (x) as a pooled investment vehicle. (See the last question under the topic for Item 5.K.) If you haven't done so in the past, please be sure that you update your processes this year to put them in the right place.

 

Questions often arise regarding Item 5.C.(1) ("Number of clients who receive advisory services for whom you did not have AUM") and Item 5.H. ("Number of clients who received financial planning services during the last fiscal year"). Advisers often ask, "Aren't these the same thing?" Possibly. If you only offer investment management and financial planning services, then essentially the answer would be the same for both 5.C.(1) and 5.H. However, 5.C.(1) could also include clients who receive other non-asset management services, such as plan sponsors who receive non-discretionary advice. Note that accounting clients are not considered advisory clients, though.

 

Also note that the number of clients in 5.D. should include the number of clients for whom you do not have regulatory assets under management. (See the topic for Item 5.C.(1) and 5.D. in SEC's FAQs on Form ADV linked above for further information.) So financial planning clients may increase the number of clients, but not the AUM.

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