Tuesday, April 10, 2012

Risk Assessments: Why and How?


Rule 206(4)-7 of the Investment Advisers Act of 1940 requires that registered investment advisers implement a compliance program that is reasonably designed to prevent violations of the securities rules and regulations. Risk assessments can assist you in evaluating your existing compliance program’s effectiveness and ensure it is designed appropriately, given the way you run your RIA.


Identify all risk areas

Begin by reviewing all of your business activities across your firm. Think about your firm’s business model, who your clients are, the role of your employees, and the products and services you offer. Expand your thought process to include conflicts of interest, potential regulatory violations, and potential breach of contract and client mandates. Review findings from recent SEC or State inspections and include any deficiencies that were identified.

Assign a Rating to Potential Risks

Once you have gathered all of your business activities and potential risk areas you must assign a rating to each. Many advisors utilize something simple, like low, medium, and high as risk categories. When assigning a rating consider the regulatory risks, financial risks, and operational risk of each item. Consider the probability of having an issue in the particular business activity, as well as the impact an issue would have on your organization.

Map each risk to your policies and procedures

For each risk identified above, ensure the proper policy and procedure have been implemented. Higher risk areas often require additional internal controls and more extensive policies and procedures.

Perform annual review

Your policies and procedures are meant to be updated on an ongoing basis as needed. At least annually the Advisor should review all business activities and update the risk assessment and policies and procedures.


Each week I will post a risk assessment on a specific business area and discuss some of the specific applicable risks.

Tuesday, April 3, 2012

ADV Amendment Filed – What’s Next?

Here are some next steps now that you’ve filed your annual amendment. Below are questions our consultants at AdvisorAssist are frequently asked:

What am I required to provide to Clients?

There are two different routes advisors can take when it comes to delivering their ADV Part 2. First and foremost, regardless of the path you chose for your ADV Part 2, you must deliver a copy of your privacy policy annually. For the ADV Part 2:
  • Option 1: If there have been material changes to your business the material changes must be described in ADV Part 2, Item 2. Under the current rules, you could provide your clients with a summary of these material changes and an offer to deliver the entire ADV Part 2. In your offer you must include instructions on how clients can obtain a copy from you.
  • Option 2: Advisors can also opt to deliver a full copy of the entire ADV Part 2. In this instance Item 2 - Material Changes still needs to be updated.
Generally, AdvisorAssist recommends that advisors include a cover letter explaining what is being provided to clients and why. For an example letter, please contact us.

May I email this information to Clients?

You may attach the information described above as pdf files in an email to clients. Sending an email with a link to the documents does not constitute delivery. You should only email this information to clients if you generally use email as a means of communication with that client.

When must I deliver the information?

The information described above must be delivered within 120 days of your fiscal year end. Generally the 120 day mark is May 1st, however, since 2012 is a Leap Year, the 120th day is actually April 30th.

What constitutes a material change?

The best way to determine if a change is material is to consult an independent resource who can assist you in making an objective determination. Material changes to your Form ADV Part 2A may include changes to your services, fees, advisory personnel, financial industry affiliations, disciplinary events and financial challenges of the firm or principals, such as a bankruptcy.

Besides my annual amendment, what other times must I update my ADV Part 2?

Investment advisors are required to update their Form ADV Part 2A promptly when the information in the brochure is materially inaccurate. Remember to file your updated Form ADV Part 2A on the IARD system.