Tuesday, February 19, 2013

Top 5 Annual Amendment Questions

We have compiled the following list of common questions to help you complete your 2013 Annual ADV Amendment Worksheet. Please be sure to get these to us as soon as possible so we can ensure that yours is completed prior to the deadline.

  1. How do I determine our "regulatory assets under management?" The key question to ask is, "Des my firm provide continuous and regular supervisory or management services for the client's account?" To help you with this calculation, we have posted a "primer" on our blog. Click here to take a look.
  2. How should I define a "client" when I am filling in the "client by state" section? A "client" is any natural person, along with their children (minors) and relatives or spouse with same principal residence. So, if you have a couple with two individual accounts and one UGMA, this is one client. To take it a few steps further...
    • If you manage accounts for a married couple and consider both of their interests in making any investment decisions, they are generally considered one client. You should have both spouses as a party to your client agreement.
    • If you also advise a trust for them where they are the sole beneficiaries, still one client. But if they have a trust with one beneficiary outside the family, that's two clients.
    • If you also manage a corporate account that is wholly-owned by them, still one client. But if that corporate account had external shareholders (outside the family), count this as a corporation.
  3. Should I be listing all of our Investment Advisor Representatives (IARs) in every state in which we do business? In most instances, you only have to include an IAR in a particular state when they are either soliciting new business or providing advisory services to a client in that state. However:
    • The IAR is managing more than 5 clients in that state.
    • The IAR is located in that state.
    • State regulations require that anyone servicing client accounts that exceed the de minimis levels register in that state.
    • State regulations require that the supervisory personnel register in that state, even if they do not service clients there personally.
    • The more practical approach is to include all IARs in all states where you have clients. This way, you have full flexibility with respect to which IARs can serve clients in each state. This becomes a workflow, client servicing and cost consideration.
  4. How do I determine if a client should be counted as an "individual" or a "high net worth individual"? According to the North American Securities Administrators Association ("NASAA"), a “high net worth individual” is an individual with at least $750,000 managed by an adviser, or whose net worth exceeds $1,500,000. The net worth of an individual may include assets held jointly with his or her spouse.
  5. What other areas of the ADV1 and 2 must be reviewed and updated? There are several other areas of the ADV that must be reviewed and updated:
    • Material Changes. Item 2 of the ADV requires that all material changes since the last filing and distribution be articulated so that clients can easily find any changes that pertain to them.
    • Business practices. Any changes to the business model and approach must be updated (i.e., services, fees, types of investments, methodologies, etc.)
    • Financial Planning. The regulators also want to know the value of securities and non-securities investments that may be advised upon outside and assets under management structure.
    • Consistency. ADV1, ADV2A, ADV2B and your agreements, websites, marketing pieces and other materials must be in sync. Processes and approaches tend to evolve over time. You must ensure your disclosures evolve too!
    • Contact Information. Did you change your office location, mailing address, phone, fax, company email? Did you hire a CCO or shift responsibilities? (This is a common deficiency.)

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