Calculating Your Assets Under Management: Part Deux

Calculating Your Assets Under Management: Part Deux

As you may recall from our last blog installment, misstating your assets under management is a serious compliance problem. In addition, asset under management calculations are likely to become even more important if the threshold for SEC registration is increased from $25 million to $100 million or somewhere in between. To refresh your memory, there are three important steps to calculate your assets under management.

Step 1: Determine if the account is a securities portfolio

An investment adviser must first determine whether an advisory account is a securities portfolio. An advisory account is viewed as a securities portfolio if at least 50 percent of its total value consists of securities. For purposes of this 50 percent test, cash and cash equivalents, such as bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments, are treated as securities.

The securities portfolios used in calculating assets under management may include all of the following:

• Accounts for clients who are not residents of the U.S.
• Accounts for which an adviser received no compensation
• Family or proprietary accounts

You should be consistent in making this calculation. If you are including one account where no advisory fee was charged, you should include all of them.

Step 2: Determine if each account receives continuous and regular supervisory or management services

The second step is determining if each account receives continuous and regular supervisory or management services. Although this usually means you have discretion over the account, there may be instances where this is not the case.

There are a number of factors indicating whether an adviser is exercising continuous and regular supervisory or management services over an account, such as the following:

• Terms of the advisory agreement – The fact that an advisory agreement states that the adviser provides ongoing supervisory or management services suggests they are in fact provided. There should be no terms in the contract to negate this provision.
• Compensation – If an adviser’s compensation is based on the average value of the client’s assets over a specified period of time, the inference is that the firm does provide continuous and regular supervisory or management services to the account. In contrast, if an adviser’s compensation is based upon the amount of time spent with a client during a visit or the fee is based on a percentage of assets covered by a financial plan, the inference is that the firm does not provide continuous and regular supervisory or management services to the account.
• Management practices – An adviser’s management practices should demonstrate that the firm provides continuous and regular supervisory or management services to the account. Active management indicates that the services are continuous and regular, even if the adviser only trades occasionally.

Giving general or impersonal advice, such as in a newsletter, is unlikely to be viewed as continuous and regular supervisory or management services.

Even if an adviser does not have discretion, continuous and regular supervisory or management services may include situations where a firm allocates clients’ assets among various money managers. To include these portfolios in the firm’s assets under management, the adviser must possess discretionary authority to hire and fire those managers and reallocate the client’s assets. The discretionary authority to hire and fire managers should be spelled out clearly in the advisory agreement. In these situations, both the adviser and the money manager may be able to include these portfolios in their assets under management.

Step 3: Calculating Your Assets Under Management

If you have determined that an account is a securities portfolio and you do exercise continuous and regular supervisory or management services over it, the entire value of the account is included in the assets under management calculation. If you provide continuous and regular supervisory or management services for an advisory account where less than 50 percent of the value is made up of securities, only the actual value of the assets under management is included in the calculation.

The bottom line is that advisers must be prepared to document how they calculated assets under management. A number of deficiency letters have criticized advisers for misstating their assets under management.

NCS is interested in measuring the interest generated by this blog. If you send us an e-mail, we will enter your name in a drawing for a copy of Les’ book.

Les Abromovitz, an attorney, can be reached at NCS by calling 561-330-7645, Ext. 213, or by e-mailing him at labromovitz@ncsonline.com. Les is the author of GROWING WITHIN THE LINES: THE INVESTMENT ADVISER’S ADVERTISING AND MARKETING COMPLIANCE GUIDE (NationalUnderwriterStore.com; 800-543-0874; Amazon.com).