Remember When “What’s your AUM?” Was a Simple Question?

By Brian R. Lauzon, CFA, AdvisorAssist, LLC on Wednesday, February 1st, 2012

RIAs and financial planners often provide a broad range of services and receive compensation in a number of different ways. Certain aspects of these services and compensation arrangements will dictate whether or not  assets are counted as “regulatory assets under management” in an advisor’s regulatory filings.  

The SEC now defines “regulatory assets under management” as assets where the advisor provides  “continuous and regular supervisory or management services.” Here are some guidelines to help advisors determine which of their clients’ assets should be counted towards AUM under this new definition.

How do you describe your services in advisory agreements?

If your advisory agreement for a particular client indicates that you provide ongoing management services, this suggests that these assets should be counted towards “regulatory AUM.”  Before doing so, advisors should read on to be certain.

How are you compensated for your advisory services?

Your compensation arrangement with your clients will also help determine whether a client’s assets should count under this new definition.  

If your advisory fees are calculated based on your client’s average market value over a specific time period, this would suggest “continuous and regular supervisory or management services.”
Other advisory fee arrangements, however, would suggest otherwise.  For example:

  • Time-based.  If your advisory fee is based on the amount of time spent with a clientRetainer-based.  

  • If your advisory fee is based on a percentage of assets covered under a financial plan

How do you manage your clients’ assets?

In the following instances you would likely count these assets as regulatory AUM:

  • If you have discretionary authority to allocate client assets among third party asset managers

  • If you allocate client assets to other managers (as a “manager of managers”), but only if you have discretion to hire and fire these managers and/or reallocate among these managers

  • If you do not have discretionary authority (but otherwise satisfy the definition of “continuous and regular supervisory or management services”) and provide recommendations to your clients on their holdings, you should count these assets as regulatory AUM if you are responsible for arranging or effecting transactions after your client accepts your recommendations.

The key here is the extent to which you monitor your client’s portfolios as well as their needs and objectives.  Infrequent rebalancing or trading (in and of itself) does not necessarily mean that your advisory services are not “continuous and regular.”

According to the SEC, you do not provide “continuous and regular supervisory or management services” for clients where you provide:

  • Market timing recommendations (but have no ongoing management responsibilities)

  • Impersonal investment advice (like a newsletter)

  • Guidance on an initial asset allocation (without continuous and regular monitoring and reallocation)

  • Advice on an intermittent or periodic basis (i.e. upon client request, in response to a market event, or just at pre-specified points in time, like quarterly or annual reviews)

What about “held away” accounts?

Accounts that are “held away” follow the same logic.  If you provide “continuous and ongoing” services for these accounts (and your advisory agreements and services are consistent with the tests noted here) then they may be counted towards “regulatory AUM.”  
Recently, the SEC has been critical of advisors that misstate their AUM.  Since this is a new definition for the industry, we suspect that there will be heightened scrutiny on this topic going forward. 

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