Being a registered investment advisor isn’t easy. You may have chosen this profession because you have great business and investment sense, a drive to help others manage their wealth, and a desire to build a solid financial foundation of your own. But working in this industry also requires strict adherence to a slew of complex and exacting guidelines. And without understanding RIA Compliance 101, following those guidelines is more than challenging.
Hiring a compliance consultant can help make your life easier. But it’s not enough to hire someone to do compliance for you. You need to understand it yourself and take steps to make sure it gets done and done right. Meeting the challenges of RIA compliance is part of the job, but that doesn’t mean the process can’t be made easier.
Rather than spending your off-hours Googling industry terminology, here are a few RIA Compliance 101 definitions to get you started.
SEC (Securities and Exchange Commission)
RIA compliance is adherence to the Investment Advisors Act of 1940 under the supervision of the SEC, which was created under the Securities Exchange Act of 1934. These are living documents that continue to be amended and updated to reflect modern trading practices.
Your state may also have its own rules for RIAs. If you do business in more than 14 states and/or manage funds of $100 million, you have the option of registering with the SEC. At $110 million, however, you must register.
What the 1040 is to personal income taxes, Form ADV is to your firm’s RIA compliance.
This yearly form has two parts. The first is specifically for regulatory purposes. You fill in the blanks with information about your firm, the amount of money you manage and other requested facts. The SEC and/or your state authority uses this information in their enforcement activities. In plain English, they use it to decide whom to audit.
The second part is for your clients and potential clients. This “brochure” portion requires RIAs to write easy-to-understand narratives detailing their services offered, amount of funds managed, fee schedule, conflicts of interest and more.
RIA Compliance Group has an excellent introduction to Form ADV here.
CCO (Chief Compliance Officer)
Under SEC regulations, each RIA firm is required to have a CCO, someone who is in charge of compliance for that firm. You don’t have to hire someone just to oversee compliance. The CCO can have other responsibilities, but it is important that they have a good working knowledge of SEC compliance and the time needed to maintain compliance standards for the firm.
In the SEC’s own words, “An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.”
So, choose wisely. Make sure your compliance officer is knowledgeable, experienced, and has authority in your organization. And be prepared to back up your CCO if certain requirements are unpopular with your team.
AUM (Assets Under Management)
Sometimes called Funds Under Management, AUM measures the market value of all financial assets managed by an RIA. This is an important number, and it’s important to keep it current because a change can trigger new reporting and compliance requirements for your RIA firm, and discrepancies can trigger an audit. Mentions of AUM in marketing materials should always reflect the most recent valuation.
The SEC cracks down on AUM reporting discrepancies for several reasons. Some firms have been caught overstating AUM to attract more lucrative clients. Others are caught understating to avoid SEC reporting requirements.
Fiduciary Duty and Conflict of Interest
When you assume management of a client’s wealth, you are required to leave self-interest at the door and represent that client’s interests with competence and loyalty. That is fiduciary duty. Violating fiduciary duty can get you in big trouble with the SEC.
In many cases, conflicts of interest take the form of the temptation to act in your own best interest instead of the client’s. For example, take a look at this high-profile case from December 2015, in which one of the largest financial institutions invested clients’ money in their own products.
Also note that it is not against SEC regulations to have a conflict of interest. It is against those regulations to avoid disclosing it. Your clients need to be aware so they can make informed decisions about their own wealth management.
Fiduciary responsibility and conflict of interest don’t just apply to you; they apply to everyone working in your firm. Check in with your team regularly to make sure everyone is complying with these rules.
While each RIA needs to take responsibility for knowledge of RIA compliance, there are ways to automate daily compliance tasks. A turnkey solution like SmartRIA can streamline and simplify compliance for you, your CCO, and the rest of your employees.
Editor’s Note: This post was originally published in 2016. It has been updated for accurate content.