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For purposes of regulatory filings, regulators expect accuracy when breaking down an investment advisor’s clients and accounts.
This element often generates a lot of confusion amongst investment advisors when translating the firm’s data into the Form ADV Part 1. Let’s take a deeper dive into (i) what is an account and (ii) who is a client?
What is an Account?
Accounts are distinct (segregated) groupings at the client’s designed custodian, trust company, transfer agency or administrator (collectively the “custodians”). This makes it relatively easy to determine (as opposed to calculating clients) since custodians maintain and report on an account-level basis, with each being specifically identified. During examinations, regulators will check the accuracy of your firm’s reported figures in your Form ADV 1. Quick tips:
- Only include accounts over which there is ongoing, continuous and regular supervision or management services over.
- Firms must segregate and report separately discretionary from non-discretionary accounts.
- Accounts that are excluded from billing should be included provided there is ongoing, continuous and regular supervision or management services over.
- A pooled investment vehicle (i.e. hedge funds and private equity) is considered one account.
- Investment advisors should exclude the following from accounts:
- accounts with a zero balance;
- closed accounts;
- accounts established to allow a client self-direct investments; and
- accounts that do not have ongoing, regular and/or continuous management or supervision over (unmanaged accounts).
Who is a Client?
Per the U.S. Securities and Exchange Commission (“SEC”), there is no one prescribed method for calculating the number of clients. Some investment advisors may look to calculate clients in terms of households (i.e distinct relationships), while others determine clients based on each individual that maintains an account with the firm. Some firms may also choose to refer to rule 202(a)(30)-1 under the Investment Advisers Act of 1940 when counting clients for purposes of Item 5.D.While there is no one right method, it’s important to ensure that you remain consistent with your calculation method. Best Practice:As noted above, there is no prescribed method, but our guidance is to think of a “client” as: to whom does the firm owe a fiduciary duty? If multiple individuals, accounts and entities are serviced as a single contractual engagement, the investment advisor does not need to count each as an individual “client”. Ultimately it depends on the overall relationship and whether the investment advice, decisions, and reporting are inclusive of all individuals, accounts, and/or entities under the engagement.
Quick Tips:
- The definition of "client" for Form ADV states that firms must count clients who do not compensate the advisor.
- Firms should include clients who are not U.S. residents (and also report these separately on Form ADV 1).
- Each pooled investment vehicles should be viewed as one client.
- The underlying investors of pooled investment vehicles (i.e. hedge funds and private equity ) should not be counted as individual clients unless the investors are separately engaged with the investment advisor to provide advisory services.
- If a firm’s principal office and place of business outside the U.S., the firm is not required to count non-US residents as clients.