11 best practice tips for state investment advisorsArticle added by David Millar on June 16, 2010

David Millar

Joined: August 21, 2010

My Company


In the summer of 2009, the North American Securities Administrator Association (NASAA) issued a report based upon examinations of 448 state level investment advisors. The examinations found 1,887 deficiencies in 13 categories that included books and records, financials, privacy, advertising, and supervisory/compliance, to name a few. The report also recommended 11 best practices for investment advisors. The best practices should be followed by every state registered investment advisor and they include:
    1) Review and revise the Form ADV and disclosure brochure annually to reflect current and accurate information. There are a few states that do not require an annual Form ADV update to be filed. However, now that an advisor's entire Form ADV is available for the public to see through the SEC's Web site, it is very wise to update this every year.

    2) Review and update contracts. This is another area where an annual review of the firm's client contracts might reveal the need to update them. This is especially true for long standing client relationships. Perhaps over the years, a client has been moved from an old portfolio to a new one or her fee has been altered. When these situations occur, a best practice would be to have the client sign a new contract that reflects the new fee or portfolio.

    3) Prepare and maintain all required records, including financial records. Back up electronic data and protect records. For those of you in states that have a minimum net capital requirement, it is extremely important to keep your financial records up to date. An auditor may select random dates to test whether the firm has maintained compliance with the minimum net capital requirement. The only way to ensure a firm is compliant is by keeping these records up to date.

    4) Prepare and maintain client profiles. I am always amazed by advisors that do not prepare and maintain client profiles. In order to fulfill their fiduciary duty, advisors should keep track of and update each client's address, phone number, total net worth, liquid net worth, annual income, income needs, investment objectives, risk tolerance, age, tax bracket, social security number, and job situation. Keeping and updating this information helps ensure a client is in the right investment mix and his needs are being met.

    5) Prepare a written compliance and supervisory procedures manual relevant to the type of business. Obviously, the SEC requires federal investment advisors to have written supervisory procedures, but not every state requires it. Even without the state government mandate, creating a supervisory procedures manual can help simplify a state level investment advisor's operations. Additionally, state auditors are starting to ask for these manuals as part of their routine examinations. Most state level RIAs have reasonably basic business models that can easily be translated into a concise manual.

    6) Prepare and distribute a privacy policy initially and annually. Whether state registered advisors believe it or not, Regulation S-P applies to them, because they are considered financial institutions. An advisor's privacy policy statement should either be part of the Form ADV Part 2 or the investment management agreement. This ensures that the client receives it upon opening of an account. The advisor should also put a date to mail the privacy policy statement on an annual to-do list calendar. It should be done during the same month of every year. The easiest way to do this is to make it part of the firm's annual offer of Form ADV Part 2.

    7) Keep accurate financials. File with the jurisdiction in a timely manner. Maintain surety bond if required. As previously stated, it is extremely important for a Firm to keep accurate financials. Most auditors will spend a large chunk of time during an audit on the financials. An advisor's financial situation may also affect their surety bond. As a result, an advisor required to have a surety bond should review it every year as part of an annual review.

    8) Calculate and document fees correctly, in accordance with contracts and ADV. I have audited multiple firms over the years and found that more often than not, client fees are not consistent. A firm should be consistent in the fees it charges. This prevents a Firm from favoring one client over another, and it precludes an administrative nightmare when doing billing. Every quarter, a compliance officer should grab 10 random accounts and check the fees withdrawn by the custodian to see if: 1) they are calculated correctly; 2) they match what the client signed in his investment management agreement; and 3) the client's investment management agreement amount is the same as what is stated in the ADV. If not, make sure there is documentation explaining the reason for the discrepancy.

    9) Review and revise all advertisements, including Web sites and performance advertising, for accuracy. Over the past 10 years, creating acceptable advertising has been like trying to hit a moving target. A marketing piece created less than a year ago may no longer be compliant. It is important to continually monitor what is considered acceptable advertising.

    10) Implement appropriate custody safeguards, if applicable. While most advisors do not have custody, it is important to make sure a firm doesn't slip into a situation where they have custody and don't know it. The firm should periodically review its policies and procedures that prevent it from having custody. After the review, the firm should test the policies and procedures to ensure they work.

    11) Review solicitor agreements, disclosure, and delivery procedures. These reviews should be done at least annually. It is especially important to review a firm's disclosures, because new conflicts may arise during the course of a year. They may come as a result of adding a new business line or hiring a new investment advisor representative. It's a good idea to periodically have an outside party review the firm's disclosures, because he may be able to more easily see a conflict.
These best practice tips are very basic in nature and can be followed without much difficulty. A well-run state-registered investment advisor can easily turn these best practices into everyday practices.

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