Earlier this week, two separate industry articles written by Charles Paikert in Financial Planning Magazine referenced registered investment adviser (RIA) firms trumpeting total asset figures that did not match the regulatory assets under management (AUM) figure found on the firms’ Form ADV Part 1. In the first article, Paikert references that a $70 billion asset figure previously publicized by a large RIA industry firm does not match the $30 billion of regulatory AUM listed on the firm’s Form ADV filings. In the second article, Paikert similarly references another rapidly growing “aggregator” RIA firm that previously announced new asset flows of over $900 million yet its Form ADV filings only references a regulatory AUM figure of $204 million.
While it appears that in both of the above scenarios there may have been no intentional act to mislead investors, both of these recent articles should serve as a good reminder for the Chief Compliance Officer (CCO) of each advisory firm to take a minute to review the firm’s Form ADV AUM figures to ensure that the figure corresponds with all marketing or advertising materials. In particular, the CCO should carefully review all public press releases or statements to ensure accuracy and compliance.
The SEC has provided some clear guidance on how to properly calculate an advisory firm’s regulatory AUM figure. Regardless of a how firm thinks about or manages its business operations internally, it’s vital that the publicly stated AUM figures are in-line with the SEC’s guidance. Both the states and SEC have historically been and continue to be very focused on RIA firms overstating regulatory AUM figures. Firms found to be overstating their assets under management may face serious regulatory sanctions as it may be perceived that the firm is acting in a “false and misleading manner” to both prospective and current clients. In addition, firms have also been found to have been over billing clients by falsely inflating the value of client assets.
In recent years, there have been a series of SEC actions taken against firms which were alleged to have overstated assets under management. The SEC has publicly stated that its advancements in technology are now allowing the agency to more proactively identify scenarios in which assets may be overstated. New advancements in technology aside, a simple tactic that regulators have employed in the past is to review a local newspaper list of the largest RIA firms in the region to ensure that the asset figures stated by the firms match each firm’s Form ADV filings.
As RIA compliance consultants, we can not understate the importance of the principals and CCO of all RIA firms making it a key compliance priority to accurately disclose the firm’s regulatory AUM in all regulatory filings, news releases, and marketing materials.