What is Regulatory Assets Under Management (RAUM)?

Financial Advisor

RAUM is a key metric that every investment adviser and advisory firm should understand, especially when filing the Form ADV required by the Securities and Exchange Commission (SEC).

Unlike traditional AUM (Assets Under Management), which broadly measures the total value of client assets, RAUM focuses on assets where advisers provide continuous and regular supervisory or management services, such as managing a securities portfolio or having discretionary authority over client accounts.

In practice, calculating regulatory assets under management involves assessing the market value of portfolios for which you provide ongoing management services. This includes cash and cash equivalents, certificates of deposit, and private funds, as well as accounts where you have the authority to hire and fire third-party managers or to select or make recommendations regarding securities.

To comply with SEC regulations, advisers must complete Form ADV Part 1, ensuring that they accurately report the value of the account as of the date of filing. For RAUM purposes, assets must meet specific criteria, such as being part of an advisory contract that requires the adviser to provide ongoing management or to arrange or effect the purchase or sale of securities.

Defining Regulatory Assets Under Management (RAUM)

The total market value of assets that registered investment advisors manage for their clients is depicted by Regulatory Assets Under Management (RAUM). This covers monetary resources such as cash, bank deposits, and money invested in mutual funds, all shed light through Item 5.F of Form ADV.

The document stands essential for those accounts receiving continual consultation or management services.

Inclusion of an account in RAUM requires that over half of its investments be financial instruments like stocks or bonds. Private fund assets are also categorized under this. These reported figures imply the advisor's adherence to SEC norms.

Key Characteristics of RAUM

RAUM distinguishes between gross assets and net assets. It involves continuous and regular supervisory services for managing securities portfolios.

Gross assets vs. net assets

Gross assets include everything a company owns. This means all the money and goods it has. It even counts securities bought with borrowed money, like margin loans. Net assets are different.

To find net assets, you take away what the company owes from what it owns.

Net assets give us a clear picture of what's truly ours after settling all debts.

For example, if an investment adviser manages portfolios full of stocks and bonds for their clients, those investments count as gross assets. But if they used loans to buy some of those stocks, the total they owe on those loans must be subtracted to figure out the net assets.

This is crucial for regulatory purposes, like with RAUM reporting to SEC’s under laws such as the Investment Advisers Act of 1940.

Continuous and regular supervisory services

After talking about the difference between gross and net assets, it's key to focus on continuous and regular supervisory or management services. This part is about how investment advisors keep an eye on client assets all the time.

They have a job to suggest specific stocks or bonds that fit what the client needs. These services are based on the agreement between the client and advisor, how they get paid, and their actual work in managing money.

The U.S. Securities and Exchange Commission (SEC) looks closely at these agreements. They check if advisors really do what they promise in their contracts, especially for those with discretionary authority.

This means they can make investment choices without asking each time. Advisors must always act in their clients' best interest, guiding them through decisions on securities portfolios under advisory contracts for financial success.

How to Calculate RAUM

Calculating RAUM involves identifying eligible assets, assessing their fair market value, and adhering to reporting timelines. It includes distinguishing between gross and net assets and providing continuous supervisory services.

Identifying eligible assets

To identify eligible assets for RAUM calculation, consider the following:

Family accounts, including proprietary accounts, with no direct compensation.
Accounts of non-U.S. clients.
All assets of a private fund, including uncalled commitments.

Ensure accurate identification and assessment of these assets to calculate RAUM effectively and comply with regulatory requirements.

Fair market value assessment

To calculate the Regulatory Assets Under Management (RAUM), fair market value for securities portfolios must be determined within 90 days prior to filing Form ADV. This assessment ensures accurate reporting and compliance with regulatory requirements.

It involves determining the market value of each security held in the portfolio.
Fair market value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Market prices from active markets are preferable; if unavailable, valuation techniques such as present value of future cash flows or recent arm's length transactions can be used.
The fair market value should reflect actual transaction prices and be devoid of any distress sale implications.

Conducting this assessment correctly is crucial for investment advisors to maintain compliance with SEC regulations and provide transparent reports. Moreover, it adds credibility to their management practices and enhances investor confidence.

Reporting timelines

Reporting timelines for regulatory assets under management (RAUM) are crucial for investment advisors.

Quarterly Filing: Form ADV requires the quarterly filing of RAUM within 45 days after the end of each quarter.
Annual Updating Amendment: For annual updating amendments, Form ADV must be filed within 90 days of the fiscal year end.
Amendments: Any material changes to RAUM need to be reported promptly by filing an amendment within 30 days.
Transition Filings: Firms transitioning between SEC and state registration must adhere to specific transition filings within set timeframes, as per the regulatory AUM thresholds previously explained.

Adhering to these timelines is essential for maintaining compliance with SEC regulations and ensuring accurate reporting of RAUM.

RAUM vs. Assets Under Advisement (AUA)

RAUM and Assets Under Advisement (AUA) are distinct in terms of the assets they cover. RAUM concentrates on assets under an advisor's management, while AUA includes assets that the advisor provides advice on but doesn't directly manage.

Learn more about their differences by exploring our blog.

Differences in scope

Regulatory Assets Under Management (RAUM) and Assets Under Advisement (AUA) have differing scopes. RAUM specifically covers assets that an investment advisor directly manages, whereas AUA includes all client assets that the advisor provides advice on but does not manage hands-on.

While RAUM focuses on the assets under the direct control of the advisor, AUA extends to include all client assets where advisory services are provided, offering a broader perspective on the total impact of an investment advisor's guidance.

This distinction is essential for regulatory reporting accuracy and assessing the full spectrum of an investment advisor's influence.

Use in regulatory reporting

RAUM is a crucial metric that investment advisors must report to regulatory authorities. This information is detailed in Form ADV and is used by the Securities and Exchange Commission (SEC) for oversight and investor protection.

Once reported, RAUM enables regulators to assess an advisor's compliance with registration thresholds, providing insight into the scale of their responsibilities over client assets.

Moreover, accurate reporting of RAUM assists the SEC in monitoring potential conflicts of interest that may arise from an advisor's asset management activities.

The precise disclosure of RAUM supports transparency in financial markets, giving investors confidence in the industry while allowing regulatory bodies to uphold fair and orderly market functions.

For instance, under Rule 204-2, advisors are required to maintain documentation regarding their calculation methodologies for both RAUM and Assets Under Advisement (AUA). These records must be retained for at least five years as part of oversight by regulatory entities such as the SEC.

Common Challenges in RAUM Calculation

Challenges often arise when calculating RAUM. For more details, read the full blog post.

Misclassification of assets

One common issue in calculating RAUM is misclassifying assets. This occurs when non-managed accounts or assets are included, leading to an overstatement of AUM. Examples include wrongly categorizing fixed annuities, brokerage accounts, or third-party managed accounts without advisor discretion.

Such misclassification results in inaccurate reporting and can lead to regulatory non-compliance for investment advisors.

In the calculation of RAUM, misclassification of assets can have significant repercussions. It's crucial for advisors to ensure that only eligible and appropriately classified assets are included in their calculations to maintain accurate reporting and compliance with SEC regulations.

Overlooking reporting requirements

Amidst the intricacies of calculating Regulatory Assets Under Management (RAUM), failing to pay attention to reporting requirements can lead to significant compliance issues. Neglecting to exclude real estate or business assets managed on a non-investment basis, and including passively managed discretionary assets without ongoing monitoring can result in inaccurate RAUM calculations.

It is crucial for investment advisors to diligently adhere to reporting guidelines to ensure precise disclosure of their regulatory assets under management.

Strict adherence to reporting requirements plays a pivotal role in upholding transparency and confidence within the financial industry, aligning with the core principles set forth by the Securities Exchange Commission (SEC).

Disregarding these essential obligations could potentially jeopardize an investment advisor's standing and credibility, ultimately impacting their ability to carry out their fiduciary duties effectively.

Thus, thorough attention towards fulfilling all reporting requisites is imperative for maintaining regulatory alignment and fostering confidence among stakeholders in this ever-changing landscape of finance.

Importance of RAUM for Investment Advisors

RAUM is crucial for investment advisors as it helps them comply with SEC regulations and ensures transparency in reporting. To learn more about the significance of RAUM, read on.

Compliance with SEC regulations

RIAs must adhere to SEC regulations by submitting amended and annual Form ADV 1 and ADV 2, as required under the Investment Advisors Act of 1940. This is a critical part of compliance with the SEC's oversight.

The submission of these forms provides essential information regarding regulatory assets under management (RAUM) and other pertinent details about an investment advisor’s operations.

It's crucial for investment advisors to meet these reporting requirements accurately and on time to maintain compliance with SEC regulations. Failure to do so can result in penalties or sanctions from the SEC.

Going forward, it is important for RIAs to also understand the impact of Dodd-Frank Act on RAUM Reporting.

Transparency in reporting

Transparency in reporting is crucial for investment advisors. It helps to prevent regulatory intervention and maintains compliance with SEC regulations. Advisors must document RAUM and AUA methodologies for five years as per Rule 204-2, emphasizing the necessity of clear and open reporting.

This transparency also aids in ensuring accuracy and trustworthiness in financial reporting, which is essential when dealing with various securities portfolios, advisory contracts, and other assets under management.

Maintaining clear and open reporting practices can help secure a strong foundation for compliance within the ever-evolving realm of investment advice. It not only ensures adherence to regulatory standards but also builds confidence among clients and investors by providing clear insight into an advisor's management practices.

Based on these facts, it's evident that transparency serves as a cornerstone principle in maintaining the integrity of investment advising activities.

Impact of Dodd-Frank Act on RAUM Reporting

The Dodd-Frank Act brought significant changes to reporting requirements for RAUM.

Read more about these regulations and their impact on investment advisors.

Key changes introduced

The Dodd-Frank Act, enacted in 2010, brought significant changes to the reporting of regulatory assets under management (RAUM) for investment advisors. It established new thresholds requiring firms with over $100M in RAUM to register with the SEC within 90 days, while those below that figure must register with state regulators.

This shift aimed at enhancing oversight and transparency within the investment advisory sector, ensuring a more robust regulatory framework to protect investors' interests.

Moving forward, these changes have reshaped the landscape for advisors and introduced a more structured approach towards compliance and reporting requirements. The impact has been particularly felt by smaller firms which are now required to register based on their managed assets.

These alterations represent a pivotal moment in regulatory practices shaping how investment advisors operate under SEC guidelines.

Implications for advisors

Advisors should be aware that overstating AUM can lead to scrutiny from the SEC due to concerns about fraudulent advertising. It's crucial for advisors to understand that the size of their AUM can significantly influence consumer perceptions of their firm's credibility and safety, impacting client trust and confidence in the advisor’s capability.

Investment advisers should ensure accurate reporting of RAUM as it not only impacts regulatory compliance but also plays a vital role in shaping investor confidence. Careful consideration and precise calculations are imperative to avoid potential legal implications stemming from misreporting or miscalculations related to RAUM.

Best Practices for Accurate RAUM Reporting

Implement regular audits and use technology for precise reporting, ensuring compliance with SEC regulations and transparency in reporting. For further insights, explore the realm of RAUM reporting best practices.

Regular audits

Regular audits help advisors guarantee compliance and accuracy in reporting Regulatory Assets Under Management (RAUM). According to Rule 204-2, advisors are obliged to document their RAUM methodologies for five years.

The use of regular audits can offer a systematic approach to reviewing and validating the methods used to calculate RAUM. This not only aids in maintaining compliance with SEC regulations but also ensures transparency in reporting, which is essential for building confidence with clients and regulatory authorities.

By integrating regular audits into their management practices, investment advisors can improve their accuracy and reliability in RAUM reporting.

Leveraging technology for accuracy

Regular audits are crucial for maintaining accurate RAUM calculations and reporting, but integrating technology is equally essential. Technology enables ongoing monitoring of supervisory or management services, allowing advisors to ensure precision in their RAUM reporting.

This involves utilizing software and automated systems to monitor and evaluate assets under management, aiding in the identification of eligible assets, fair market value assessments, and adherence to reporting timelines.

By using technology to ensure accuracy in RAUM calculations, investment advisors can simplify their regulatory compliance processes while minimizing the risk of errors.

Furthermore, embracing technological solutions helps advisors navigate the intricacies of regulatory requirements more effectively by providing customized tools aimed at improving accuracy in RAUM reporting.

Such technology not only streamlines the process but also supports transparency and precision in regulatory asset management, contributing to a strong compliance framework that aligns with evolving regulatory standards.

Conclusion

When calculating and reporting regulatory assets under management, it’s crucial to determine the value of the assets that satisfy the definition of RAUM. This includes gross assets for which the adviser has discretionary authority, as well as assets where the adviser is responsible for arranging or effecting transactions. Assets like illiquid assets and securities portfolios must also be included if they meet the criteria for on-going management services.

For proper aum calculations, advisers should ensure all assets that are primarily for asset management are reported on Form ADV Part 1 and that details about their management practices are disclosed in ADV Part 2. The date of filing the form plays a critical role, as the amount of your regulatory assets is determined as of that date.

In summary, calculating regulatory AUM involves more than just identifying assets managed; it requires a thorough understanding of what assets should be reported, versus assets under advisement, and how they align with regulatory requirements. By including all eligible assets in the aum calculation, advisers can meet compliance standards, ensure transparency in their reporting regulatory assets, and position their firm effectively for growth with million under management.

FAQs

1. What is Regulatory Assets Under Management (RAUM)?

Regulatory Assets Under Management or RAUM refers to the fair market value of assets that registered investment advisers manage, plus any capital they can control.

2. Who needs to report RAUM?

Registered Investment Advisers who provide continuous and regular supervisory or management services need to report their RAUM in Form ADV according to the Investment Advisers Act of 1940.

3. What types of assets are included in RAUM?

The types of assets included in RAUM range from securities portfolios under discretionary authority, cash and cash equivalents like bank deposits and certificates of deposit, fixed annuities, proprietary accounts, family accounts up to non-U.S advisors' managed assets.

4. How does one calculate the value for reporting purposes?

For calculating regulatory assets under management (RAUM), an adviser should use the current market value as determined within 90 days prior to filing its annual updating amendment on a consistent basis using U.S GAAP (Generally Accepted Accounting Principles).

5. Are there specific guidelines for different kinds of investments when calculating RAUM?

Yes! For private funds like hedge funds and venture capital funds, you must include both equity and debt securities at fair value regardless if it’s securitized or not. You also have to include asset-backed securities even if they’re held in trusts or limited partnerships.

6. Can advisory services provided without discretion be considered part of RAUM?

Advisory services provided without discretionary authority may be counted towards your firm's regulatory assets under management if you offer ongoing portfolio management or monitor client portfolios as part of an agreed upon contractual commitment.