How to Calculate Regulatory Assets Under Management (RAUM)
Registered investment advisers (“Advisers”) must filed an annual updating amendment to their Form ADV each year within 90 days of the Adviser’s fiscal year end. If an Adviser’s fiscal year ended on December 31, 2013, its annual amendment should be filed on or before March 31, 2014.
Now is a good time to review a significant change made by the U.S. Securities and Exchange Commission (“SEC”) in 2012 to Item 5.F of Form ADV Part 1A: the requirement that the Adviser indicate the amount of “regulatory assets under management” or RAUM.
How does the SEC define RAUM?
RAUM is defined as the value of those “securities portfolios for which [the Adviser] provides continuous and regular supervisory or management services.” Because RAUM is a metric designed to calculate gross assets under management for regulatory purposes an Adviser’s RAUM may be higher than its assets under management (typically calculated on a net basis). It is intended to capture a firm’s overall participation in the market, not necessarily the amount that it manages on behalf of clients. The three-step process for calculating RAUM includes:
- Determine whether a client account is a “securities portfolio”
- Determine whether there is “continuous and regular” management
- Determine the value of the portfolio
Step One – “Securities Portfolio” Determination
The first step is to determine whether each client’s account qualifies as a “securities portfolio.” An account should be treated as a securities portfolio if at least 50% of its total value is made up of securities. When making this determination, consider the following:
- The SEC views cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments) as securities;
- Accounts of foreign clients;
- Family or proprietary assets; and
- Accounts managed without any kind of compensation.
- All the assets of a private fund (defined in the instructions to Form ADV) are treated as a securities portfolio, regardless of the nature of the assets.
Step Two – “Continuous and Regular” Determination
The second step is to determine if the securities portfolio receives “continuous and regular supervisory or management services.” The SEC identifies three factors that should guide all evaluations of whether an Adviser provides “continuous and regular supervisory or management services”:
- Terms of the advisory contract, i.e., does the Adviser agree to provide ongoing management services?
- Form of compensation:
- If the Adviser’s compensation is based on the average value of the client’s assets, this suggests that the Adviser provides “continuous and regular supervisory or management services;”
- Alternatively, compensation arrangements similar to the following suggest that the Adviser does not provide such services:
- The Adviser is compensated based upon the time spent with a client during a client visit; or
- The Adviser is paid a retainer based on a percentage of assets covered by a financial plan.
- Management practices: to what extent does the Adviser actively manage assets or provide advice? Note that the Form ADV instructions explicitly state that the fact that the Adviser makes infrequent trades (e.g., based on a “buy and hold” strategy) does not mean its services are not “continuous and regular.”
|Adviser is Deemed to Provide Continuous and Regular Supervisory or Management Services||Adviser May Provide Continuous and Regular Supervisory or Management Services||Adviser Does Not Provide Continuous and Regular Supervisory or Management Services|
|If it explicitly has discretion over the account and provides “ongoing supervisory or management services with respect to the account.”OR It does not have discretionary authority but:
Step Three – Valuation Determination
The third step is to determine the value of the securities portfolio. Advisers must report the current market value of the assets held in securities portfolios, calculated within 90 days prior to the date of filing the Form ADV. The same valuation method used to report account values to clients, or to calculate fees for investment advisory services, should be used for purposes of Form ADV. Generally, Advisers should report the entire value of each securities portfolio for which the Adviser provides continuous and regular supervisory or management services.However, if the Adviser provides continuous and regular supervisory or management services for only a portion of a securities portfolio, it should include as RAUM only that portion of the securities portfolio for which it provides such services. For example, it should exclude from its own RAUM the portion of an account:
- Under management by another person; or
- That consists of real estate or businesses whose operations the Adviser “manages” on behalf of a client but not as an investment.
The definition of RAUM: the value of those “securities portfolios for which [the Adviser] provides continuous and regular supervisory or management services,” assumes concepts that may be both unfamiliar and unclear. We hope the step-by-step approach provided above will be a useful guide to firms as they prepare their annual updating amendments.