I am often asked how advisers can simplify their ADV registration process. The simple answer is to complete the items in succession. This approach saves time, reduces errors, and ensures accuracy. The key is to devote adequate time to identifying areas that have changed within the past year — those are the ones that will need extra attention.
The following are the key areas that advisers should pay special attention to when filing their ADV Part 1:
Notice Filings
A quick review of the Blue Sky Laws will tell you which states require notice filings and which do not. For most states, six (6) clients is the minimum threshold triggering a notice filing requirement. However, a critical oversight many advisers make is overlooking states that do not fall within the minimum requirement — states like Louisiana, Wyoming, and New Hampshire.
Developing a running client state-of-residence report can save you money. For instance, if the number of clients in a particular state drops below that state's minimum threshold, you must amend your filing before the end of the calendar year if you wish to avoid paying that state's notice filing fee.
Clients and Assets Under Management
Item 5 is arguably the most important part of the ADV registration — and it is also the part most commonly misrepresented by advisers. The errors range from incorrect client percentage breakdowns to inaccurate AUM figures.
Investing in detailed reporting tools that allow you to easily segment and analyze your client composite is worthwhile — not only for filing your ADV accurately, but for understanding the types of clients you serve and keeping pace with the applicable regulatory requirements for each client group.
Custody
Custody has been heavily scrutinized by regulators in recent years, as enforcement actions for the misappropriation of and misconduct involving client assets have increased. Regulators are finding that many advisers are not answering Item 9 correctly, primarily due to a misunderstanding of the Custody Rule.
"Paying special attention to the Custody Rule — and developing a firm policy and procedure addressing it — will prove highly beneficial when completing ADV Part 1."
Firms that have a documented policy addressing custody, including the safeguards in place to protect client assets, are better positioned to answer Item 9 accurately and demonstrate compliance to regulators.