Chris Stanley is the Founding Principal of Beach Street Legal LLC, a law practice and compliance consultancy for investment advisers and financial planners. In this role he provides legal advice and compliance counseling related to federal and state securities laws, SEC rules and regulations, RIA mergers & acquisitions, investment management compliance, RIA registration, and general corporate legal matters.
Most recently he served as General Counsel for Loring Ward (now integrated into Buckingham Strategic Partners), a turnkey asset management provider headquartered in San Jose, California. He also previously served as Loring Ward’s Chief Compliance Officer, as well as Chief Legal Officer and Chief Compliance Officer for the SA Funds – Investment Trust, a mutual fund family advised by Loring Ward. Chris received his J.D. and M.B.A. from Santa Clara University, and his B.A. from Boston College. He has also passed the FINRA Series 7 General Securities Representative and Series 24 General Securities Principal examinations, as well as the NASAA Series 66 examination. He is admitted to the State Bars of California, Missouri, and the District of Columbia.
The integration of college funding services into an adviser’s practice is an excellent way to add another dimension to the comprehensive financial planning process. Given the significant financial impact that college funding decisions alone can have on a family’s overall financial plan, such integration can also have the added benefit of putting an adviser in a better position to make fiduciary investment and financial planning recommendations that are in clients’ best interests.
However, there are a few important compliance considerations to keep in mind when offering college funding services for the first time:
Since college funding will be a new service offered by the adviser (potentially with an additional fee structure as well), it is important to update a few sections of Form ADV so that it remains current:
- Form ADV Part 2A, Item 4: Describe the specific college funding services offered to clients.
- Form ADV Part 2A, Item 5: Describe the fees associated with the provision of college funding services, or explain that college funding services are included as part of the adviser’s existing investment management and/or financial planning offering.
- Form ADV Part 1, Item 5E: To the extent college funding services are charged based on a new fee structure not currently offered by the firm (e.g., fixed fees, hourly fees, etc.), confirm the appropriate box(es) are checked.
As a general matter, advisory agreements with clients should at all times accurately reflect the services to be performed by an adviser and the fees to be paid by a client. When additional college funding services are provided to an existing client (and presumably additional fees are charged), the client should sign either a new advisory or separate standalone agreement, or an amendment or addendum to the current advisory agreement, that reflects the new services/fees. Updating services/fees may be possible via “negative consent” upon advance written notice to a client; however, existing agreements should be carefully scrutinized to determine if this is a viable option.
Future clients should sign an updated advisory agreement that includes the provision of college funding services and the corresponding fee schedule, or could alternatively sign a standalone agreement that is specific to college funding services alone.
Counting Regulatory Assets Under Management for 529 Plan Accounts (and similar account types)
Advisers are required to report their regulatory assets under management (or “RAUM”) in Form ADV Part 1 (which generally corresponds to the assets under management reported in Form ADV Part 2A). However, not all client assets managed by an adviser may necessarily be included as RAUM. In determining the amount of RAUM to be reported, an adviser may only include the securities portfolios for which it provides continuous and regular supervisory or management services. This is an easier test to meet if the adviser has discretion over a particular account. If the adviser does not have discretion over a particular account (which may be the case for a 529 Plan account and other similar account types), the adviser must be responsible for “arranging or effecting the purchase or sale” of securities or other investments in the particular account.
Thus, if a 529 Plan account is held-away at another custodian at which an adviser cannot itself place trades or instruct the custodian to place trades (i.e., it is up to the client him or herself to actually place any recommended trades), such adviser may not count the value of such account(s) in its RAUM.
Continuing the above example of an adviser that provides advice with respect to a held-away 529 Plan account, avoid the temptation to simply obtain the client’s username and password to directly place trades on the client’s behalf. Even if an adviser only uses such account access for trading purposes, if the client’s login credentials would allow the adviser to distribute funds, change the address of record, change beneficiaries, or perform certain other functions other than trading, the adviser will generally be deemed to have custody over the assets in such account and therefore be required to undergo an annual surprise exam by an independent accounting firm.
If the held-away account custodian offers some form of interested party, view-only, or other limited access to the adviser that only permits trading, custody may be avoided… but tread carefully in this area and check out the SEC’s Custody Rule FAQ‘s for further information (specifically Question II.6).
Use of the Term “ Expert” or Other Similar Words
After completing the CAP Masterclass Program, advisers will clearly gain an enhanced level of understanding and expertise with respect to the ins and outs of college funding. However, before an adviser rushes to update its website to tout itself as a college funding “expert” or “certified” in some capacity, be aware that regulators are typically not a fan of such words or descriptors. Texas, for example, has a specific rule regarding the use of certifications and designations, and other states as well as the SEC have their own rules that grant them authority to restrict what they consider to be “misleading” advertising or marketing material.
Compliance Policies & Procedures
All roads lead back to an adviser’s compliance policies and procedures, and the addition of college funding services is no exception. The addition of a new service or the imposition of new fees charged to clients should always trigger a compliance policies and procedures review, primarily so as to update conflicting/contradictory references and to keep it an accurate reflection of an adviser’s actual business practices. Once updated, distribute the fresh compliance policies and procedures to all supervised persons and have them confirm receipt in writing.