We’re seeing it more and more frequently: State and SEC auditors are showing heightened interest in the books and records of RIA firms. If you aren’t familiar with the SEC Books and Records Rule, 204-2(a), now is the time to give it an in-depth look. To help you get familiar with the rule’s requirements, here’s a quick rundown of what you should know.

Does the SEC Books and Records Rule apply to you?

If your RIA firm has more than $100 million AUM, you’re required to register with the SEC and are therefore subject to the rule. Regardless, most states have books and records rule that mirror the SEC’s. So, even if you aren’t registered with the SEC, it’s likely a books and records rule will apply to you.

What does the Books and Records rule entail?

The SEC Books and Records Rule includes six requirements related to keeping accurate books and records, such as adjusted journal entries, general ledgers, bank statements, cancelled checks, and the like. Generally, RIA firms are required to keep these types of records for five years. You must keep your most current two years of records on your firm’s premises. You can keep the later three years of records off-site.

Does your RIA firm need audited financial statements?

For SEC purposes, RIAs are not required to have audited financial statements, but it’s certainly possible this requirement could show up down the road. That said, your RIA firm’s books and records must be maintained under generally accepted accounting principles (GAAP).

Are you subject to a net capital requirement?

RIAs are not subject to a net capital requirement per the SEC. However, your RIA firm must be solvent; you can’t be going into bankruptcy or in a negative capital situation.

Certain states, on the other hand, do have rules around net capital. Depending on where your RIA firm is registered, this type of requirement could apply to you.

Do you know your state’s books and records rules?

Most states have their own books and records rules, which, as I mentioned earlier, are typically very close to the SEC requirements. Most states require a financial statement balance sheet, income statement, and cash flow. Although uncommon, certain states do require firms to submit audited financial statements or balance sheets. The bottom line: Know your state’s rules and make sure you’re in compliance.

More rules could be coming…

At the time of this writing, the SEC has proposed a rule that would require RIA firms outsourcing certain functions to perform and document due diligence before retaining a service provider. This puts more responsibility on your RIA firm to do its homework—and more administrative work—when hiring a provider for outsourced functions.

Currently, functions such as sub advisor, client services, cybersecurity, investment risk analysis, and trade communications are included on the SEC’s list. The list does not yet include the selection of an outsourced CFO, but that doesn’t mean it won’t be included in the final rule.

Comply with confidence.

As the SEC Books and Records Rule becomes more of a focus area for auditors, it’s important to get familiar with the rule as soon as possible. Failing to comply can lead to costly penalties—and no RIA firm wants to deal with those. If you’re unsure about the rule and its impact on your RIA firm, we’re here to help. Contact us today with any questions you have.

Your RIA firm is likely one of your largest and most time-consuming assets. Of course, much of the time you spend on it involves taking care of clients. This leaves little time for checking in on the financial wellbeing of your own business operations. But if you’re not paying attention to your RIA firm’s numbers—and how they stack up against those of similar firms—you could be missing an opportunity.

Here’s how to leverage benchmarking to grow your RIA firm.

First, know your numbers.

At a minimum, you should be tracking and updating your RIA firm’s current and expected cash flows on a consistent basis. Knowing your numbers also means having confidence in the accuracy of your financial statements. Are you able to trust the reports your accounting system provides?

Measure your key performance indicators.

If you know your RIA firm’s numbers, you can consistently measure its key performance indicators (KPIs). Focus on the ones that are most important to your firm. These might include:

• Average client age
• Average number of years clients have been with your firm
• Average number of new clients your firm adds each year
• Percentage of AUM from your firm’s top five client relationships or families, excluding institutional clients

Compare your KPIs to those belonging to similar RIA firms.

Comparing your RIA firm’s KPIs to the KPIs of other similar firms lets you see how your firm stacks up against its peers. At Elevate, we leverage a tool from Truelytics, the leading SAAS business intelligence platform for wealth management enterprises, to help you benchmark your firm in this manner. This unique tool can also uncover valuable data about your business. The result: You get a “business health record” you can apply to your practice management.

Pinpoint areas of improvement.

Once you’ve benchmarked your RIA firm against its peers, you can identify KPIs to improve upon. Doing so can help you ask the right questions and ultimately increase your bottom line and overall firm value. For example, if the industry average of revenue per employee for similarly sized RIA firms is $85,000, and your firm is at $45,000 per employee, the question becomes: Do you have too many employees?

Knowing how your RIA firm stacks up also allow you to evaluate its revenue and expenses. For example: What is the average basis point you’re charging for your advisory services? What percentage of your revenue is recurring (i.e., reliable) each year? Excluding acquisitions, what is your estimated future annual revenue growth rate?

For expenses, consider reviewing significant purchases as well as costs such as rent, legal services, and marketing to see how these compare to what similar RIA firms are paying.

Set goals for growth.

Knowing how your RIA firm compares to others gives you an idea of where your KPIs should be. This perspective gives you something to measure against while also serving as a blueprint for growth. The more you can strengthen your RIA firm’s KPIs and cash flow, the more valuable your firm will be—today and tomorrow.

At Elevate, we combine the power of technology with data analytics to help you better understand and grow your RIA firm. As our client, you have access to the Truelytics tool referenced in this blog post as a value-add to our CPA services. To find out how we can help you leverage benchmarking to your RIA firm’s advantage, contact us today.

When choosing a CPA firm, it can be tempting to simply follow a colleague’s referral or a Google review. But even if a CPA firm comes highly recommended or rated, it might not be the right one for your RIA firm.

Serving RIA firms requires specialized expertise—something not all CPA firms have. Here are just a few of the benefits of working with a CPA firm that understands financial services:

Avoid leaving money on the table

Calculating an RIA firm’s income and expenses can be complicated. But a CPA who specializes in financial services knows exactly what this calculation—as well as other ratios and key performance indicators (KPIs)—should be.

This knowledge is especially valuable when it comes to custodial payments. Typically, a custodian will provide a monthly income stream to an RIA firm based on its percentage of AUM. But the custodian’s payments are not always correct. (Yes, we’ve even seen big-name custodians make mistakes.) Even if it’s small deviance, it can add up over time. A CPA who knows what to look for can swiftly identify an erroneous payment.

See how your RIA firm stacks up

A CPA firm that focuses on RIA firms will have an internal database of relevant KPIs as well as access to a national database of the same. At Elevate, we reference these two databases to benchmark our clients’ RIA firms against other similar firms. The benefit: you can determine if your RIA firm is on the right track. If not, you can leverage the data to pinpoint areas for operational improvements.

Know your RIA firm’s value

Like you tell your clients, it’s important to know the value of your assets. A CPA firm that understands financial services can help you understand the value of your RIA firm. At Elevate, we partner with the business intelligence platform Truelytics to give our clients this insight. Through Truelytics’ platform, we can even show RIA firm owners how certain changes, such as focusing on a new client demographic, could increase their firm’s value.

Stay ahead of trends

A CPA who is dedicated to the financial services industry does more than serve clients. At least that’s what we’ve found to be true at Elevate. Our CPAs focus their continuing education on financial services. This allows us to keep our clients up to speed on compliance updates and other issues. By carefully anticipating the next trend, we make sure our clients are equipped to make the most of it.

Find the right CPA firm

When seeking a CPA firm, it’s wise to do your homework. Make sure the firm knows the financial services industry as well as the complicated challenges RIA firms face. Working with a CPA who possesses this specialized expertise can not only save you time and money—it can also help you achieve growth.

We started Elevate CPA Group for precisely this reason: to give RIA firms the unique tax, accounting, and advisory support they need. Our team of CPAs, advisors, and accountants focuses solely on the financial services industry. More than a tax firm, we act as our clients’ strategic growth partner, allowing them to move forward with confidence.

If you have questions or would like to learn more about working with Elevate, schedule your complimentary consultation today.

If you’re looking to break away and set up your financial advisory firm, aligning yourself with an outsourced CFO can help you get off to a solid start. The right outsourced CFO will not only facilitate the entire process but also will serve as your trusted advisor for years to come.

Here are six key steps to setting up your RIA firm and how working with an outsourced CFO can make a difference.

Register your RIA firm with the proper regulatory bodies

Whether you’re registering your firm with the Securities Exchange Commission (SEC) or a state regulatory body, the process is likely to be arduous and costly. For this reason, consider hiring a regulatory compliance consultant. This individual can assist with your firm’s regulatory registrations and monitor the process along the way. An outsourced CFO can vet and approve a regulatory compliance consultant for you, so you know you’re working with the right one.

Choose an entity structure

The entity structure (e.g., partnership, S corporation, etc.) you choose is critical to positioning your firm for growth, as are the agreements between you and your partners. Your outsourced CFO works closely with attorneys who can assist in drafting shareholder, operating, and noncompete agreements.

Develop your IT infrastructure

Given our current regulatory landscape and the risk of cybersecurity issues, having a robust IT infrastructure is more critical than ever. That said, avoid rushing into any IT solution. The solutions you choose should fully meet the unique needs of your RIA firm, including those related to email correspondence and archiving.

An outsourced CFO can point you to a preferred IT provider who can offer the services you need. Equally important, your outsourced CFO can ensure this aspect of your business is at a proper monthly cost.

Set up your books

Per the SEC’s “Books and Records Rule,” your RIA firm is required to make and keep true, accurate, and current books and records. As you might imagine, this is only the tip of the iceberg of this rule. An outsourced CFO can make sure your firm stays in compliance. In addition to providing updated financial statements each month, an outsourced CFO can provide tax planning and preparation services—for your RIA firm as well as your clients.

Build your client base

Marketing your RIA firm is essential to meeting your goals for growth. Not only must your marketing be effective; it must also comply with applicable regulations. This is why it’s essential to work with a marketing firm that specializes in the financial services industry. An outsourced CFO can connect you with an appropriate marketing firm for you.

Work with an experienced outsourced CFO

It can be both thrilling and overwhelming to set up your financial advisory firm. As a CPA firm focused solely on investment advisory firms, Elevate offers outsourced CFO services to support you through the process. We leverage our tax and accounting background as well as our relationships with attorneys, regulatory compliance consultants, and marketing firms to help you find success.

If you’re ready to explore how Elevate can help you set up your RIA firm and maximize its value, schedule your complimentary consultation today.

Elevate CPA Group’s Rick and Brian were recently featured in The RIA Compliance Collective’s podcast.
Check out this great podcast, Knowing Your Numbers, here!