Regulatory assets under management

What Is Regulatory Assets Under Management?

Regulatory assets under management (RAUM) refers to the total market value of client assets that a financial institution, such as a registered investment adviser, manages according to specific guidelines set by regulatory bodies, primarily the Securities and Exchange Commission (SEC) in the United States. This metric is a crucial component of investment regulation and financial compliance, providing regulators with a standardized measure of an advisory firm's size and scope of activities. Unlike a firm's internal definition of total assets under management (AUM) for marketing or operational purposes, RAUM is strictly defined for regulatory disclosure requirements and determines an adviser's registration obligations. For an account to be included in RAUM, it must consist of at least 50% securities portfolios for which the adviser provides "continuous and regular supervisory or management services."³³

History and Origin

The concept of regulating investment advisers, and by extension, their managed assets, stems from the need to protect investors following periods of market instability. The bedrock of investment adviser regulation in the United States is the Investment Advisers Act of 1940. This landmark legislation was enacted after a congressionally mandated study by the SEC during the 1930s, which highlighted potential conflicts of interest inherent in the advisory relationship³².

Initially, the Act focused on registration and fiduciary duties. Over time, as the investment advisory industry grew and evolved, particularly with the proliferation of various private funds and complex investment strategies, the need for a precise, standardized measure of managed assets for regulatory purposes became evident. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 significantly impacted the regulatory landscape for investment advisers, altering registration thresholds based on AUM and emphasizing the need for clear definitions³¹. This legislative evolution led to the formalization of "regulatory assets under management" as a specific metric reported by advisers on Form ADV, the uniform registration form for investment advisers.

Key Takeaways

• Regulatory assets under management (RAUM) is a specific calculation of managed assets required by regulatory bodies, such as the SEC, for investment advisers.
• RAUM determines an investment adviser's federal or state registration requirements and is reported on Form ADV.
• The calculation of RAUM includes specific criteria, such as accounts primarily composed of securities and subject to continuous and regular management services.
• Unlike broader definitions of assets under management (AUM), RAUM excludes certain assets or services that do not meet strict regulatory criteria.
• Accurate RAUM calculation is critical for compliance and avoids potential regulatory enforcement actions.

Formula and Calculation

Calculating regulatory assets under management involves specific guidelines outlined by the SEC, primarily in the instructions for Form ADV Part 1A. The core principle is to include the fair market value of all securities portfolios for which the adviser provides continuous and regular supervisory services.³⁰

The general approach is to sum the market value of eligible client accounts:

$\text{RAUM} = \sum_{i=1}^{n} \text{Market Value of Securities Portfolio}_i$

Where:

• $ \text{Market Value of Securities Portfolio}_i $: The current market value of an individual client account that qualifies as a securities portfolio.
• A securities portfolio is defined as an account where at least 50% of its total value consists of securities. Cash and cash equivalents (e.g., bank deposits, certificates of deposit) are treated as securities for this 50% test.²⁹,²⁸
• Only portfolios for which the adviser provides continuous and regular supervisory or management services are included. This implies the adviser has ongoing responsibility for overseeing or managing the investments, often involving discretionary authority or regular advice and implementation.²⁷,²⁶
• Assets are calculated on a gross basis, meaning any indebtedness (like margin loans) is not deducted.²⁵,²⁴
• Valuations should be determined within 90 days prior to the date of filing Form ADV.²³

Interpreting Regulatory Assets Under Management

Regulatory assets under management (RAUM) is a primary indicator of an investment adviser's regulatory status and the scale of its advisory business. The numerical value of RAUM determines whether an adviser must register with the SEC or with state securities authorities. Generally, investment advisers with $100 million or more in RAUM are required to register with the SEC, while those managing less typically register with state regulators.²²,²¹ This threshold is crucial for both new and existing firms, as crossing it mandates a change in regulatory oversight.

Beyond registration, RAUM figures provide insight into the capacity and operational complexity of an advisory firm. Firms with higher RAUM often have more extensive investment management operations, more robust compliance departments, and may serve institutional clients in addition to individual investors. For investors, a firm's RAUM, disclosed on Form ADV, can serve as a point of comparison when evaluating different advisory services, although it should not be the sole factor in decision-making.²⁰ It reflects the value of assets for which an adviser is held accountable under specific regulatory standards, rather than a promotional figure.

Hypothetical Example

Consider "Horizon Wealth Management," an investment advisory firm. When preparing its annual Form ADV update, Horizon Wealth Management must calculate its regulatory assets under management.

Here’s a breakdown of some client accounts and how they factor into RAUM:

• Client A (Equity Portfolio): $5,000,000. Horizon provides continuous, discretionary management, and the portfolio is 100% equities. This account is included in RAUM.
• Client B (Balanced Portfolio): $3,000,000. Horizon provides continuous, non-discretionary advice on a portfolio that is 70% stocks and 30% bonds. Since more than 50% is in securities and continuous services are provided, this account is included in RAUM.
• Client C (Retirement Account): $2,000,000. Horizon provides financial planning services for this client, whose assets are held in an employer-sponsored 401(k) where Horizon does not have trading authority or provide continuous management services. This account is not included in RAUM, as it does not meet the "continuous and regular supervisory or management services" criterion.
• Client D (Real Estate Portfolio): $1,500,000. Horizon provides advice on the client's real estate investments, but real estate itself is generally not considered a security for RAUM purposes. This account is not included in RAUM.
• Client E (Private Fund): $10,000,000. Horizon acts as the general partner for a private fund. All assets of a private fund are typically treated as securities portfolios for RAUM purposes, regardless of the underlying assets. This account is included in RAUM.

In this hypothetical scenario, Horizon Wealth Management's total regulatory assets under management would be:
$5,000,000 (Client A) + $3,000,000 (Client B) + $10,000,000 (Client E) = $18,000,000.

This calculation helps Horizon determine its regulatory obligations, such as whether it needs to register with the SEC or remains subject to state-level regulation.

Practical Applications

Regulatory assets under management is a fundamental metric with several critical practical applications in the financial industry, particularly within investment management and regulatory oversight:

• Registration Thresholds: The most significant application of RAUM is determining an investment adviser's registration requirements. Advisers typically register with the SEC if their RAUM reaches $100 million or more, and must register with the SEC if it hits $110 million. If RAUM falls below certain thresholds (e.g., $90 million for SEC-registered firms), they may be required to revert to state registration.,
  ¹⁹*¹⁸ Form ADV Filing: All SEC-registered investment advisers, and certain exempt reporting advisers, must calculate and report their RAUM annually on Form ADV Part 1A, Item 5.F., ¹⁷T¹⁶his public disclosure provides transparency to investors and regulators regarding the firm's scope of business.
• Regulatory Scrutiny: Regulators, including the SEC and state securities authorities, pay close attention to RAUM figures in their oversight activities. Discrepancies or misstatements in RAUM can lead to regulatory inquiries or enforcement actions. The SEC's Division of Investment Management, for example, focuses on areas such as misleading disclosures and fraudulent valuations related to assets under management.
  *¹⁵ Business Planning and Strategy: Advisory firms use their RAUM figures as a key internal metric for strategic planning, benchmarking against competitors, and assessing growth. Decisions regarding staffing, technology investments, and target client segments can be influenced by changes in a firm's RAUM.
• Fee Calculation: While RAUM is a regulatory metric, firms often base their advisory fees on their internal AUM, which conceptually aligns with the assets for which they provide ongoing services. Consistency between reported RAUM and how fees are calculated for clients is expected by regulators.

¹⁴## Limitations and Criticisms

While regulatory assets under management (RAUM) serves as a vital metric for oversight in investment regulation, it is not without limitations or criticisms:

• Strict Definition vs. Business Reality: The rigid definition of RAUM can sometimes misrepresent the actual scope of services an advisory firm provides. For instance, a firm might offer extensive financial planning services for a client's entire net worth, including real estate or retirement accounts where the adviser does not have direct management authority. These assets would not count towards RAUM, even though they are a significant part of the client relationship. T¹³his can lead to a lower RAUM figure than the firm's broader "assets under advisement" (AUA).
• Exclusion of Non-Securities Assets: Assets like real estate, commodities, or certain types of annuities are generally excluded from RAUM calculations unless they are part of a securities portfolio that meets the 50% securities threshold. T¹²his means firms specializing in alternative investments or comprehensive wealth management might have lower RAUM compared to equity-focused firms, despite managing substantial assets.
• Valuation Challenges: Determining the fair market value of illiquid or infrequently traded assets (e.g., in some private funds) for RAUM purposes can be challenging. While the SEC allows flexibility in valuation methods, it requires consistency and good faith, which can still lead to complexities and potential scrutiny.
  *¹¹ Focus on Quantity, Not Quality: RAUM primarily measures the quantity of assets under management under specific regulatory guidelines. It does not inherently reflect the quality of investment advice, the complexity of client needs, or the firm's overall service model. A firm with lower RAUM might offer highly specialized and valuable services to a niche clientele.
• Potential for Misinterpretation: Investors might conflate a firm's reported RAUM with its overall reputation or capability, potentially overlooking smaller firms that offer superior service or expertise in areas not fully captured by the RAUM metric.

Regulatory Assets Under Management vs. Assets Under Management

The terms "regulatory assets under management" (RAUM) and "assets under management (AUM)" are often used interchangeably, but they have distinct meanings and purposes. The key difference lies in their scope and the rigor of their definition, driven by regulatory versus business objectives.

The distinction is crucial for both financial professionals, who must accurately report RAUM to avoid regulatory issues, and investors, who should understand that a firm's publicly touted AUM may encompass a broader array of assets than those strictly defined by RAUM. The SEC's intent behind RAUM is to provide a standardized, comparable metric for regulatory purposes, separate from a firm's self-promotional figures.

FAQs

What is the primary purpose of Regulatory Assets Under Management (RAUM)?

The primary purpose of regulatory assets under management is to provide a standardized metric for financial regulators, such as the SEC, to determine an investment adviser's registration requirements and monitor the scope of their advisory activities. It helps ensure compliance with the Investment Advisers Act of 1940.

How does RAUM differ from a firm's reported "Assets Under Management" (AUM)?

RAUM is a specific, narrowly defined calculation required by regulators for compliance purposes, based on strict criteria regarding the types of assets included and the services provided. Assets under management (AUM), conversely, is a broader term often used internally by firms for marketing or general business metrics, and may include assets that do not meet the strict RAUM criteria.

What types of assets are included in RAUM?

RAUM primarily includes securities portfolios (accounts with at least 50% securities) for which the investment adviser provides continuous and regular supervisory services. This includes accounts where the adviser has discretionary authority or ongoing management responsibilities. Assets of private funds are typically counted as securities portfolios for RAUM purposes.

Why is accurate RAUM calculation important for an investment adviser?

Accurate calculation of RAUM is critical because it dictates an investment adviser's federal or state registration status and is a mandatory disclosure on Form ADV. Misstating RAUM can lead to regulatory penalties, including fines and enforcement actions from the SEC or state securities regulators.

Do all financial institutions calculate RAUM?

RAUM is primarily a concern for investment advisers who are subject to registration and oversight by the SEC or state securities regulators. Other financial institutions, like broker-dealers supervised by the Financial Industry Regulatory Authority (FINRA), have different regulatory metrics and reporting requirements.