CLIENT FILE REVIEW NASAA 2010 INVESTMENT ADVISER TRAINING

Number of files to be reviewed?  The number of files reviewed at an examination is an issue. How many is enough? More importantly is the number of clients reviewed. Clients may have multiple accounts and it is important to review the client as a whole to have a better understanding of suitability, fees, performance, etc…

How are files selected?  Type of business AUM, Financial Plans, Consulting  Trade Blotter –recent activity  Type of investments Mutual Funds, Variable Annuities, Stocks, Options, Alternative Investments, etc…  Type of account Discretion/Non-discretion, Trust, Margin, IRA, Education, Pension, etc…

How are files selected?  Complaints  Size of account – largest/smallest  Accounts of IARs and relatives  New accounts/Established accounts  Terminated accounts  Random

Managed Accounts Client File Review  Client Contract  Custodial Application  Legal Documents Trust Instrument, POA, Will, etc…  Suitability Review investment holdings (custodial statements) as compared to investment objectives, risk tolerance, and other suitability information & insurance products Age of suitability information Investment holdings consistent with legal documents, if applicable.

Managed Accounts Client File Review  Trading Activity Look for signs of excessive trading, front running, bunched trades, commissions, mutual fund breakpoints/type of shares  Trade Blotter Verify that trades on the custodial statements have been properly recorded on the IA’s trade blotter  Fee Calculation Review fee invoices - verify fee calculations and make sure fees paid agree with contract/Form ADV - make sure IA has proper authority to deduct fees from custodial account

Managed Accounts Client File Review  Performance Calculations Verify individual performance calculations  Correspondence Review correspondence for false or misleading information, and questionable commentary  Reports/Statements generated by IA Review and compare reports/statements generated by IA to those generated by custodian – discuss differences

Money Manager Accounts Client File Review  Contract  Money Manager Contract  Solicitor Disclosure Document Verify the client received both Form ADVs, separate solicitor disclosure document  Fee Calculation Review fee invoices - verify fee calculations and make sure fees paid agree with contract/Form ADV - make sure IA has proper authority to deduct fees from custodial account  Correspondence Review correspondence for false or misleading information, and questionable commentary

Financial Plans Client File Review  Contract  Financial Plan  Suitability Review Financial Plan to ensure contracted services are met – Example: Estate Planning, Retirement Planning Review Financial Plan for reasonableness of recommendations in relation to suitability information  Fee Calculation Review fee invoice, verify fee calculations, and make sure fees paid agree with contract/Form ADV

Financial Plans Client File Review  Correspondence Review correspondence for false or misleading information, and questionable commentary  Plan Delivery Recommend a plan delivery receipt be signed by client to document receipt and date of delivery If portion of the fee is collected in advance, delivery receipt provides evidence plan was delivered within six months – custody issue if more than $500 is collected six or more months in advance

Hourly Consulting Client File Review  Contract  Fee Invoice  Documentation of services provided Review consulting documents to ensure contracted services are met Verify fee calculations and make sure fees paid agree with contract/Form ADV