The financial statements that you maintain for your RIA firm, which include income statements, balance sheets, statements of cash flows, are powerful tools. Apart from the fact that they are a required to be maintained for books and records purposes, the data that they contain hold the key many other critical regulatory and practice management activities.
RIA Financial Statements In a Nutshell
Maintaining complete and accurate financials on your business simply makes good business sense. However, our primary purpose here is the maintenance of financial statements for compliance purposes, which may include:
While maintaining proper financial statements is required in order to avoid regulatory sanctions, it can also be a useful tool for RIAs. Creating and reviewing financial statements on a regular basis can prove to be an indicator of the health of the firm. The financial statements can demonstrate that the firm is performing as intended and disclosed, or act as a tool to show areas where it can improve. Ensuring financial stability of a firm is an important step in gaining client and regulatory confidence. Proving to be solvent and possess secure financials could be the difference between gaining and losing clients, or spending more time with regulators during an exam.
State Specific Requirements
Many of the regulations regarding financial statements for RIAs are dependent on the advisor’s principal state of business. Along with SEC Regulators requiring specific actions regarding financial statements, each state also has specific requirements on the issue. As an advisor it is important to recognize your specific state’s requirements in order to avoid unnecessary regulatory issues. Currently, there are states that require audited financial statements to be sent to their state regulatory agency each year. This applies only if the firm is registered with the state, and does not apply to SEC firms.
It is important to stay updated on your specific state’s requirements in order to avoid unnecessary regulatory issues. Depending on the state, there may be minimum net worth requirements that are to be demonstrated through the financial statements. Where applicable, your firm’s books and records archive should contain the necessary financial statements and audit results.
Custody’s Additional Burdens
When an advisor claims custody of their clients’ assets, there are additional rules and regulations to be aware of in regards to Financial Statements. Advisors that also act as Custodians may be required to submit an audited balance sheet at the end of the their fiscal year. This balance sheet must be prepared in accordance with generally accepted accounting principles (GAAP), and audited by a certified public accountant (CPA). The audit must also include the accountant’s opinion and other qualified notes regarding the firm’s financials. Custodian advisors must also provide clients with a quarterly account statement that outlines all of the activity of their funds in the given period.
Through the Regulator's Eyes
Regulators expect RIA firms to maintain updated financial statements that are created in accordance with generally accepted accounting principles (GAAP). Regulators have put an emphasis on monitoring the financial statements of newly-registered advisors. If they are not completed correctly, it is a sign that a further examination is needed. Compliant financial statements prove to the regulators that the firm is running effectively. Proper maintenance and submission, if required, of updated financial statements is one key way to avoid regulatory sanctions.