Colorado Releases Guidance for Financial Planners

For the past several years, regulators at both the federal and state levels have placed a greater emphasis on the advisory fees charged to retail clients and how those fees are calculated and disclosed. We have previously written about these efforts publicized through Risk Alerts, Exam Priorities and Observations, and Staff Bulletins. Recently, the Colorado Division of Securities published an Ongoing Financial Planning Guide that articulated its concerns regarding investment adviser firms that provide continuous financial planning services.

The Colorado Division of Securities stated that it has encountered a growing trend in which investment advisers provide on-going financial planning rather than the traditional hourly or one-time fixed fee models. Under the on-going financial planning arrangement, investment advisers theoretically take a greater role in implementing financial plans, assisting clients with day-to-day financial decisions, updating financial plans, and making themselves available to the client as needed.

Compliance concerns regarding financial planning have traditionally focused on the disclosure of services and fees, including how and when the fees are charged, whether collecting fees in advance triggers custody concerns, and whether collecting fees in advance create a refund obligation. Colorado’s Guidance continues highlighting these areas of focus and expands what it considers to be best practices.

One area of increased focus concerns the disclosure of advisory services in the firm’s brochure. The instructions to Item 4 of Form ADV Part 2A directs investment advisers to describe the types of advisory services provided and the nature of the services provided. While broad language such as “holistic” or “comprehensive” might have previously passed regulatory scrutiny, Colorado recommends that more precise disclosures that should provide a description of financial planning deliverables and the anticipated time needed to provide the deliverables. The greater level of disclosure details allows clients to understand the contracted services, expected deliverables, and whether the services have been completed. For a financial planner operating under an on-going or subscription-based model, complying with Colorado’s recommendation may be difficult as it will require the specific description of a potential arrangement with multiple yet-unknown variables.

Failing to provide specific disclosure of the financial planning services creates a situation in which it may appear to the client, and regulators, that a financial planner is charging for their “availability” to the client. While communication between the client and their investment adviser is an integral part of the relationship, Colorado has taken the position that “[f]ees should only be charged for work that has been or will be completed.” Adding to the regulatory risk, Colorado’s position is that an investment adviser is charging an unreasonable fee if the fee is charged for the adviser’s “availability”.

While the newness of Colorado’s Guidance makes the practical application difficult to predict, it is reasonable for investment advisers providing financial planning on an on-going basis to expect comments or questions from the Colorado Securities Division regarding those services.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

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