A Recordkeeping Checklist For Financial Planning Services: Proactive Documentation Of Service Delivery To Reduce Regulatory Scrutiny

Background On Books And Records Requirements

For state and Federally Registered Investment Advisers (RIAs) alike, the requirement for maintaining complete and accurate books and records is a key element of a robust compliance program.

SEC-registered RIAs must follow SEC Rule 204-2 of the Advisers Act, which requires them to maintain true, accurate, and current books and records for various aspects of their advisory business. For state-registered RIAs, NASAA Model Rule 203(a)-2, adopted in 1987 and amended multiple times since, provides similar requirements that states can use as a framework to establish their own rules for RIAs to follow.

For many state-registered firms, it may be helpful to note that regulations regarding books and records are largely consistent across states and with the SEC. However, it's still important for advisers to confirm compliance with their specific jurisdictions' rules when evaluating their own practices and processes. Investment advisers must not only know what records are required but also understand how long they need to retain them and the proper methods for maintaining these records.

Let's explore what records are actually required to be maintained by investment advisers.

Specific Books And Records That RIAs Are Required To Keep

Rule 204-2 of the Investment Advisers Act of 1940 is a critical element of the regulatory framework governing the conduct of registered investment advisers. The primary goal of this rule is to ensure transparency in the adviser's operations, enabling regulators to examine the firm for compliance and confirm that the adviser is upholding its fiduciary duties.

Commonly referred to as the "Books and Records Rule", Rule 204-2(a) requires RIAs to "make and keep true, accurate and current certain books and records relating to [their] investment advisory business".

The SEC's Information for Newly Registered Investment Advisers summarizes the specific records that advisers are required to maintain:

• Advisory business financial and accounting records, including: cash receipts and disbursements journals; income and expense account ledgers; checkbooks; bank account statements; advisory business bills; and financial statements.
• Records that pertain to providing investment advice and transactions in client accounts with respect to such advice, including: orders to trade in client accounts (referred to as "order memoranda"); trade confirmation statements received from broker-dealers; documentation of proxy vote decisions; written requests for withdrawals or documentation of deposits received from clients; and written correspondence you sent to or received from clients or potential clients discussing your recommendations or suggestions.
• Records that document your authority to conduct business in client accounts, including: a list of accounts in which you have discretionary authority; documentation granting you discretionary authority; and written agreements with clients, such as advisory contracts.
• Advertising and performance records, including: newsletters; articles; and computational worksheets demonstrating performance returns.
• Records related to the Code of Ethics Rule, including those addressing personal securities transaction reporting by access persons.
• Records regarding the maintenance and delivery of your written disclosure document and disclosure documents provided by certain solicitors who seek clients on your behalf.
• Policies and procedures adopted and implemented under the Compliance Rule, including any documentation prepared in the course of your annual review.

Generally, advisers are required to maintain these and similar records in an easily accessible manner for no less than 5 years. For the first 2 years, these records must be stored at the adviser's office(s), either physically or electronically. Additionally, advisers with custody have further recordkeeping requirements under the rule.

Checklist For Firms To Audit Their Books And Records

The below checklist, while not an exhaustive self-audit tool, provides a quick way for firms to assess the overall state of their books and records program. It's based on the SEC's general requirements that apply to most firms. If there's any uncertainty about the current state of a firm's compliance program, the following questions can help guide an ad hoc review of the firm's records and identify whether further review or changes may be necessary:

1. Are all of the firm's financial records easily accessible and centralized in one place, or are they spread across several different locations? If an outside bookkeeper is used, how much lead time is required for them to provide current financial information?
2. How easily can the firm obtain copies of all trading records, documentation of investment recommendations provided to clients, and the suitability documentation that supports those recommendations? Is the suitability information complete and up to date? (Suitability information should be reviewed annually and updated every 2–3 years, at minimum). Is this information available for all applicable clients and collected in a manner that can be easily relied upon, reviewed annually, and updated periodically (whether as a part of a client's financial plan, a stand-alone investor profile document, or through a combination of documents, notes, and forms containing sufficient details)?

According to an SEC interpretive release regarding the "Standard of Conduct for Investment Advisers", regulators believe that in order to provide suitable investment advice that is in the best interest of each client, the adviser must first form a reasonable understanding of the client's objectives. The interpretation goes on to explain, "In order to develop a reasonable understanding of a retail client's objectives, an adviser should, at a minimum, make a reasonable inquiry into the client's financial situation, level of financial sophistication, investment experience, and financial goals". NASAA also published a guide for state-registered firms that expands on this issue of Documenting Suitability and communicates expectations that, from my experience, are shared by most state regulators.

3. Is the firm able to provide a list of all accounts for which it has discretionary trading authority? Is there clear and complete documentation for each client showing that they granted the firm discretionary authority (typically through advisory contracts)?
4. Can the firm readily gather records related to advertising and marketing materials? Is there a sound process in place for logging the review and approval of all published advertising?
5. Does the firm maintain complete and timely records of access persons' personal securities transactions, including quarterly transaction reports and an annual report of holdings? Are these reports consistently submitted on time?
6. Can the firm provide documentation of the delivery (both initially and annually) of disclosure documents (ADV Parts 2A & 2B) and Form CRS (for SEC-registered and Rhode Island-registered firms)? Is there confidence in the ongoing maintenance and accuracy of these disclosure documents?
7. Does the firm have a reasonably tailored compliance manual or set of policies and procedures that accurately reflect its operations and current dynamics? What documentation exists surrounding the annual review and maintenance of these policies?

Evidencing Service Delivery Is Necessary To Prove Your Fees Are Reasonable

At the heart of the issue of being able to demonstrate the reasonableness of advisory fees is the lack of detailed and accurate recordkeeping needed to clearly present to regulators and provide evidence of the services rendered over time. This is further complicated by the absence of clear and consistent regulation governing the documentation of service-related records for the purpose of evidencing service delivery, especially as it relates to financial planning services. As you may have noticed in the earlier sections, none of the required records clearly address this issue.

While many advisers focus on delivering quality planning and support to clients, they may not prioritize tracking and documenting every interaction, plan update, or client follow-up throughout the engagement. Without a sufficient paper trail, proving that all recurring fees charged to clients are justified can be difficult, especially when fees are based on non-traditional models like flat fees or recurring monthly fees based on complexity and client needs. This can also be an issue for advisors who charge ongoing AUM fees, where part of the fee covers financial planning services.

Some advisers may wonder, "Why is this still an issue?" or "Shouldn't the regulation specify which records need to be maintained?"

Let's expand on the issue introduced above regarding the lack of relevant regulation here. Advisers reviewing their State's (or the SEC's) books and records rule will likely find little to no explicit language indicating specific service-related documentation for financial planning. Instead, the focus remains on trading records; securities bought, sold, and held for investment management clients; original correspondence regarding the investment advice related to client accounts and those trades; disbursement requests; and additional requirements for those with custody.

The Advisers Act and NASAA Model Rules similarly fall short in establishing clear guidelines for the actual documentation needed to evidence the delivery of services beyond these investment-related requirements. However, during registrations or routine examinations, regulators commonly expect that the firm's books and records contain documentation clearly justifying the firm's fees. This documentation must be sufficient to demonstrate compliance with the regulation requiring advisory fees to be reasonable, even though the specifics of how to document service delivery remain undefined.

Unfortunately, this can make it challenging for many advisers, especially those whose services focus on financial planning, to determine how far they must go to document the actual delivery of services to each client. Some advisers consider this lack of specificity as permission to do the bare minimum to reduce their administrative burden, hoping that regulators will accept a verbal walkthrough of the work they do for clients as more than sufficient justification for the fees charged. By contrast, other advisers may spend hours meticulously documenting every client interaction, sometimes down to the minute, regardless of the nature of work being documented – often at the expense of their capacity to serve more clients, deepen existing client relationships, or focus on business development.

In most states, rules and regulations include a separate requirement – often found under prohibited or unethical practices – that advisory fees must be reasonable and not excessive. However, what constitutes "reasonable and not excessive" is rarely defined. Some states provide additional context, such as California, which states the following:

Charging a client an advisory fee that is unreasonable in light of the type of services to be provided, the experience and expertise of the adviser, the sophistication and bargaining power of the client, and whether the adviser has disclosed that lower fees for comparable services may be available from other sources. (Cal. Code Regs. tit. 10 § 260.238)

Even with this additional language, advisers are largely left to determine for themselves what "reasonable and not excessive" actually means.

In an effort to bring clarity to the issue of reasonable fees, and given the increasing variety of advisory fee models and the deficiencies related to insufficient disclosure or records regarding fees, NASAA published its NASAA Investment Adviser Section, Regulatory Policy and Review Project Group Fee Guidance. This document addresses emerging fee arrangements, discusses how they may apply within firms, and emphasizes the importance of adequate recordkeeping. NASAA affirms the importance of maintaining detailed records of service delivery to demonstrate the reasonableness of fees charged for those services:

The books and records of an advisory firm are a critical component of any inquiry into the reasonableness of fees charged to a client for continuing financial planning services. The client's file, including notes covering contacts and meetings with that client, forms the cornerstone of the records that will generally be used by a regulator to assess fee fairness. Therefore, the importance of evidence of interaction, including resulting work product in the client's file, is paramount, and should be emphasized in the course of the regulator's application process for an adviser with continuing financial planning indicated as a business line.

NASAA continues by providing context around how these records will be evaluated during an examination:

Likewise, examiners will focus on these documents when conducting examinations of registered advisers. The mere presence of a schedule showing that a meeting occurred is likely inadequate to prove that services were provided. Notes of the substance of discussions of client contacts, whether by phone, video meeting, or in-person are important to demonstrate that advisory services justifying a fee were performed by the adviser. Any follow-up action items that occur after a client contact should be documented in sufficient detail for the examiner to be satisfied that the client's fees paid for a corresponding service by the adviser.

While NASAA's guidance is helpful, it's important to remember that state regulators still have the authority to determine how they view and define what constitutes a "reasonable" advisory fee arrangement. This can be particularly challenging in states where regulators are still trying to understand ongoing financial planning as an advisory service and the related fee models emerging from it. The complexity increases for advisers who are registered in multiple states, as interpretations of "reasonable" may vary, with some states having more restrictive definitions.

The common theme, however, is that insufficient documentation evidencing the delivery of services significantly increases the likelihood of regulatory scrutiny on the fees being charged. When regulators can't clearly understand and see documentation of the services being delivered, they can't validate that the fees being charged for those services are reasonable, which can lead to pushback on the fees or fee models. By documenting their service delivery thoroughly to fulfill their books and records requirement, advisers can reduce the likelihood of pushback on the reasonableness of their fees and fee models.

Establish A Standard For Routine Recordkeeping That Reflects The Delivery Of Financial Planning (And Investment Management) Services

To minimize potential regulatory concerns regarding the reasonableness of a firm's advisory fees – and to ensure the firm can effectively demonstrate that the level of service justifies the fees being charged – it's essential to establish and follow internal standards for service-related recordkeeping. By doing so, evidencing the delivery of services becomes much less burdensome when dealing with regulators during examinations or future registrations.

Recordkeeping Checklist For Investment Management Services

For investment management services, consider the following: Where does the client engagement begin, and what services are provided throughout? This could include (but isn't limited to) the following activities:

• Onboarding the client
• Reviewing and recommending portfolio adjustments in line with collected suitability information
• Opening and funding accounts
• Executing initial updates to the portfolio
• Conducting periodic reviews and rebalancing
  Scheduling recurring meetings and annual reviews,
• Making amendments to the Investment Policy Statement (IPS) and suitability information
• Updating beneficiaries
• Administering funding and withdrawal requests

Recordkeeping Checklist For Financial Planning Services

For financial planning services, follow a similar process that examines where the client engagement typically begins and all the steps that follow: Consider the information gathering and client discovery phase, followed by the research and development of a financial plan. Next, document the delivery of the plan, check-ins throughout the year to support plan implementation, periodic meetings to work on or execute various aspects of the plan, and the annual review of the client's situation. The review should include updating the plan to account for any significant changes, managing seasonal "to-dos", reviewing any advised assets that aren't being managed or supervised under the investment management service, and responding to any other financial planning questions that arise throughout the year.

Client Service Calendars are an excellent tool for bringing visibility to the work advisers do throughout the year. These calendars serve as structured outlines of what clients can expect, provide advisers with a framework for systematizing their service delivery as they grow, and help explain to regulators what the firm's ongoing financial planning services look like. (Be certain that the client file reflects that the adviser did all the things that the firm committed to do in the client service calendar!)

For all advisory services, it's important to consider how to efficiently document client engagements over time, making it easy to substantiate the delivery of services and justify the fees associated with those services. Because ultimately, it's far more beneficial for firms to establish their own strong recordkeeping standards and processes than to have regulators impose them or require changes to the firm's service or fee models due to insufficient documentation practices. When done well, this not only reduces the likelihood of regulatory scrutiny during examinations but also helps regulators gain perspective on what good records and typical service delivery for financial planning look like!