Net Worth & Prepayment Standards
🔑 Numbers & deadlines
| Item | Figure / deadline | Applies to |
|---|---|---|
| Minimum net worth — adviser exercising discretion | $10,000 | State-registered IAs (many states use this minimum) |
| Minimum net worth — adviser maintaining custody | $35,000 | State-registered IAs (many states use this minimum) |
| Large prepayment of fees — state-registered adviser | More than $500 received, for services to be provided at least 6 months later | State-registered IAs |
| Large prepayment of fees — federal-covered adviser | More than $1,200 received, for services to be provided at least 6 months later | Federal-covered advisers |
| Notice to state administrator after falling below minimum net worth | By the end of the next business day | State-registered IAs |
| Financial report filing after that notification | By the end of the business day following the notification | State-registered IAs |
| Surety bond to cure a net worth shortfall | Amount of the shortfall, rounded up to the nearest $5,000 increment | State-registered IAs |
| Disclosure document triggered by large prepayment / custody | Balance sheet in the brochure | State-registered & federal-covered as noted |
The custody figure ($35,000) and the discretion figure ($10,000) are different numbers and are commonly swapped in exam questions. Custody = higher. Discretion = lower.
Net worth requirements
- Federal-covered advisers are not required by the Investment Advisers Act of 1940 to maintain minimum financial levels. However, covered advisers are still subject to some disclosure requirements depending on their financial status.
- Similar to broker-dealers, state-registered investment advisers must meet certain financial requirements to receive and keep registration with a state.
🔑 Broker-dealers vs. investment advisers — financial standard
| Firm type | Financial standard |
|---|---|
| Broker-dealers | Subject to net capital requirements |
| Investment advisers | Subject to net worth requirements |
You don’t need the detailed calculations here, but you do need the association: BDs → net capital; IAs → net worth.
Which state’s requirement applies
- State-registered advisers are registered only with the state, so they don’t follow SEC financial requirements.
- ⚠️ This differs from broker-dealers, which register with both the SEC and the states.
- If an adviser is registered in multiple states with different minimums: under North American Securities Administrators Association (NASAA) rules, the adviser follows the financial requirements of the state where its principal place of business (headquarters) is located.
- 🔑 Even if another state has a higher requirement, only the home state’s requirement determines the minimum net worth standard.
Common state minimums
| Adviser activity | Minimum net worth |
|---|---|
| Advisers exercising discretion | $10,000 |
| Advisers maintaining custody | $35,000 |
Definitions
| Term | Definition | Example |
|---|---|---|
| Discretion | When an investment adviser exercises control over a client’s investment decisions. Power of attorney (trading authorization) must be granted to operate in a discretionary capacity. A discretionary trade involves the adviser choosing one or more of the following: Action (buy or sell), Amount (how much), Asset (what security). | An adviser granted trading authorization decides which security to buy, how much, and whether to buy or sell, without contacting the client first. |
| Custody | Holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them | An adviser that physically holds client securities, or has authority to obtain possession of client funds. |
| Large prepayment of fees | When an investment adviser takes a large prepayment of fees for services that won’t be provided for at least 6 months, additional client disclosures may be required. There are two standards — one for state-registered advisers and one for federal-covered advisers. | A state-registered adviser collects $600 today for a financial plan to be delivered in 8 months. |
The three A’s of a discretionary trade: Action, Amount, Asset.
Large prepayment of fees — the two standards
| Adviser type | Threshold | Timing of services | Consequence |
|---|---|---|---|
| State-registered advisers | More than $500 received | For services to be provided at least 6 months later | Must disclose a balance sheet in its brochure |
| Federal-covered advisers | More than $1,200 received | For services to be provided at least 6 months later | Must disclose a balance sheet in its brochure |
- If an adviser collects what’s considered a large prepayment of fees, the adviser must disclose a balance sheet in its brochure.
- A balance sheet shows the firm’s assets and liabilities, which is why many advisers prefer to avoid triggering this disclosure.
- 📌 A balance sheet must also be included in the brochure if a state-registered investment adviser maintains custody of client assets (discussed in a future chapter).
Surety bonds
- Investment advisers may be subject to surety bond requirements, similar to broker-dealers.
- Whether a bond is required depends on the state administrator’s policies, which can vary by state.
- In general, the surety bond concept for investment advisers works the same way it does for broker-dealers.
Falling below minimum net worth requirements
An investment adviser might meet the net worth requirement when registration becomes effective, but later fall below the minimum.
Textbook example: an adviser that does not maintain custody is registered when its net worth is $15,000. Several months later, its net worth drops to $8,000. Remember: the minimum for advisers not taking custody is $10,000.
🔑 Notification timeline
| Step | Deadline | Timeline example (shortfall occurs Monday) |
|---|---|---|
| Notify the state administrator | By the end of the next business day | Notify by Tuesday |
| File a report about its financial condition | By the end of the business day following that notification | File report by Wednesday |
Contents of the financial report
The financial report includes the following information:
- Trial balance of all ledger accounts
- Statement of all client funds or securities which are not segregated
- Computation of the aggregate amount of client ledger debit balances
- Statement as to the number of client accounts
The specifics of the financial information shared with the administrator are not important. Test questions tend to focus on what must be provided, not the characteristics.
| Account type | Meaning |
|---|---|
| Segregated accounts | Stand-alone accounts owned by customers |
| Omnibus accounts | Advisers place all their clients’ funds and assets into one large account; funds in this type of account are not considered segregated |
Curing the shortfall — surety bond
- NASAA rules generally require the adviser to post a surety bond equal to the shortfall, rounded up to the nearest $5,000 increment.
Textbook example — adviser takes custody, subject to the $35,000 minimum net worth requirement; net worth falls to $27,000:
| Step | Calculation | Result |
|---|---|---|
| Shortfall | $35,000 − $27,000 | $8,000 |
| Rounded up to nearest $5,000 increment | $8,000 → next $5,000 increment | $10,000 |
| Required action | After making the required disclosures to the administrator | Obtain a $10,000 surety bond |
Disclosure of financial problems
- Advisers that take custody or maintain discretion over client accounts must also disclose significant financial problems to clients.
- This disclosure is required if the adviser believes its financial condition may impair its ability to meet obligations to clients.
- Example: an adviser with substantial liabilities and few assets may not be able to keep enough investment adviser representatives (IARs) on staff. That could interfere with promised services (such as being able to reach an IAR about account status). In situations like this, the adviser must notify clients promptly.
Key points
Investment adviser financial requirements
- Must maintain a minimum net worth of:
- $10,000 if exercising discretion
- $35,000 if maintaining custody
- May be required to post a surety bond
Large prepayment of fees
- Requires balance sheet disclosure in the brochure
- For state-registered advisers:
- More than $500
- Services 6 months or more in advance
- For federal-covered advisers:
- More than $1,200
- Services 6 months or more in advance
If falling below minimum net worth requirements
- Must notify state administrator by end of next business day
- Must file financial report by end of business day following notification
- Must obtain a surety bond in the amount of shortfall (rounded up to nearest $5k increment)
Financial problems disclosure
- Prompt disclosure made to clients in event of financial distress
- Must be made to clients if:
- Maintaining custody
- Discretionary authority exists
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Uniform Securities Act 1956 with NASAA updates — the tested statute | NASAA |
| 2 | Investment Advisers Act rules (206(4)-x, custody, brochure) | eCFR (17 CFR Part 275) |
| 3 | State IA registration resources, forms and fees | NASAA |
| 4 | Model Rule 202(d)-1 — $35,000 net worth with custody, $10,000 with discretion, positive net worth on >$500 prepaid 6+ months | NASAA |
| 5 | Achievable Series 65 — chapter 4.3.3.3 | Achievable (course text) |
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