More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
To help advisors considering independence, Schwab Advisor Services released a white paper on Tuesday outlining the various legal and regulatory issues they’ll face in the transition.
The paper, “Legal and Regulatory Considerations: Navigating the Transition to Independence as an RIA,” is part of the Schwab Market Knowledge Tools series that took place on a webcast Tuesday afternoon.
The paper and webcast, along with a website, are intended to help advisors who are considering switching to an independent model.
Tim Oden, senior managing director of business development for Charles Schwab, noted that one of the first steps for advisors who are still trying to decide is to understand their legal obligations.
“Advisors need to be cognizant of the legal and regulatory issues,” Odem, (left), told AdvisorOne on Tuesday. “We recommend they find a lawyer who specializes in moving to an independent model and use them as a sounding board.”
It’s also helpful for advisors to find someone who has already made the transition to act as a guide, Oden said.
“Advisors should also work with someone who has been through the transition before. Advisors’ lack of experience comes to bear in the middle of the process and can translate into less time with their clients.”
Once they make the decision to go independent, it’s important not to forget about their clients. As Oden points out, “Advisors have the luxury of having three months to one year evaluating the model. Their clients haven’t had that luxury. Even loyal clients need time to think about what the model is, what it means for them and what the risks are.
To ensure a smooth transition, Oden stresses the importance of being prepared. “Advisors need to plan like crazy and consider every possible contingency. For example, what will your current employer say when you announce your resignation? What’s your plan if it’s friendly? What if it’s adversarial?”
However prepared advisors think they are, though, Oden warns that they won’t be able to foresee everything.
“No amount of planning is going to account for every little thing that will be different. For the first 30 days, you’ll feel like a fish out of water,” he cautioned.
One way to counter that is to choose your team well, he said. Even if you already have a relationship with a trusted attorney, look for one that specializes in working with independent advisors.
Oden refers again to how advisors deal with their clients during the transition.
“In the first 30 to 60 days after resignation, the key is to be able to articulate reasons why the changes occurred in value terms to the client,” Oden noted. Just wanting to make more money isn’t enough, he said. “Clients will see through that. It’s the old ‘What’s in it for me?’”
Oden suggests role-playing the conversation with clients.
“It’s amazing how often we uncover little gaps in how they explain it or they get overly complex.”
The paper suggests advisors focus on six key areas when they consider switching to an independent model:
- Assess their employment situation and formulate an exit strategy. Advisors should meet with a lawyer to review agreements that are already in place.
- Evaluate their needs and goals. Advisors should develop a plan that considers their client base, as well as the products and services they want to offer and that their clients want.
- Choose a legal structure. Advisors coming from wirehouses or banks need to decide which structure will work best for their firm
- Purchase insurance. The paper recommends purchasing insurance to protect against business risks, particularly errors and omissions insurance.
- Register with the appropriate authorities. Advisors need to determine which regulatory bodies they will operate under and register their firm.
- Prepare and file appropriate disclosure documents. Advisors need to disclose all material facts regarding conflicts of interest.