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How To Become A Registered Investment Advisor

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An increasing number of independent agents are evaluating whether to set up a registered investment adviser (RIA) firm or become an investment adviser representative (IAR) of an existing RIA firm. The answer will directly impact the success of many during the next 10 years.

The ability to offer written retirement and financial plans to prospective clients stands out as a main benefit of becoming an RIA or IAR. Being an RIA does not mean giving up on being an insurance agent. To the contrary, both services are compatible and complementary.

By preparing written plans for prospective clients, agents can present themselves as advisors. Consumers have become very good at identifying agents who are just looking to sell a product. Consumers want objective financial advice, personalized for them. By preparing such a plan, the agent-advisor goes a long way toward establishing trust and credibility, as well as delivering a valuable service.

Preparing retirement plans does take time and expertise, but the agent benefits are strong. These include the ability to:

o Demonstrate the advisor’s objectivity.

o Eliminate the perception of being “just an annuity sales rep.”

o Analyze the prospect’s current investments and identify needed changes.

o Position annuity recommendations within the proper context of an overall plan.

o Get hired to manage the prospect’s investments for an ongoing fee.

o Provide excellent advice and solve problems.

o Create client relationships that produce referrals.

As an RIA, the agent is free to build a customized financial plan for each client. Plans can include recommendations to purchase a variety of investment and savings vehicles. For example, part of a plan could recommend the best fixed index annuity for the client’s situation (for which the agent will receive standard commission), while the other part could be a balanced portfolio using no-load growth mutual funds and income securities (for which the RIA will be paid a fee).

When hired to manage a client’s investment funds, the advisor provides advice about whether to buy, sell or keep specific investments. This advice can and should be highly customized to the client.

It is important to note that agents who choose to become IARs (or RIAs) are insulated from accusations of providing “unregistered investment advice.” However, that does not mean agents can make reckless, totally self-serving recommendations and then escape the consequences by hiding behind the RIA shield. RIA or not, unethical, irresponsible behavior can and should be punished.

So, how does an agent become an RIA? To provide financial planning and investment advice, agents must be affiliated with an RIA firm as an IAR. There are 3 IAR choices for most agents, as follows:

Do-it-yourself RIA: Although not a viable option for most agents, any agent can set up a separate corporation and then register it with their state or with the Securities and Exchange Commission.

Prior to registering, the agent must complete the appropriate exam, depending on state requirements. To register, the agent must then submit the appropriate application and disclosures to the state and prepare the RIA firm’s advisor disclosure brochure–a lengthy document describing the RIA firm’s services, information about its staff, how it charges fees, and how it manages client assets.

Most financial professionals who decide to establish their own RIA corporation are wise to retain an RIA consultant to help with the regulatory application process. There are also ongoing state and SEC requirements, such as filing annual reports, updating documents maintained by the regulatory body, and of course, paying fees. A separate errors and omissions policy is usually necessary to cover RIA services, since the typical insurance agent E&O policy excludes coverage for these financial planning and investment advisory services.

In addition, the RIA firm must develop expertise and capacity in 2 important areas:

a. Managing client assets: The RIA must perform several important functions such as selecting a custodian to hold client funds, developing investment portfolio strategies, selecting investment funds, etc.

b. Building customized financial and retirement plans: This requires the RIA to build an integrated retirement plan with the proper mix of investment and savings vehicles, as well as to articulate clearly the customized recommendations to the client.

Become an IAR of the broker-dealer: This approach may appeal to agents who are already registered representatives of a broker-dealer. The RIA may be the B-D or a “sister” firm. Either way, agents can get up to speed rather quickly offering RIA services to clients. The RIA and/or B-D should have already set up the RIA and have capabilities to manage client assets.

Agents should understand 2 fundamental points about this RIA option:

o Broker-dealers are responsible for the recommendations their representatives make, regardless of whether for an immediate annuity, fixed index annuity, mutual fund, stock, bond or variable annuity. Used incorrectly, or in the wrong situation, the sale of an immediate annuity or a fixed index annuity can do as much damage to client finances as a variable annuity or stock. Therefore, B-Ds are completely justified in their supervision to ensure that all sales are appropriate for each client situation.

Accordingly, many B-D registered representatives will be subject to supervision and haircuts on their fixed index annuities–not because the product is a security, but because B-Ds have the supervisory responsibility for whatever financial products their registered representatives may recommend. It is the association with a B-D that drives supervision, not the product itself.

o Financial advisors who do not want their B-Ds supervising their non-security activities, or taking a piece of the commissions for that supervision, should be looking at other ways of doing business. Becoming an independent RIA allows agents to leave their B-Ds and eliminate supervision and commission haircuts.

Many registered reps are weighing the option of leaving their B-Ds to escape B-D supervision of their fixed index annuity business. Absent other reasons to maintain their B-D relationships, many independent agents would be wise to consider affiliation with an independent RIA firm.

Affiliate with an independent RIA firm: Agents who have never been associated with a B-D or who have terminated their B-D relationships may be well-served by becoming IARs of an independent RIA. This means just what it says: The agent becomes a representative of the RIA for the purpose of providing investment advice for a fee and preparing retirement and financial plans.

With this approach, the agent is taking advantage of what the independent RIA has already developed and refined.

The independent RIA firm can also guide the agent on registration, facilitate E&O coverage for RIA services, and handle client billing. The trade-off is that the RIA will keep part of the fees generated by the IAR-agent. The RIA firm may also make financial planning support available for a fee so the IAR-agent can choose to use this service when a formal, written retirement plan is needed.

Establishing an RIA firm of one’s own is no small task. The upfront and ongoing time required is substantial. However, agents should not be discouraged from this if they can afford to spend time away from their day-to-day activities to do so.

An obvious key advantage to establishing an RIA firm is that the agent does not have to share investment advisory revenues with anyone. If an agent chooses to be an IAR of someone else’s RIA firm, the agent will receive a portion of the fees. Each agent must carefully weigh the opportunity of keeping more fees against the work required to do it all on one’s own.

The accompanying chart provides a list of some of the tasks and requirements to set up an RIA firm or to become an IAR. It is not comprehensive. Agents choosing to set up their own RIA firm would be required to complete all items checked in the RIA column, while agents choosing to affiliate with an independent RIA firm would have fewer tasks, as per the IAR column.

The decision to be an RIA is simply whether being an RIA improves the agent’s ability to serve client needs. Today’s retirees and baby boomers are going to expect financial advisors to guide them on their complete financial picture. Besides offering fixed index and other non-variable annuities, agents would be wise to position themselves now to provide investment advice and integrated retirement plans to help meet clients’ overall retirement planning needs.

David D. Holland, CFP, CPA/PFS, ChFC, is a personal producer and CEO of Retiree Adviser Marketing Corp., Ormond Beach, Fla. He can be emailed at [email protected]