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October 21, 2007 at 04:00 PM
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.
