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October 27, 2014 at 08:28 AM
In my previous article on the affiliation options that an advisor has, I led you to the point of deciding whether you wanted to be an employee advisor, an independent contractor advisor or your own registered investment advisor.
This article assumes that you’ve now decided to make the move to become an RIA, just as I did. That decision, as difficult as it might have been, now leads to a host of other questions you must ask yourself, and some outside experts, before you’re able to hang up your own RIA shingle.
For example, if you work for a wirehouse or bank, how do you make the transition without your employer finding out? What products and services will you offer? How will you price your services? How long will it take until you’re ready to open your doors?
In addition to these business decisions, there are serious compliance pitfalls that you must avoid and others you must embrace. Failing to do so could cost you dearly.
To begin, here’s a list of some of the issues we’ll examine.
There are a lot of issues to consider before making the move from a wirehouse or bank to an independent…
- What is the basic structure of an RIA firm?
- What steps are involved when starting your own RIA firm?
- Should you create your own RIA firm yourself or outsource this task?
- What does it cost?
- How long does it take to start your own RIA firm?
- What are some of the legal issues that could cause problems when creating an RIA firm?
- What products and services will you offer, and how will you price them?
- How will you generate new business?
- Which custodian (or custodians) will you use?
- Which regulatory agency is responsible for overseeing your business and what can you expect?
STRUCTURE AND STEPS
The term “registered investment advisor,” or RIA, applies to the firm rather than the individual. This is true even if you are the firm’s sole employee. In the eyes of your state or federal regulator, you are an investment advisor representative, or IAR, under your firm’s RIA. Therefore, your business card may include the term “registered investment advisor,” but only in reference to your company, not as a designation after your name.
The process of starting your own RIA firm from start to finish involves many steps and includes a few variables. However, in general, these are the steps you will need to take when creating your own RIA firm.
- Choose your business entity and domicile.
- Register the business with the secretary of state.
- Obtain the federal tax ID number for the business.
- Complete FINRA’s Series 65 exam. Some states waive this if you have earned your CFP, CFA, CIC, ChFC or PFS.
- Register your RIA with the Investment Adviser Registration Depository (IARD) and receive a CRD number.
- Register your firm with the SEC or state(s). In general, RIA firms with assets over $100 million register with the SEC. Others register with their state of domicile.
- Create your Form ADV (Parts I and II) on the IARD website and your client agreements.
- Draft your compliance manual and policy notices.
- Install your initial regulatory compliance program.
- Set up books and recordkeeping.
These are the basic steps involved in establishing your RIA, although there are several variables that exist from state to state. It’s also a good idea to have your marketing materials reviewed before you begin. Once you’ve met all regulatory requirements, you are ready to conduct business. It’s important to note that with so much at stake, you may want to consider hiring a professional to assist in this process. In the next section, we’ll take a closer look at the pros and cons of this approach.
CREATE YOUR OWN OR OUTSOURCE: COST AND TIME
Attending to the many issues involved in starting your own RIA can be quite time consuming. Should you do the work yourself or outsource it? Outside of a potentially significant but lesser known legal pitfall (which we’ll cover in a moment), the two most important factors in this decision are the cost and complexity. Creating the business entity and registering with the secretary of state’s office is the easy part; it gets more difficult from there.
If you decide to hire an outside firm, how much will it cost? Samantha Shiells, COO of RIA in a Box, a company dedicated to helping advisors create their own RIA, says that for a one-time fee of $2,785, the firm will complete your Form ADV and register your firm with the state or SEC in one jurisdiction. In addition, you will receive a policies and procedures manual, a privacy statement and a few other items. Each additional jurisdiction will cost $600, and additional IARs will cost $300 each.
The total time it takes will range from six to 10 weeks depending on the jurisdiction. In general, the SEC must respond with a decision to approve or not to approve your request to form an RIA within 45 days. However, state requirements will vary. Ultimately, you must weigh the time it will take, the expertise required and the cost of hiring an outside firm versus doing it yourself. There’s so much more to creating an RIA than simply following the steps outlined earlier, such as the legal structure of your firm—should you be an S-corp or an LLC?
Then there’s one of the most important choices you’ll need to make: Which custodian will you use? Each custodian has its pros and cons, so do your homework, but now let’s discuss some of the major legal pitfalls to avoid when you’re moving from being a captive broker to becoming an RIA, or even from an independent broker-dealer.
BEWARE THESE LEGAL ISSUES
Most advisors would be unhappy facing a lengthy time between leaving their current employer and starting their own RIA firm. After all, once you decide to make the change, you’ll probably be ready to begin your new firm immediately. However, certain FINRA regulations make this quite difficult, and professional help should be considered.
