If you own an investment advisory business, growth is a good problem to have. It can become such a big problem, however, that you may consider hiring another you — another financial advisor to help serve your existing clients and prospect for new ones. There are many legal and compliance considerations to keep in mind when doing so, the most salient of which are described below.
“Fit” and technical aptitude are clearly important considerations when entrusting another advisor to represent your business, but disclosure history is equally important. This public disclosure history can be reviewed through the Investment Adviser Public Disclosure website by selecting “Individual” and searching by name or CRD number. Once the correct individual is selected, scroll to the bottom of the page to click on “View Detailed Report.” The generated PDF document includes a wealth of helpful information pulled from the individual’s Form U4 such as current registrations, employment history, professional qualifications, disciplinary actions, criminal convictions, civil judgments and arbitration awards. It is also possible that the disclosure report contains pending actions or allegations that have yet to be proven.
Any disclosure red flags are worth reviewing before extending an employment or contracting offer because the advisor candidate’s disclosures may trigger disclosure obligations for your business as part of Form ADV Part 1, Item 11. If, for example, the advisor candidate has been charged or convicted of any felony within the last 10 years, charged or convicted of certain misdemeanors within the last 10 years, or found to have violated various federal or state rules and regulations, such incidents may very well affect an otherwise clean ADV. The entirety of ADV Part 1, Item 11 should be reviewed to determine what may need to be disclosed.
What Your Peers Are Reading
Though the advisor candidate may represent herself as a financial advisor, wealth planner, or some other title that implies prior registration as an investment adviser representative (IAR), that may not necessarily be the case. Because there is no meaningful regulation of titles for registered representatives of broker-dealers to distinguish them from IARs of investment advisers, your “financial advisor” candidate may not have ever passed the Series 65, obtained the CFP designation, or otherwise become eligible to perform advisory services. Confirm this eligibility by reviewing the IAPD report described above.
Assuming that she is indeed eligible for registration and will become registered as an IAR of your advisory business, the next step is to file a Form U4 through the Investment Adviser Registration Depository. This will “link” the new IAR to your advisory business, so to speak. If the advisor candidate was previously registered with another investment adviser, most of her information should pre-populate and carry over so that all the Form U4 fields won’t have to be completed from scratch. That said, it’s best to have the advisor candidate review her own U4 information to ensure it is accurate before submission to the Securities and Exchange Commission and state securities regulators. It is also important to register or notice file her in applicable states pursuant to state de minimis requirements (see, State De Minimis Registration Considerations for Advisors).
And finally, be mindful of inheriting a messy breakup from the advisor candidate’s prior firm — especially if clients are making the transition to your business as well. The last thing you want to be accused of is aiding and abetting the advisor candidate’s breach of a non-compete, non-solicit, or other restrictive covenant. Another signal may be found in the Form U5 filed by a prior firm, which will indicate if the advisor candidate’s departure was voluntary or not.
Independent Contractor or Employee?