1) At a glance:
Legal and regulatory
considerations for
becoming an RIA
As an independent Registered Investment Advisor (RIA), you’re in charge of
the decisions that drive success. You control everything from the speed of your
business’s growth to how you serve the complex needs of clients. However,
with this freedom come additional responsibilities. Choices you make
during your transition will impact your business far into the future. Weighing
the legal and regulatory considerations associated with the RIA business
model now can help you set up your business for long-term prosperity.
2) The following is an
excerpt from Legal and
Regulatory Considerations:
Navigating the Transition
to Independence as an RIA,
a white paper.
Evaluate your needs, goals, and objectives
Devote sufficient time and thought to building a strategic plan
that charts your vision and puts a timeline in place.
•• Determine your level of independence. The RIA model
offers advisors more options than ever: You can start your
own firm, join an existing RIA firm as a partner, or find
your place somewhere in between. It all depends on your
personal and professional goals. With the hybrid model,
you can offer advisory services as an RIA while keeping
your commission-based business.
•• Assess your client base. Pay attention to the products
and services your clients require and desire—this can help
you define your niche. Gaining clarity around the types of
clients that will best fit your business model will help you
determine the appropriate mix of services for your firm.
•• Consult legal counsel. This may be the most important
move you make. By discussing your options with trusted
legal and financial experts, you can potentially save a
significant amount of time and money throughout the
transition process.
Assess your employment situation and form
an exit strategy
For many advisors, restrictions in the employment agreement
with their current firms and the compensation tied to employment
may dictate when and how they make the transition. By formulating
an exit strategy, you can make the transition more smoothly and
avoid or limit the chance of having a drawn-out legal battle with
your former employer.
•• Review your employment agreements. Have your legal
counsel review all agreements, including promissory
notes or other forgivable loan arrangements, training
agreements, non-solicitation and non-compete provisions,
and confidentiality restrictions.
•• Determine whether the Protocol for Broker Recruiting
is available to you. Following the protocol can protect
your new firm from monetary or other liabilities for
soliciting current clients.
•• Set your timing expectations. While it may only take a
month or two to get a firm registered as an RIA, typically
advisors take about six months to fully complete the transition.
Depending on the complexity of your business model,
however, this timetable can be expanded or compressed
down to weeks or even days.
•• Keep your plans confidential. One common way that
departure plans are discovered by management is through
gossip. Even well-meaning friends, family members,
and business associates can inadvertently disclose your
plans to leave. Maintaining strict confidentiality can help
avoid unnecessary conflict during the transition or
premature discovery.
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3) Choose your entity structure
You will need to form a company if you don’t already have one.
If you already have an existing company, evaluate whether it is
the best vehicle for your new independent RIA.
While there are several entity types to choose from, your attorney
will likely recommend either a corporation or a limited liability
company (LLC). Both entities limit personal liability and allow for
proper succession planning.
•• Compare S corporations with LLCs. Consult your tax
advisor to determine the advantages of each structure
for your company.
•• Decide where to form your RIA. This is most often a
choice between forming your RIA in the state in which
you’ll be physically located, or in Delaware or other states
with similar favorable statutory and case laws. The advice
of your attorney can assist you in an analysis to determine
the right location for forming your new entity.
•• Choose a name. This is a critical part of developing your
brand image. From a legal perspective, you will need to
ensure that the name you choose is available in the state
where you are forming your entity, but you should also
consider taking the additional step of running a trademark
search to ensure you can use the name you have chosen.
•• Formalize a written agreement with partners. If you
are not going to be the sole owner of your RIA, write a
business agreement with each partner.
Protect your business from the unexpected
Obtain insurance to protect your firm against common business
risks. While there is no legal requirement to maintain most types
of insurance, it is important to protect your company against the
financial impact of a claim in today’s litigious environment.
•• Evaluate your insurance options. The types of insurance
you might consider include general business, errors and
omissions (E&O), life, disability, and buyout.
•• Registration is a complicated issue, so consult with your
legal advisor to determine the appropriate registration
authority or authorities for your firm. But typically a firm
must register with the SEC if it manages $100 million or
more in assets and register with one or more states if it
manages less than $100 million in assets.
•• Register individuals as necessary. Determine the
individuals who need to register with individual states.
A firm’s federal or state registration determines which
individuals need to register as Investment Advisory
Representatives and where they need to register. Each
state will also have qualification requirements to register as
an Investment Advisory Representative. The most common
qualification is passing the Series 65 examination. Other
examinations and/or designations may also be acceptable.
Prepare and file disclosure documents
and forms
To register as an investment advisor, you need to prepare and
file certain documents. While filling out the forms is relatively
easy, take care to provide proper responses to limit regulatory
and civil liability.
•• Complete Parts 1 and 2 of Form ADV. These are filed
electronically through the Investment Adviser Registration
Depository (IARD).
•• Register individuals. Investment Advisory Representatives
typically file Form U4 through the IARD/CRD system.
•• Complete additional state filings. State-registered
advisors may have to file additional documents, including
a balance sheet, surety bond, client agreements, and
marketing materials such as letterhead and business cards.
•• Draft client agreements. Client agreements should be
drafted based on your firm’s specific and unique business
practices, as described in your disclosure brochure.
Although you are not technically required to have an
advisory agreement, providing services without one is
highly unadvisable.
Determine licensing and registration
Learn more
Where your firm is based and its assets under management
(AUM) are the two most significant factors in determining
how to register your investment advisory business.
To get a copy of the full Legal and Regulatory Considerations
white paper or learn more about the RIA model, call a
Schwab representative at 877-687-4085 or visit
advisorservices.schwab.com/fastforward.
•• Learn the SEC and state registration requirements.
There are a number of qualifications for determining
whether you must register with the SEC or a state
authority—the most common of which is your firm’s AUM.
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