In Part I of this series, I reviewed the regulatory and technological changes driving the financial industry to the day when I believe most brokers will have to consider becoming investment advisers. In this Part II, I will review what it means, as Bob Dylan said, to be on your own - the decisions you have to make, and the partners you have to choose to succeed.
Without a Home . . .
Going independent does not mean you are going to be alone. To the contrary, you will need good, reliable partners to get started and remain successful. In fact one of the biggest decisions you will make is picking your new home - the firm that will act as custodian for your customers' assets.
The big players in this space are the brokerage firms and banks who offer RIA clearing and custody as an adjunct to their core businesses. Among the brokers are the discount firms that pioneered low cost trading - TD Ameritrade, Fidelity, Schwab and Scottrade. At the other extreme are the major banks such as State Street, BNY Mellon and Royal Bank of Canada, with offerings that appeal to larger and more sophisticated, institutional size firms. At the sweet spot in between are brokerage firms such as Raymond James that have expertise in dealing with high net worth customers and have developed creative ways to support brokers looking to move away from commission based business.
The market also includes RIA Aggregators such as Dynasty Financial, Focus Financial and Hightower - firms that specialize in consolidating existing RIAs and helping brokers start new RIAs. But their help comes at a price, and although the models for each of these firms is different, in each case you are getting a partner that will take a recurring fee or some degree of ownership in your business.
So how do you decide? The key differentiators are price, service and technology. Beware of hidden fees and conflicts of interest.
You're Invisible Now, You Got No Secrets to Conceal
Once you are ready to go independent, you will need to create your new business and register to become an investment adviser. The registration process includes completing Form ADV - a detailed disclosure document that is publicly available - out there for the world to see. And once you are registered, you own compliance responsibility including responsibility for making sure all conflicts of interest are disclosed.
So how do you make a smooth transition without letting you intentions become known? How do you avoid creating unnecessary angst and anxiety from your clients and possible retaliation from you current employer? And how do you set up a good compliance program?
Lawyers, Guns, and Money
Going independent may be the biggest move of your career. Do not do it alone, and do not rely only on guidance from a firm that may have a financial interest in how you go on your own. Spend a little bit of time, and maybe a little bit of money, to understand the legal nuances of how to leave your current firm as amicably as possible. Guns are not recommended, and with deference to Warren Zevon, if you do it right, they aren't necessary.
The law firm you select should have more than just basic experience with setting up RIAs. Do your due diligence. The firm should have deep regulatory, corporate and litigation expertise.
What else do you need to know? Here are the answers to some of the most common questions:
Where do I register?
In general, SEC registration is available to firms that expect to have over $100 million of regulatory assets under management within the first 120 days of operation. Firms that do not expect to meet this threshold must register in each of the states where they are doing business.
How long does it take?
It may take two to four weeks to create a new business entity and prepare the SEC investment adviser registration materials. Once filed, the SEC is required to approve or reject the filing within 45 days of its receipt. But that time frame is somewhat illusory as the SEC staff will frequently delay the approval by asking questions and making requests to clarify the filing. Other factors such as disciplinary events and multiple state filings can cause additional delays.
What will it cost to register a new firm?
The primary cost involved to register a new entity is the legal time and effort necessary to prepare Form ADV. Firms with a simple business model and no disciplinary matters can generally be registered with the SEC for approximately $10,000 (including the de minimis filing fees), but the actual fee may vary considerably (higher or lower) depending upon a number of factors such as the scope of regulatory review.
Do I need a Series 65?
It depends on where your office is, where your clients live, and what industry experience you have. The Series 65 / investment advisor representative examination is a state requirement. Most, but not all states, require it if you have an office in the state or 5 or more clients in the state. However many states offer waivers for individuals with certain professional designations (for example, the CFP (Certified Financial Planner), or CFA (Chartered Financial Analyst) or with a Series 7 and Series 66.
What other regulatory and legal costs should I expect?
To commence operations the firm would need client agreements and related disclosures, as well as an effective compliance program. The cost to implement a compliance program could be $20,000 -$40,000 in the first year, depending largely on the experience and skill of the firm's compliance officer. Beware of in-expensive turnkey manuals. When the regulators come in (and they will - often in the first year) the compliance manual is one of the first documents to be reviewed. Regulators quickly recognize a turnkey manual, and if yours has not been customized, they will target your firm for a long, and potentially painful examination.
Bringing It All Back Home
Your custodian and law firm are two of the most important decisions to be made as you get set to go on your own. But what about the other decisions? Here's a list of some of the most important things you will need to have in place before you start.
Regulation and technology are driving financial advisors to become RIAs. For commission based brokers, the time to change has come, and the transition need not be painful. In fact, a well-planned transition developed with the right partners can help you keep in line with industry trends and your clients' needs.
Gusrae Kaplan Nusbaum PLLC
120 Wall Street New York, NY 10005
Telephone: (212) 269-1400
Andrew Wels, Esq. leads Gusrae Kaplan's investment advisor unit. A veteran of the securities industry with more than 30 years of experience as a regulatory attorney and compliance officer, Andrew specialized in providing practical regulatory advice. He regularly helps clients develop effective compliance programs, prepare for routine regulatory examinations, and respond to complex investigations. Andrew's experience across asset classes for investment advisers and broker-dealers provides a unique perspective to help clients navigate the confusing and frequently overlapping regulatory requirements for investment advisers and broker-dealers.
Andrew has provided legal and regulatory guidance for the development of several successful financial services, including the high net worth investment advisory programs for clients of JPMorgan Chase and the Dreyfus Division of BNY Mellon, and the investment adviser services platform for TD Ameritrade.
Prior to joining Gusrae Kaplan, Andrew served as Assistant General Counsel and Director of Compliance at Cantor Fitzgerald / BGC where he oversaw all legal, regulatory and compliance matters - and helped guide business development for the firm's trading, brokerage and asset management businesses.
His experience includes almost every asset class including swaps, foreign exchange, life settlements and futures (including movie futures), as well as matters involving trading, clearing and settlement. Andrew launched his career in the public sector working for the National Association of Securities Dealers and the U.S. Securities and Exchange Commission. A graduate of the Wharton School, Andrew has a B.S. in Economics and Finance as well as a J.D. from Boston University School of Law.