With the freedom of moving to an RIA comes the irresistible opportunity to craft stronger client relationships, gain more control over your choices, land potentially higher earnings, and enjoy the ability to create a more flexible work-life balance.
However, it can also bring more responsibilities and challenges when it comes to navigating the complex landscape of regulatory compliance, legal considerations, and business administration tasks.
The choices made during this delicate time can have far-reaching implications for the future of your practice.
Thankfully, the senior team at TERRANA GROUP is here to offer invaluable guidance regarding the current environment and ensure you’re able to fully evaluate your options. Let’s take a deep dive into actionable insights for Advisors ready to explore new horizons.
An Essential Roadmap
RIAs are legally and ethically bound to act in their clients’ best interests, a responsibility that sets them apart from broker-dealers. This model differs from the suitability standard often applied in wirehouse environments, requiring a shift in mindset and operational practices.
This fiduciary standard aligns more closely with the current regulatory climate, which has become increasingly complicated in recent years.
The Securities and Exchange Commission (SEC) and state regulators have heightened their scrutiny, closely focusing on areas such as off-channel communications, cybersecurity, and fee disclosures. In July 2023, the SEC adopted new rules requiring RIAs to disclose cybersecurity incidents and submit annual reports detailing their data risk management, strategy, and governance policies.
Advisors transitioning to a more independent or hybrid model must be prepared to swim these waters with their eyes open.
The first move is to take an in-depth look at your needs, goals, and objectives. Consult with your mentor or an experienced wealth management recruiter, which will help you gain clarity, define your niche, and create an iron-clad exit plan.
Two Critical Steps
For Advisors ready to strike out on a new path with an RIA practice, there are two absolutely crucial elements to success — choosing the right custodian for your firm and understanding the registration process.
Foundational Support
The Investment Advisors Act of 1940, § 275.206(4)-2, Custody of Funds or Securities of Clients, requires that independent Advisors maintain their clients’ assets and securities via a financial institution or entity that meets the requirements for a qualified custodian.
According to Investment News, your choice of RIA custodian is one of the biggest and most impactful decisions you can make, and thorough research is a must. Their primary roles are to ensure the security of AUM, maintain accurate records, and provide foundational services such as trade execution, reporting, and tech integration. Prioritizing a custodian dedicated to innovation is key.
The right custodial partner gives you access to emerging technologies and investment options, empowering Advisors to better serve their clients. These vital services also help mitigate regulatory and cybersecurity risks.
Costs are always a significant consideration when seeking more independence. Advisors should carefully evaluate the fee structures of potential custodians, including 12b-1 fees, payments for order flow, interest on asset-backed lending/margins, and other additional charges.
Having a crystal-clear perspective on your overhead lets you establish more transparent communications from the start and provide clients with comprehensive disclosure documents, including Form ADV Part 2A, which outlines an Advisor’s fees, services, and conflicts of interest.
Embarking on the Registration Journey
The specific steps involved in registering your RIA depend on the size and complexity of your firm and the regulatory body in your region.
Advisors must first apply to the Financial Industry Regulatory Authority (FINRA) for an online account (a process called Entitlement). In the state of Illinois, “any person who engages in the business of financial planning or who manages $100 million or less in investments is required to register as an investment Advisor with the Illinois Securities Department.”
In addition to Form ADV mentioned above, you’ll also need to complete Form CRS, a client relationship summary that gives a concise overview of your practice’s services, products, required standards of conduct, and conflicts of interest.
Leveraging the latest tech gives you a competitive edge for making your RIA dreams a reality. Today’s cutting-edge wealth management software streamlines tasks such as:
- Centralizing compliance and regulatory documents.
- Customer relationship management.
- Simplifying the client onboarding process and collecting essential data.
- Identifying potential violations of investment policies or guidelines.
- Compiling annual reports for clients and regulatory bodies.
Partnering with industry professionals like the senior consultants at TERRANA GROUP can offer fundamental insights into licensing, exams, and other necessary qualifications for independent broker-dealers and RIAs seeking a paradigm shift.
Thinking Proactively
The wealth management landscape is constantly evolving, and you deserve every advantage that comes from seeking expert advice on making the transition to an RIA practice.
Today’s millennial and Gen Z investors expect personalized service, omnichannel availability, and a more holistic approach to their financial health. Many Advisors see this as a prime opportunity to build a truly unique practice that appeals to this promising demographic.
For over 32 years, the TERRANA GROUP team, led by nationally recognized business consultant Michael Terrana, has been fostering powerful relationships in the financial services world and beyond and creating an ever-growing network of thriving Advisors and thought leaders.
Overcome the fear gap and take the first step toward more career satisfaction and fulfillment today!
