Starting out as an RIA or independent broker-dealer is complicated. New RIAs don’t just need to worry about attracting clients or managing their assets responsibly, they also need to keep up-to-date with requirements for state and federal compliance. Failing to adhere to these strict regulatory rules can be costly — fines, legal fees, and lost clients are just the beginning. But most newly independent agents are not compliance experts. Learning how to manage compliance, and what you can outsource to partners, can help you to get your house in order and keep you free to focus on what matters most: getting the best results for your clients.
1. Managing SEC And State Filings
In order to proceed as an RIA, you’ll need to make sure all required filings and registrations are completed and kept up to date. Depending on the assets under your management, you may be required to file with the federal Securities and Exchange Commission (SEC) or the appropriate regulatory authority in your state.
Form ADV is the most critical form you’ll deal with as an RIA, and is required for all advisors. This form is annual and must be updated annually for all RIA firms. In addition, you are required to update Form ADV when your contact information changes, your fee schedule changes or there has been a change in ownership, among other circumstances. You must file an annual updating amendment to your Form ADV within 90 days after the end of your fiscal year.
Form ADV has multiple required sections. The first part contains information about your firm, your AUM, and your place of business, in a checkbox and fill-in-the-blank format. The SEC and state regulators use the information you provide in this part of the form to manage their regulatory and examination programs, and to set examination priorities. The information you provide may be part of the decision as to whether, and how frequently, to audit your firm.
The second part of Form ADV consists of a written disclosure brochure that RIAs provide to their existing and prospective clients each year. The brochure must be written in easy-to-understand language and provide clients and prospective clients with information about the business, including the owners and how long the business has existed, the types of advisory services offered, and the assets under management.
Form ADV is the uniform form used by investment advisors to register with both the SEC and state securities authorities. The form consists of two parts, both of which are available to the public on the SEC’s Investment Adviser Public Disclosure (IAPD) website.
Part 1 requires information about the investment advisor’s business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the advisor or its employees. Part 1 is organized in a check-the-box, fill-in-the-blank format. The SEC reviews the information from this part of the form to manage its regulatory and examination programs.
Part 2 requires investment advisors to prepare narrative brochures that include plain English disclosures of the advisor’s business practices, fees, conflicts of interest, and disciplinary information. The brochure is the primary disclosure document for investment advisors and must be delivered to advisory clients.
Part 3, the “relationship summary,” requires advisors who work with retail investors to prepare a brief, plain English summary about the types of services the advisor offers, the fees and costs clients have to pay, any conflicts of interest the advisor may have, any legal and disciplinary history, and a reference to anywhere a client can find more detailed information about the advisor.
Form ADV is the most important, but by no means the only, state or federal form your business will have to wrestle with. While it’s likely that any advisor striking out on their own already holds a Series 7, 65, or 66 license, you’ll be responsible for keeping your licensing up to date and complying with all applicable registration requirements.
Luckily, new RIAs have a number of compliance solutions available to help manage registration and filing requirements. Third party compliance consultants and compliance software products such as RIA In A Box or SmartRIA can help you to meet your compliance requirements. The experienced transition consultant professionals at Terrana Group can help you decide which filing solution would work best for your new business.
2. Understanding Your Fiduciary Duty
If you’re thinking about breaking away as an independent advisor, it’s critically important that you understand your duties as a fiduciary for your investors. And understanding that duty isn’t a one-time prospect, either. The SEC is consistently issuing new interpretive guidance that explains and clarifies your duties and responsibilities. Keeping up with this guidance, and complying with new regulations and interpretations, is part of your compliance obligation as an RIA.
Regulation Best Interest (BI), implemented in 2019, requires broker-dealers to only recommend financial products that are in their customers’ best interests, and to clearly identify any potential conflicts of interest and financial incentives the broker-dealer has related to those products. The client cannot waive this rule, and it must be followed with respect to all products recommended to clients.
The SEC’s rule 206(4)-7 requires each financial advisory firm to designate a Chief Compliance Officer, or CCO, who is responsible for ensuring compliance with the BI rule. Only about 10% of RIAs employ a full-time CCO, with many opting to outsource this aspect of their compliance to third party firms. Your CCO must be “knowledgeable regarding the Advisers Act, competent in regard to administering your compliance program, and empowered to enforce compliance with your policies and procedures.” The professionals at Terrana Group can help you put in place a top-notch outsourcing strategy that will ensure your compliance with this aspect of your duties.
3. Setting Up Compliance Processes And Procedures That Work For Your Business
For SEC-registered RIA firms and for many state-registered RIA firms, the Investment Advisers Act of 1940 requires RIAs to establish policies and procedures that prevent violations of the SEC’s rules. Your CCO is responsible for reviewing these programs and procedures annually, and ensuring they meet all of the requirements set forth by the SEC or applicable state registering authority
The SEC requires your policies and procedures to address the following minimum requirements:
- Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, your disclosures to clients, and applicable regulatory restrictions;
- The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
- Proprietary trading by you and the personal trading activities of your supervised persons;
- Safeguarding of client assets from conversion or inappropriate use by your personnel;
- The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
- Safeguards for the privacy protection of client records and information;
- Trading practices, including procedures by which you satisfy your best execution obligation, use client brokerage to obtain research and other services (referred to as “soft dollar arrangements”), and allocate aggregated trades among clients;
- Marketing advisory services, including the use of solicitors;
- Processes to value client holdings and assess fees based on those valuations; and;
- Business continuity plans.
Creating and understanding these documents can be arduous. Software solutions exist to assist with the creation of these documents and can be employed to meet the SEC’s requirements. However, engaging with a consultant to ensure that each of these requirements is put into place is the best way to ensure that you do not inadvertently run afoul of the rules.
Want to Keep the Conversation Going?
Going independent is more complicated than ever, and the right consulting partner can make all the difference. At Terrana Group, our experienced and knowledgeable professionals welcome the opportunity to consult with you to determine the right platform for you going forward — one that satisfies your long term objectives and is also best for your clients!
Over the course of nearly 30 years, we have helped facilitate thousands of professional placements for Advisors, with client assets transferred exceeding $67 billion dollars. We have completed placements in most every major city throughout the United States, while building deep relationships with the advisory world’s most sophisticated and notable firms — including major Wall Street brokerages, most Regionals, Boutiques, Banks, Independent Broker Dealers, RIAs and Custodians. We have a broad knowledge of the deals that are currently being offered and will ensure that you are being presented with the offer which will be best for you.
Confidentiality, professionalism, and respect are protocol to our practices and beliefs; we handle each and every step of the placement process with complete communication, keeping you informed while making the process smoother from beginning to end.
We are proud to always be considered as a great asset by our clients because of our proven expertise, many years of knowledge, and acute attention to detail. Financial Advisor Recruiting Services are not all created equal; we guarantee that the TG experience for clients and candidates is always world class.
We are based in Chicago, with a nationwide reach. Let us know you are interested by contacting us today. To get the conversation started, email info@terranagroup.com or give us a call at 312.655.8380 today.
