Archived Under Launching an RIA

Common legal questions every new RIA must answer

Going independent and starting your own RIA is an exciting prospect. But it’s easy to get so caught up in choosing a name, logo, office, and other more “sexy” details that you miss out on some essential legal considerations of starting an RIA.

Branding is obviously important. However, falling short of your legal requirements could result in big penalties and fines, so it’s important that you get these right.

Related: Click here to download our RIA Breakaway Checklist.

Today’s post looks at the common legal questions every new RIA owner must answer before they get started.

Get Registered

Your advisory firm must either register with the SEC or your state, not both. The main differentiator is AUM—if you manage more than $100 million, then you register with the SEC, although there are multiple exceptions. For instance, Wyoming does not regulate advisors at the state level, so all advisors located in Wyoming must register with the SEC.

State registration requirements depend on the state, and these can vary widely. 

Keep in mind that your firm has to have at least one IAR, and these have to be registered at the state level. Even if your firm is only registered with the SEC, this IAR requirement still stands. 

Important Forms

Paperwork probably isn’t part of your RIA dream, but it’s definitely part of the process, and can be remarkably simple if you take a step back. Check with your individual state for proprietary forms as well, but here are the basics. 

  • Form ADV – You must register your Form ADV with the SEC and state securities authorities. This form specifies the investment style, the AUM, key officers of the advisory firm and other relevant information. 
    • Form CRS – The Client Relationship Summary became a required addendum to all Form ADVs for SEC-registered advisors in the spring of 2020. It discloses asset/account minimums, how your advisors are compensated and any resulting advisor-level conflicts of interest. It is intended for client consumption, so must be written in plain language.
  • Policies and Procedures Manual 
  • Investment Advisory Contracts 
  • Licensing Requirements – You must either have one of two options:
    1. Series 65 or Series 66/Series 7 combo
    2. CFP, CIC, ChFC or PFS
  • Investment Advisor Registration Depository – You’ll need to create an account with IARD, which is managed by FINRA, although RIAs are managed by the SEC, not FINRA.

Choosing Your Business Structure 

Your business structure is a foundational brick of your practice that can set the whole wall off-kilter if it’s out of place. There are a few basics to keep in focus, and remember that you can amend this structure as your business grows—it’s not a one-time thing. 

Sole Proprietorship 

We don’t recommend using a sole proprietorship. While it is the simplest and easiest to maintain option, there is no separation between you and the business. You are personally liable for the firm’s debts. It can be a great option in other industries, but the sums of money advisors deal with are exceptionally large. Best practice is to skip this one.

S Corporation 

Often called the “S Corp,” this setup offers more legal/financial protection and separation for you as the owner. Revenue will pass through to shareholders and be taxed on their individual tax returns, protecting you from the “double tax” of some corporate structures. This setup may be eligible for the 20% Qualified Business Income (QBI) tax deduction from the Tax Cuts and Jobs Act. 

Limited Liability Company (LLC) 

The LLC is a hybrid of a sole-proprietorship and a corporation, offering legal/financial separation and protection for the owner as well as pass-through taxation. There is no stock or stockholders, and it may be eligible for the QBI deduction. 

Your business structure is a question of your vision for your firm and the scale you’re hoping to achieve.

Related: Click here to download our Fusion Black Ops fact sheet and learn more about how we can help you safely move from point A to RIA.

Protecting the Name of Your RIA

Trademarking your firm name is one of the “et cetera” items that can become a headache. The trademark database offers a fairly easy search function that can give you an idea of companies with the same or similar name. 

Website Domain and Social Media

You’ll also want to check the availability of domain names, Facebook pages and Twitter handles. A simple search can help you find this, and avoid confusion and lost revenue in the future. Once you’ve chosen a name, buy the domain and create social media pages. Even if you’re not ready to post anything yet, you can make sure no one else takes them in the meantime.

Get the Right Insurance for Your New RIA

Because financial firms are run by flawed human beings, Errors and Omissions (E&O) insurance is the most common form. 

An E&O policy can help you cover a variety of eventualities in the advisory space. If a client makes a legal claim after losing money on the markets, or perceived negligence from you or what they see as a breach of your fiduciary duties, E&O insurance can provide coverage. 

Cyber insurance is quickly becoming a must-have in the digital world. If hackers access client information through your accounts, your firm could be hit with huge penalties and you could be found liable for any lost assets.

Pre-Soliciting Clients (and Staying Out of Trouble) 

Make sure you know the language in your contract when you’re looking for new clients before you open your firm. There are a few different restrictive covenants, and the language is nuanced in each one. 

Non-Compete Agreements 

Non-competes are famously draconian in scope. They’re also seemingly comprehensive to the point of restricting you from being an advisor at all after leaving a firm. 

That kind of extreme is virtually impossible to enforce legally, and non-competes are usually narrowed in some sense. These provisions could restrict you from a geographical area, restrict you from a certain niche or other details. 

Non-Solicit Agreements 

A non-solicit says you will not solicit clients of your former firm. This may seem obvious, but think about families that you forged the agreements with and have worked with for years. Breakaway advisors often operate in a grey area here, where clients can “follow” you of their own accord. The key, though, is you can’t make the invite. 

Non-Accept Agreements 

These are essentially an extension of non-solicit agreements in that they involve a list of clients you cannot do business with, even if they seek you out. Whereas in the non-solicit, you can’t seek business with a group of former clients, in a non-accept there’s a “no fly list” even if they come after you. 

These agreements have varying degrees of enforceability, depending on the language of the contract, the judge and the state where it happens. Many judges are reticent to tell people who they can do business with, but you still need to proceed wisely. 

A Word of Caution

We also should make a side note here on the importance of discretion before you break away. Keep it more than quiet. Be absolutely silent. Your old firm can take legal action and at the very least make things difficult for you, even if you have good rapport with them. 

Discuss the change only with your inner circle of friends and take extra caution talking to coworkers. Use burner phones if you have to and do not use company equipment to do work for your breakaway firm. 

That’s exactly why we developed Fusion Black Ops, our new process where we help you build out your new RIA using code names, encrypted communication channels and our network of industry contacts, so you can progress toward your goal without risking your livelihood before you’re ready to make the jump.

Getting from Point A to RIA

You’re right to be excited about starting an RIA—it’s a great opportunity to take control of your future! Just make sure to cover. your bases so you can move forward freely.

Fusion Financial Partners can help you go from point A to RIA quickly, safely and efficiently. Get in touch today and let’s plan for your dream.

Speak with our experts.

Speak with our experts.

We are ready to become an extension of your leadership team.

Call Us