Look before you leap
This might seem like a no-brainer, but the devil is in the details. Read your employment agreement, speak with experts, and consult online resources. The last thing you want to do is start telling your clients you’ll be starting your own firm in six months only to suffer legal action from your current employer because you violated a term of your employment contract.
Like any project, start with a checklist. We’ll post an easy-to-use list as part of our series, and this article should function as a high-level guide of key issues to consider.
Keep the lights on
Setting up a legal entity, managing a business banking account, ensuring proper accounting reconciliations, and getting adequate insurance coverage are things that don’t add value to your RIA but help you keep the lights on. With that in mind, you want to create as much of a “set it and forget it” approach as possible.
First, you’ll need a lawyer. You need a legal entity and you need agreements. You could go it alone by having a sole proprietorship and copying/pasting parts of an investment management agreement you’re already familiar with, but you might as well set aside every dollar you make as your disaster fund. Exposing yourself to unlimited liability and not tailoring your IMA are easy ways to turn tail risk events into unmitigated disasters.
Each legal entity type has its pros and cons, and the right choice depends on your circumstances. For most RIAs, a simple LLC is usually best. For partners, a multi-member LLC could work, but depending on capital needs, your state and growth plans, an S-Corp may be more appropriate. Services like LegalZoom make it as inexpensive and easy as possible, but don’t overlook the value of consulting an attorney. Ideally, you have one in your network to whom you’re referring clients. And if you don’t, use this as an opportunity to create that relationship.
Second, look for integration when it comes to accounting. The temptation may be to stick with whoever you’re using for your personal banking, but odds are you have better options. Software like QuickBooks integrates with certain banking and credit card providers, which virtually eliminates the need for you to save and upload receipts or perform month-end reconciliations. That’s more time giving financial advice and less time sorting out your business finances.
Keep the SEC happy
Having served as a Chief Compliance Officer for multiple SEC-registered investment advisers, take it from me: Keep the SEC happy. And the only way to do that is to hire someone that has a track record of keeping them happy. Unless you’re establishing an RIA with more than $350 million in AUM, a full-time CCO probably doesn’t make sense. You’ll need part-time support.
Most advisors tend to hire a consultant. You may balk at the cost, but consider the alternative: Forgetting a simple ADV update or not pre-clearing a routine trade could result in a fine, a costly deficiency letter, or an event you’ll forever need to disclose to every client.
Some consultants will promise the world, charge a fortune, and only give you off-the-shelf templatized documents. It’s easy to get caught up in their sales pitch if you’re unfamiliar with the requirements. At a minimum, you’ll need the following:
- FINRA entitlement
- Form ADV filing
- Form U4
- Investment Management Agreement
- Compliance Manual & Code of Ethics
- Business Continuity Plan
- Information Security Policy
Keep in mind, these really are the absolute minimum documents you need. Depending on the type of securities you’re trading for your clients and your portfolio management strategies, you could need a dozen other policies and procedures, along with a robust compliance monitoring program.
Hiring a quality cost-effective consultant will be key to ensuring you’re satisfying your regulatory obligations so when the SEC or your state securities regulator visits you’ll make it through the exam unscathed.
As part of this series, we’ll dig into best practices for hiring a compliance consultant, key issues to be aware of before filing your ADV, and how to easily tailor policies to your business.
Select your vendors
The area that turns most advisors off to becoming an RIA is vendor selection. Just look at a list of the things you need to run your business:
- Financial planning software
- Performance reporting tools
- Trading program
- Client portal
- Risk analysis software
- Fee billing program
As if that weren’t daunting on its own, until very recently an advisor needed to contract with 8 separate vendors just to get access to everything on that list. With no fully integrated solutions available, that means advisors need to switch between 8 different applications on their computer just to prepare for one client meeting.
With Altruist, advisors get a best-in-class software tech stack in a fully integrated platform. Commission-free trading, performance reporting, automatic trade rebalancing, portfolio management tools, fee billing, and an elegant client portal—all while allowing the advisor to keep everything they earn.
We think our advisor software speaks for itself, so we won’t turn this into a sales pitch. The key takeaway here is that the cost of software is no longer a factor in determining whether to start a new RIA.
As always, please let us know if you have any questions. And be sure to catch up on more articles in this series: