Blogs - Powering Independence
Legal Hurdles Facing RIAs
Thursday, February 14, 2013
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Interest among financial advisors in going independent is as high as it’s ever been for many reasons— better economics, more flexibility, better technology, the ability to choose the investments they want to use, and above all client focus. More advisors would probably make the move sooner if not for the perceived – or more to the point, misperceived – hurdles. Legal and compliance issues generally factor in that list, but with the right partners to work with those issues become more like stepping stones than hurdles.

Whether starting an RIA or joining one, clarifying the legal and regulatory considerations and requirements around independence will help advisors identify what’s needed to put in place to facilitate building a successful firm and fulfill their vision. Leveraging the expertise and skills of experienced attorneys, compliance professionals and other service providers, and following well-defined procedures will make the process of transition smoother, probably faster and definitely more pleasant.

Recently, I was part of a panel discussion on the topic of “powering independence”. Also on the panel was Brian Hamburger, Founder and Managing Director of Hamburger Law Firm and MarketCounsel, a business, regulatory, and compliance consulting firm to entrepreneurial investment advisors. He shared a wealth of knowledge and experience in guiding advisors through transition. His advice was simple, “Having the right counselors stand with you during this period is really going to help you navigate the most difficult issues that you are going to deal with.”

The first key to transition entails having clarity of purpose - crystallizing just what it is that an advisor is trying to create. Then finding a trusted counselor or counselors to act as a transition mentor and help quarterback a range of regulatory issues will streamline the process of getting there.

According to Brian, “There are a number of considerations that financial advisors ought to make prior to going independent. The biggest is context—where are they now, how much time do they have, and what is their vision? Are there any restrictions with regards to them transitioning their employment? Is that restriction based on time or are there restrictive covenants within their agreement that otherwise inhibit their ability to leave?”

In addition to defining an advisor’s specific circumstances, it’s also vital to stay on top of the latest (and ever-shifting) regulatory rules and compliance requirements. That’s why it’s so important to seek knowledgable legal and compliance counsel as soon as possible. “By understanding the vision and what the advisor wants to accomplish, we can then translate that into regulatory disclosure and file all the forms that are necessary, such as Form ADV and licensing obligations. We also need to identify the various types of contracts that must be drafted and the policies and procedures that comprise the compliance manual,” added Brian.

At Dynasty, we instruct most of our advisor partners who are making a move to independence to follow the broker protocol very strictly, and we are a big proponent and supporter of it. Jonathan Morris, Dynasty’s General Counsel, notes that the Protocol helps create a plan for an advisor to get from Point A – typically where they are employed at that point in time – to Point B working within the independent firm without the uncertainty of potential litigation impeding the move. Using the broker protocol really creates a very well travelled path to transition.

Other topics to consider apart from  transitioning employment are more business related, including corporate issues such as what type of entity to create, what state to create it in and any questions regarding equity, for instance who else is going to own the firm. That raises other issues, including the eventual succession plan or incentive programs for other employees. Dealing as early as possible with concepts of eventual succession will ensure that the right pillars are in place from the start – the right operating agreement, the right incentive plan, protection of intellectual property and tax issues. Even something as fundamental as whether the transitioning advisors should own the firm they are starting up at that point in time, or whether alternative structures are needed where, for example, their employment terms prohibits ownership.

Brian counsels, “You also want to consider what resources you have. How well-capitalized this endeavor is going to be? Are your finances tied up or do you have money to spend on this transition? What’s going to be your budget for going out and creating this business?” The legal can’t be separated from the practical in this case, and so a lot of the issues you need to evaluate are going to have legal implications. By conducting a thorough assessment of an existing client base – focusing on the products and services clients need and want – an advisor can begin building a strategic plan that charts their vision and best serves the clients.

After reading all this, advisors may still think transitioning to independence can seem daunting, but you are not the first one to walk down this path and make these critical decisions. It’s important to keep in mind that many highly successful RIAs started at the same point not that long ago, or are there right now.

Brian summed it up best, “A trusted partner is able to facilitate the departure of an advisor leaving a restrictive employment arrangement and help him or her realize an entrepreneurial dream. Then continue working with them on an ongoing basis to ease the burden inherent in a highly regulated industry.”

In other words, turn hurdles into stepping stones.

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