Independent RIA

[ashray2]

We are a local CPA firm in Georgia serving 300+ small and mid-sized privately-held businesses. We want to expand into financial advisory business have most of the necessary certifications and licenses for it (CPA, CFA, CFP, Insurance Licenses etc.) but no idea how the back-end infrastructure and support system works.

So far we have set up an RIA with the state but now we need your help in moving forward. Should we work with a BD mainly to have back office, compliance, technology, E&O etc., taken care of or there is an alternative route? We want to be non-captive to proprietary products and solutions. What is an alternative to avoid having to affiliated with a BD (and thereby avoid sharing a payout)? Can someone explain this from infrastructure and process standpoint please?

Thanks!

[the observer]

If you want to remain truly independent, the last thing you should do is burden yourself with FINRA and a Broker Dealer.

Hire a compliance consulting firm to assist with your paperwork, compliance manuals, mock audits etc. Get at least one experienced investment adviser in as well. There are plenty of completely indie Broker Dealers you can trade through without become FINRA registered or becoming brokers.

Schwab has a platform, TD Ameritrade has a platform, Trade PMR has a platform. They all offer different things and you really need to research what the best fit for you is. Personally, I chose Trade PMR. They incorporate billing for free into their platform, a big plus that saves me a tone of money, so I can keep my cost down. They also incorporate Morningstar Workstation into the platform, have a CRM and performance reporting feature, all add-ons for a fee. You mix and match what you want based on your customers. Some of the true indies won't offer naked options, some not even covered options. Do you need this feature? You really have to do your own research and make your decisions based on your clients needs.

But the first decision you need to make is... do I really want to deal with a broker dealer and having worked in that world for 25 years before finally realizing that my 6,7,24 and 63 weren't worth the hassle, I can tell you the answer should be a resounding NO!

[ashray2]

Thank You, Observer! Having gone through most your posts on this board, I can safely say that you comments are always useful and to the point. I really appreciate you sharing your knowledge and wisdom with everyone on this board.

I agree. The first step is to decide whether to go BD route or just register with a state as an RIA and then use a suitable independent platform for clients' needs (correct?). We have had at least 3 BDs pitched us their support recently but we don't like the idea of tying ourselves to a particular BD. We want to remain "true" independent in all sense so that we can serve our current and future clients in their best interests.

So, would you say the best route is to register as an RIA with the state, outsource compliance function to a third party, and then use one of (or mix-and-match depending on clients' needs) the independent platforms (TD, Schwab, Trade PMR etc.)? OR, are you suggesting not to bother with FINRA registration and deal through more than one BDs?

Please comment.

Thanks again!

Ash

[the observer]

"So, would you say the best route is to register as an RIA with the state, outsource compliance function to a third party, and then use one of (or mix-and-match depending on clients' needs) the independent platforms (TD, Schwab, Trade PMR etc.)?"

Since from your first post I inferred that you do not have any experienced compliance personnel who have worked for years in the RIA or FINRA world, you should definitely outsource all your compliance unless you decide it's cheaper to hire a good person in-house.

Also, I think you should analyze which of the indie houses offers the best mix for your particular needs and while you could choose more than one to work with, just remember, you'll be creating a nightmare in terms of billing and a whole bunch of other things by spreading the love. If you have hundreds of millions it might not make a difference. You'll definitely have more compliance headaches, particularly if one custodian has different fees from another for everything. Your ADV is going to get really complicated, really quickly... not forgetting your reasoning behind which client gets serviced by the cheaper custodian etc. I can think of a hundred reasons why not to split the business, but then again, there are probably quite a few advisers who do split their business. Like I said before, you look at the best mix for everything you do and see what features each one offers that are a fit to you. You may have to sacrifice a little here or there but as long as you can argue best execution and best deal for your clients overall, you should be good to go.

"OR, are you suggesting not to bother with FINRA registration and deal through more than one BDs?"

Not sure what you mean here. If you register as an indie RIA at the State level (less than 100m) then you can work together with the indie B/D's without ever registering with FINRA as a B/D. You'll do your paperwork through FINRA's IARD system as a RIA, but that's it. I wouldn't go near registering with FINRA. Anyone in your firm dealing with clients should have their Series 65 but you do not need to be FINRA registered to get a 65, once your RIA is registered you can sponsor anyone for the 65 exam yourself. You need to check with your State. DO NOT rely on the "exception to registration for advice incidental to" for your CPA's... they will find you and punish you if you intend to make it an arm of your business.

I don't want to advertise for any compliance firms but there are a couple of compliance conferences a year set up by various organizations and if you attend one, you'll get a chance to interview a whole bunch of them and pick their brains before hiring one.

[ashray2]

Observer, thank you so much again for a prompt response with a detailed explanation. As I said in my original post, we have finished the process of registering with a state (Georgia) as an RIA and two of our employees who will deal with the clients have already acquired series 65. We have looked into a couple of third-party compliance firms (one of them actually helped us in registering as an RIA with the State) but haven't made the final selection yet.

The area that we are STILL very confused about is the use of a BD. Of course we do not want to register with FINRA as a BD ourselves, but must we use a BD (assuming we will not split our book) as a part of compliance, OR we can deal directly (without using a BD and thereby without splitting the payout) using one of the many independent platforms (TD, Schwab, Trade PMR etc.). We understand the benefits of using a BD (system and support, back office and compliance paperwork, E&O etc.) but we don't want to use a BD IF it is not required by SEC or a State. Please share your wisdom one more time :)

Thanks again!

Ash

[the observer]

If you're already that far along, I suggest you attend a webinar on working together with a completely indie B/D. I'm going to suggest Trade PMR. They may not be your ultimate choice because they don't offer everything the other guys offer. However, once you understand how they work together with RIA's you can then do webinars with Scottrade, TD and Schwab.

All of them offer you different things. Some like Trade PMR offer billing for free, which is fantastic because you do not want to mess with that on your own, that's a ton of work all by itself. The downside... no options or naked shorts etc. There's a one time fee to join, it's cheap with Trade PMR. They have their own interface (E-Custody) for trading etc.

Other indie B/D's will offer a few more bells and whistles, others still will offer their proprietary research etc. Don't forget to enter all this into your ADV Forms. You may already be using Morningstar research and not need a few of the other bells and whistles. Trade PMR offers Principia Workstation inside their platform.

Others will offer the options but no billing, so you have additional monies flowing out to a bookkeeper and billing firm. You'll want to bill directly from the client accounts and believe me, the books are much easier to keep if you bill in arrears rather than in advance.

I'm happy with Trade PMR, they give me the most bang for my buck and I can keep costs really low for my clients. They charge $19.95 for each trade... Scottrade is cheaper, but with no free billing, YOUR costs per client might be higher or lower depending on the way you operate. Your mission is not to get the cheapest cheapest execution all the time, your job as fiduciaries is to get the execution and overall service that keeps costs lower for all your clients, all things considered.

Go to tradepmr.com and sniff around. Give them a call and ask them when the next webinar is. It'll help you understand how one works independently through a B/D without being involved with the B/D. Hope this helps!

[ashray2]

Thank you so much, Observer! I really appreciate all your help so far. As you suggested, I will sniff around Trade PMR site and attend one of their webinars, and get back in touch with you if I still have some questions.
Best,
Ash