Schwab's Advisor Services division has developed a suite of new resources to help financial advisors navigate the legal and regulatory issues that arise when making the transition to an independent Registered Investment Advisor (RIA) practice.
The tools include a new online hub geared specifically for advisors currently at independent broker-dealers (IBD) who are mulling the transition to either a fully independent practice or a hybrid model that would enable them to maintain a conventional brokerage business along with a fee-based advisory service.
"Whether you are considering starting your own RIA, joining an existing one, or exploring a hybrid model, the transition process can seem daunting for many advisors," Nick Georgis, vice president at Schwab Advisor Services, said in a statement.
After a slow start to the year, Schwab saw an increasing number of advisors initiate the move toward an RIA practice in the second and third quarters.
Tim Oden, senior managing director of business development for Schwab Advisor Services, said that recent volatility in the markets has not appeared to have had a marked effect on the tide of advisors making the jump to independence, in part, perhaps, because the multi-step transition runs on a longer arc than the daily ebb and flow of the indexes. Many recent converts to independent practice that Schwab has worked with have also explained that their decision was predicated on the sunset of retention packages with their former employers, freeing them up to go it alone.
But every case is different.
"What the jump to independence means -- it's a little bit different for everybody. For some it is a quality-of-life issue; for some it is a control issue; for some it's an economic issue," Oden said in a telephone interview. "For all it is a move to more flexibility and autonomy."
Schwab is stocking its new site with webcasts and podcasts dedicated to the RIA transition, specifically geared for financial advisors at IBDs, supported by a new white paper and other advisory resources.
To begin with, Schwab recommends that advisors thinking about making the jump take a thorough inventory of their existing client portfolio, paying particular attention to the common threads among their investors to guide the selection and development of products and services to consider offering as an RIA.
But beyond the conceptual stage, Schwab's first piece of advice is to get a lawyer.
"Undoubtedly, one of the most difficult challenges facing new independent advisors is staying abreast of the latest regulatory rules and compliance requirements," the authors of the white paper wrote. "This is one area, however, where cutting corners can have a devastating and lasting impact. Once you've made the decision to pursue independence as an RIA, you should seek legal and compliance counsel as soon as possible."
Oden was quick to point out that advisors are best served by engaging legal counsel with a firm that specializes in the legal and compliance issues surrounding the evolving RIA sector. "The devil's in the details for each one of these conversions," he said. "Experience matters when it comes to considering a move to independence." (Like other financial houses, Schwab has its own stable of firms with whom it partners, including MarketCounsel, which aided in the preparation of the new white paper.)
A specialty counsel is particularly important from a regulatory perspective, where the rules for registration and compliance are "in flux," according to Oden, noting the current debate over whether FINRA or some other self-regulatory organization should wrest regulatory control over RIAs from the SEC, as well as the proposal to raise the minimum threshold for an RIA to register at the federal level to $100 million in assets under management.
Historically, RIAs with less than $25 million have been required to register at the state level, though there are many nuances that can modulate those rules.
The transition to an RIA practice commonly takes about six months, according to Schwab. The firm's advisors note, however, that that duration can vary widely in both directions, depending on an array of factors tied to the complexity of the business model.
At the earliest stages of planning for the transition, advisors should engage with their legal counsel to help assess their current employment situation, evaluating potential legal pitfalls such as non-compete and non-solicit provisions.
"We are quick to point out to anyone making this move that it is appropriate and they have the ability to prepare to compete, which is to say that they can evaluate different models and they can take steps to prepare to move into the next model," Oden said. "They cannot compete with their employer."
Throughout the development of the exit strategy, which lays the necessary groundwork for resignation and then, in turn, standing up the RIA practice, Oden cautioned that advisors need to be particularly cautious with the information they share with their current roster of clients.
Then, on advice of counsel, they must be judicious in the client information they take with them to steer clear of proprietary data. But Oden emphasized that all of these steps, when taken properly, are entirely legitimate and in keeping with the best practices of the industry.
"An exit strategy doesn't have to be cloak and dagger," he said. "It just has to be well thought out, respectful of the former employer."