How advisors should register an RIA with the SEC or states

This story is the fourth in a series Financial Planning Chief Correspondent Tobias Salinger is writing on how to build a successful RIA. Here are the previous stories in the series:

• When should a financial advisor launch an RIA?
• When is the right time to leave a wirehouse?
• How do I leave my firm — and avoid lawsuits?

Check back weekly for the next story, or find the pieces by following Salinger on LinkedIn.

The registration of an advisory firm represents a career milestone for many financial advisors — but missteps could lead new companies down a compliance rabbit hole or even into a tax trap.

The "registered" in the name of registered investment advisory firm refers to the obligation for RIAs to submit their "Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser" (Form ADV) to the Securities and Exchange Commission or a state securities regulator. In most cases, RIAs with $100 million in assets under management or more must register with the SEC, while smaller firms file their Form ADV at the state level.

RIAs that join the ranks of nearly 32,000 firms are following the planners and investors who are fueling the industry's ongoing movement toward the profession's most stringent standard placing clients' interests above their own, the fiduciary duty. At the same time, they're making strategic choices about practice management issues such as fee models, business entities and the timing of their registration that may carry important ramifications to their future.

And the act of registration itself can take a long time — even once they file the lengthy and detailed Form ADV, said Scott Gill, who founded Synergy RIA Compliance Solutions in 2019 after tenures as the director of compliance and senior compliance consultant with the XY Planning Network and a compliance officer with wealth management firm Carolinas Investment Consulting. State regulators may take "anywhere from four to six weeks to six to eight months" to approve the registration, Gill noted. In that span, the excitement of a new RIA launch based on serving clients according to the profession's highest ideals may fade into a bureaucratic slog.

"We generally expect, at the SEC level, somewhere between a 30- and 45-day processing time frame. The SEC registration process is a lot more consistent in that manner than we see at the state level," Gill said, citing unforeseen delays from matters as basic as a state agency staff member taking a vacation or going on medical leave. "That is one of the more difficult and frustrating parts of the process. … The more planning the firm does on the front end, the more effective the registration process will be."

READ MORE: How financial advisor compensation is crucial to succession and M&A

Many questions to answer

As of the end of 2024, a record 15,870 RIAs had current registrations with the SEC, with another 16,046 supervised by state securities regulators, according to the latest annual "Investment Adviser Industry Snapshot," released last month by the Investment Adviser Association, a trade organization, and COMPLY, a compliance firm. 

The number of SEC-registered RIAs has increased in 22 of the last 24 years, with the volume jumping by 139% during that time frame. And they all must complete the Form ADV, which has a data and multiple choice section, a brochure explaining the firm's services, conflicts of interest and any compliance breaches in the past, and a "customer relationship summary" seeking to fit the key details about all of those topics into a shorter document in plain English. 

Besides filing Form ADV, RIAs must register the new business with the relevant secretaries of state and decide on their business entity of choice. 

Over 41% of SEC-registered firms were technically organized in Delaware, and experts say the tax advantages of pass-through entities prompt most new RIAs these days to launch as limited liability companies treated as S-corporations by the IRS. 

However, state-level variation in the rules for LLCs and the potential for a tax or equity impact in an M&A deal someday may prompt some RIAs to be traditional C-corporations or use another entity. That's why a certified public accountant and/or a business attorney often proves handy to advisors weighing their options.

In all, more than 73% of RIAs use some form of a pass-through entity as a partnership, limited partnership, LLC or LLP, and 24% are corporations, according to the industry snapshot. But over 63% of those registered before 2000 were corporations.

Beyond the act of registering with the SEC and state authorities, RIAs need to build a compliance and legal structure within their companies well in advance, said Monique Botkin and Laura Grossman, associate general counsels with the association. That could include hiring a chief compliance officer or legal experts in-house or picking vendors to oversee those tasks.

"The point is, filing your Form ADV is just the tip of the iceberg," Grossman said. "You need a full compliance program."

In a recent podcast, Gill and another industry compliance expert, Kristin Guerrero of RIA Compliance Key, discussed registration and that requirement for RIAs to create a larger "culture of compliance" from the start. A subsequent episode dives into how to ensure that client data procedures and other technology tools align with the compliance program, which is just another aspect of the way that "registration really is only one piece of the larger puzzle," Gill said.

READ MORE: RIAs are growing rapidly but not equally. Here's why

Avoiding the main pitfalls

On the other hand, some components of the registration itself put that lesson on display, too. 

For instance, Gill pointed out that certain state regulators often push back against the use of retainer fees or subscriptions for planning clients or forbid advisors from being registered with more than one RIA at once — which is problematic for those embracing client charges that are different from the industry's standard model tied to 1% of assets under management or teams creating their own advisory firm after leaving another. The latter hurdle could bring problems in the migration of client accounts around restrictive covenants and state-level guidelines.

"They must terminate their registration with their previous firm, prior to completing their registration with their new firm," Gill said. "Thats a challenge, and a lot of firms get surprised or blindsided by it when they're leaving their existing RIA."

Synergy RIA Compliance Solutions

Other RIAs sometimes get into what Gill describes as "the ultimate compliance nightmare" when they register with the SEC under an exemption to the minimum level of AUM for firms that might otherwise need to file a Form ADV in 15 states because they have clients spread that far geographically. RIAs that don't register with the SEC must file an ADV with the state regulator in every jurisdiction where they have an office location or more than a minimal number of clients.

If the SEC determines that the new RIA hasn't properly demonstrated their regulatory rationale for registering at the federal rather than state level based on that exemption or the AUM floor, the regulator may send the new advisory firm instructions to file the Form ADV instead with one or more state agencies, Gill said. And filing that in 15 or more states often "seems insurmountable" to new startup RIAs, he noted.

"To have to register in even four or five states at one time is a bear," Gill said.