1. business and industrial

An Advisor’s Guide to Establishing
an Independent Practice
Ideas Without LimitsSM
Our partners in developing
this guidebook:
Moss Adams LLP
MarketCounsel LLC
Table of Contents
Introduction..................................................................................................................... 1
Executive Summary...................................................................................................... 3
Business Operations and Technology................................................................... 7
Software: Helping You Work Smarter.......................................................... 9
Service Model-Specific Software Needs................................................... 11
Selecting Software............................................................................................. 14
Common Mistakes and How to Avoid Them......................................... 15
Conclusion.............................................................................................................. 16
Office Space................................................................................................................... 17
Step 1: Explore Your Options......................................................................... 17
Step 2: Determine Your Spacing Needs.................................................... 21
Step 3: Review Your Lease.............................................................................. 22
Conclusion.............................................................................................................. 22
Human Capital............................................................................................................. 23
Selecting the Right Staffing Structure for Your RIA Firm.................. 25
Estimating the Cost of Your Firm’s Staffing Structure...................... 28
The Critical Factor: Firm Culture and Values.......................................... 32
Conclusion.............................................................................................................. 32
Recruitment................................................................................................................... 33
Advertisements or Job Postings................................................................... 34
Rules of Thumb................................................................................................... 36
Conclusion.............................................................................................................. 36
Protecting Your RIA Firm: Risk Management.................................................. 37
Business Insurance Plans................................................................................ 37
Employee Medical Coverage and Insurance Plans............................... 38
Conclusion.............................................................................................................. 38
Legal Considerations to Establishing Your RIA Firm.................................... 39
Defining “Investment Advisor”.................................................................... 39
Issue 1: Developing an Exit Strategy......................................................... 40
Issue 2: Regulatory Considerations............................................................ 44
Issue 3: Corporate Considerations.............................................................. 46
Marketing....................................................................................................................... 48
Situation Analysis............................................................................................... 48
Marketing Plan.................................................................................................... 49
Identity and Collateral Materials................................................................. 49
Client Retention and Development............................................................ 50
Acquisition Strategies...................................................................................... 50
A Final Word.................................................................................................................. 52
About Pershing Advisor Solutions............................................................... 52
Appendix......................................................................................................................... 53
Custodian Selection Worksheet................................................................... 53
Sample Request for Proposal........................................................................ 56
Introduction
You stand at the threshold of one of the biggest decisions in your career: to
leave the limitations of big company life behind, and head out on your own
as an independent advisor. The opportunity to set your own game plan, retain
more of the revenue you generate, and build equity in your own future is
exciting. The possibilities are endless, and so are the questions: What business
model should you choose? How should you structure your firm? How will you
keep abreast of perpetually changing legal and regulatory requirements? How
do you determine your first hire?
Pershing Advisor Solutions can help. A growing number of your peers have completed this transition
successfully. Drawing on their experiences and on the insights of leading business, legal, and technology
professionals will help you with your decisions. We tapped into our wide network of industry experts and
extensive in-house knowledge to create this guidebook, which offers a broad introduction to a number
of critical concepts and provides a framework to help you make key business decisions.
An Advisor’s Guide to Establishing an Independent Practice addresses the key areas that every owner of an
independent advisory firm should consider:
Business Operations
When opening a new business, you face a multitude of operational decisions, ranging from the
mundane, such as selecting an online site to post a recruitment ad, to long-term commitments, for
example signing a commercial lease and selecting a benefits plan. Before interviewing vendors or
touring office space, however, it is essential to start at the beginning and design an overall operational
strategy that reflects your goals and business model. With contributions from Moss Adams LLP, this
guidebook reviews the typical operational needs of various advisory business models, explores some
of your options, and offers a step-by-step approach for reaching important decisions.
Technology and Software
In today’s financial services industry, technology plays a major role in defining operational processes
and shaping the customer experience. Working in a wirehouse, you were constrained by the
choices made by a separate IT department. Now you are free to build a technology environment
that supports your own personal business vision. The flip side of that freedom is the personal
responsibility for every decision about technology outsourcing, purchase, development, maintenance,
and enhancement. We asked Moss Adams LLP to help you put these technology choices into a
business context, evaluate vendors, and avoid common mistakes.
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Legal Considerations to Establishing Your RIA
As a new independent advisor, you face your first legal questions before you even leave your job
when you negotiate an exit strategy with your current employer. Learn more about this topic
as MarketCounsel LLC explores some of the employment issues involved, such as restrictive
employment covenants, confidentiality, and FINRA® rules. This guidebook also touches on
other important legal challenges you will face in building your new business, including regulatory
considerations such as registration and conflicts of interest, and corporate considerations including
entity formation and legal agreements.
Marketing
Marketing your firm requires far more than a set of business cards and a glossy brochure. It is
an essential business function that addresses the all-important question: How will you grow your
business? Our useful checklist addresses the essentials of a successful marketing plan, such as
establishing a brand and segmenting clients and prospects. It also shares with you some of
the proven tactics in an advisor’s marketing toolkit, from invitations and events to building
a referral network.
If you would like to explore any of these topics in greater depth, please contact
Pershing Advisor Solutions at (800) 445-4467.
2 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Executive Summary
At first, it was only an idea you thought about during the spare minutes
between client calls, branch office meetings, or presentations by product
vendors—the idea of running your own financial advisory firm. Then, as you
noticed more of your colleagues and peers starting their own firms, you began
to think, “Why not me? I can be my own boss, serving my clients in a way
I believe is best for them.”
You may have heard that a typical registered independent advisor (RIA) earns more than a
wirehouse broker in annual cash income, and can accumulate long-term value through equity
in the business. Perhaps becoming independent and leaving your wirehouse is a wise and most
personally fulfilling route.
What you have heard about owning your own registered investment advisory firm can be
true. Not only will you become a business owner, but the potential economic rewards can
be significant, particularly as your firm continues to grow. Consider this:
Your Take-Home Pay
As a wirehouse employee, your paycheck ranged between 35% and 45%1 of your gross production.
In your own RIA firm, you will see three types of take-home pay—your salary, your bonus, and
your ownership distribution. RIA firm owners collect a salary and bonus for the work they do
as client relationship managers and advisors, and then are able to take the profits (after all firm
expenses have been paid) as an ownership distribution.
Equity in Your Firm
Many wirehouse advisors seek to transition to the RIA firm model because of their desire to do what
is best for their clients. In a wirehouse, you may have client relationships of 15 to 20 years, but the
wirehouse technically owns the relationship. In an RIA environment, your firm owns the client
relationships. This, in turn, drives the valuation of RIA firms, which is currently at a premium. In
general, transactions in the marketplace show that RIA firms are being valued at revenue multiples
of two to four and EBITDA (earnings before interest, tax, depreciation, and amortization—or
operating profit) multiples of between six and eight.2
1
Payout range is calculated as the average of payout for $100 million AUM producer based on payout grids of leading broker-dealer firms.
2
oss Adams LLP. “Real Deals: Definitive Information on Mergers and Acquisitions for Registered Investment Advisors.”
M
New York: Pershing Advisor Solutions, 2006.
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Tax Benefits
There may be significant tax advantages to owning your own RIA firm in terms of your personal
income, and finding a tax-efficient business structure. These are largely dictated by which business
entity structure you choose: an S-corporation, LLC (limited liability corporation), or
an LLP (limited liability partnership), for instance. It is important to consult with a tax professional
and an attorney to determine which type of entity will not only achieve your long-term strategic
goals, but will be the most tax efficient, as well.
Setting up your RIA firm requires planning—it is not just filling out an ADV form and registering
with the SEC. It can be a complex and time-intensive process. Before making the move to create
your new business, there are certain decisions that must be made:
1) What kind of firm do you want to have? Are you planning to create an investment
management firm focusing on portfolio and stock selection, or do you want to be a wealth
management firm providing holistic financial advisory services? By first identifying the client
services of your RIA firm, you will have narrowed down the business decisions to those most
appropriate to your firm’s strategy and client service offering.
2) Have you developed a strategic plan? At its most basic, your strategic plan should identify
who your clients will be, what your value proposition is to the marketplace, and how you will
differentiate yourself from the competition. It is also an opportunity to articulate the core
values and principles of your firm. As the owner of an RIA firm, this the ideal time to create
your vision of the firm.
3) What is your timeline? The process of leaving a wirehouse, creating the infrastructure of
your own RIA firm, and finally opening your doors to clients can take between six and twelve
months. On the following page, we have included a simple timeline, but if you have a specific
time frame in mind, confirm your plans with the professionals at Pershing Advisor Solutions
and other experts to ensure that your transition window can accommodate all the necessary
steps in setting up your own RIA firm.
Answering these important questions will lay the foundation for each business decision you make
regarding the structure, staffing, and systems for your RIA firm. It will also frame all subsequent
decisions and ensure that you create an RIA firm that fulfills your hopes for personal and
professional success.
4 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Table 1. New Advisor Timeline
10-12 MONTHS > Commit to leaving the wirehouse to start your own RIA
8-10 MONTHS > Determine what steps are necessary to be compliant with wirehouse requirements for leaving
> Select and consult with counsel to devise a legal exit strategy from the wirehouse
> Review any bonus programs or forgivable loans in effect from the wirehouse
6-8 MONTHS
> Ensure compliance and check any client or employment agreements as you depart
the wirehouse
> File your ADV form and check for compliance with regulations
> Begin searching for potential office locations
> Identify your business model
> Establish the value proposition of your firm
> Contact Pershing Advisor Solutions to assist you through the transition process
4-6 MONTHS
> Choose your office location
> Produce marketing materials, such as business cards
> Structure your technology processes­—client relationship management system, internal
accounting and billing, etc., and evaluate vendors
> Begin recruiting for any additions to your firm
> Select the risk management and insurance programs needed
> Establish internal compliance procedures
2-4 MONTHS
> Refine your technology processes and select systems
> Build and launch your firm’s web site
> Train staff on your firm’s client service offerings and technology
> Ensure smooth flow of operations and other back-office functions
> Set up financial management systems, such as the annual budget and key
performance ratios, and track firm revenue and growth
> Establish relationships with centers of influence
> Promote your firm
DAY 1
> Welcome your clients
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The following sections provide information on every critical aspect of building your RIA firm:
> Business Operations and Technology are the building blocks of your firm—the systems,
processes, and tools necessary for organizing the workflow within your RIA firm.
> Office Space is more than just finding the right physical location for your new RIA firm.
It includes understanding common types of leasing arrangements and performing calculations
to estimate the amount and cost of office space you will need.
> Human Capital addresses which positions your new RIA firm should create initially, and as
you grow. Selecting the right organizational structure is crucial, and changes, depending on the
RIA business model of your firm. Other important considerations include compensation and
associated benefit costs.
> Recruiting specifically focuses on adding new staff to your RIA firm. As you search for and
select individuals to join your firm, understanding how to craft a compelling recruiting message
that attracts the right individuals is crucial.
> Risk Management requires an understanding of the business insurance and protection you will
need to minimize business risk and protect your personal and business assets.
> Legal Considerations should be thought through at every phase of your plan for exiting
your wirehouse employment and establishing your own RIA firm. Federal, state, and selfregulatory organizations’ requirements for an RIA firm are myriad, and it is critical to
understand by which you are affected.
This guidebook addresses the key challenges you may face you as you leave your wirehouse firm.
Not every challenge presented in this guidebook applies to your unique situation, and the issues may
be more or less complex. Our goal is to present the range of challenges you may need to consider,
and provide you with a reference tool to help you work through the transition to your own RIA
firm. As always, it is imperative to seek counsel for your individual situation.
6 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Business Operations and Technology
As a business owner, you will have the freedom and flexibility to design your
business in a way that meets the needs of your clients while also helping to
fulfill your own personal goals. So what are your first steps?
Your operations must be designed to support the
strategy and business model of your firm. The
services you offer, the way you offer these services,
and the interaction your clients will have with
you and your firm—in other words, the overall
client experience—should drive the design of
your operations.
Your first decision is determining the strategy and
direction of your RIA firm. Advisory firms tend to
fall into four groups, based on the services they offer
and the client experience provided:
Things to Consider
> Operations and Technology
Identify your firm’s client
service model.
Define how your operations and
technology will support your
client service experience.
Develop a budget and timeline.
Research your service vendors,
and utilize transition support.
> Investment Advisory Firms. Their primary
focus is on the development of investment
Coordinate training, and keep
strategies and the selection of investment
a list of resources.
managers. Typical services include investment
consulting and retirement planning. These
firms provide nondiscretionary investment advice usually centered around investment
objectives, such as generating a specific return for a corresponding level of risk. Investment
advisory firms differ from investment managers because they do not directly manage the assets.
> Investment Management Firms. These firms concentrate on discretionary investment
management of clients’ assets, primarily utilizing direct instruments instead of separate accounts.
> Financial Planning Firms. These firms offer comprehensive financial planning services,
including the development of a financial plan, retirement planning, cash flow planning,
income tax planning, and investment management, among other services.
> Wealth Management Firms. These firms serve as a holistic advisor to clients, typically
offering integrated tax, estate, and personal financial planning, in addition to investment
advisory services. Services may also include charitable giving strategies, and life planning
or counseling.
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Each of the four service models has pros and cons, and successful firms can operate across the board.
The service models are not mutually exclusive, as some firms may choose to offer services that are
associated with multiple models. It is worth noting that many firms struggle to support multiple
models, and the firms that succeed with multiple models are usually the largest and most established.
It is significantly easier to design and implement an operating plan centered on one service offering.
RIA firms rely on technology to operate and deliver the client experience. Creating a technology
plan and selecting the most appropriate software and hardware is vitally important
to your firm’s ability to distribute your expertise to an increasing number of clients.
On a typical day at your wirehouse firm, you could pick up the phone, dial the firm’s technology
assistance line, and have someone work with you to fix problems or download software. Technology
software would be automatically loaded onto your computer, and you could attend training for the
software applications. In your own RIA firm, you will be the technology manager—deciding which
types of software applications you need, which individual applications to purchase, and how to
effectively use and implement them to help your RIA business run efficiently. How can you make
these decisions?
Any technology decision you make should be framed within a larger business context. Specifically,
you should identify:
> How do I want work to occur and flow in my firm?
> What technology do I need?
> What is the purpose for this technology application? For example, is it for client service
and communication, internal firm operations, or compliance and safety?
> What do I hope to gain from using this technology?
8 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Software: Helping You Work Smarter
In any firm, not just advisory firms, the goal of technology is to make a process or people more
productive, or to produce products and services of higher quality. In an advisory firm, there are
a number of common functions, such as financial planning, that require software for successful
analysis and delivery. Other functions may be performed manually or outsourced to a custodian or
another third-party service provider.
Of course, many of the decisions regarding which software solutions will best meet your needs
depends on your strategy and service offering. Software can be used to help perform the
following functions:
> Client relationship management
> Investment policy and/or proposal generation
> Asset allocation
> Accounts payable and accounts receivable, including accounting, payroll, and benefits
> Data storage and document management
> License and registration management
> Compliance
While software solutions are available in each of these areas, it may be less complicated or more
efficient to perform the function manually—as in the case of license and registration management and
compliance. The table below shows how typical advisory firms perform common business functions.
Table 2. How Common Functions Are Performed Within RIA Firms
Function
Packaged
Software
Custom
Software
Manually
Performed
Outsourced
or Automated
Client relationship management
57%
10%
32%
1%
Investment policy and/or proposal generation
23%
28%
43%
6%
Asset allocation
35%
24%
35%
5%
Accounts payable and accounts receivable
56%
8%
27%
9%
Data storage and document management
37%
14%
33%
17%
License and registration management
6%
4%
69%
21%
Compliance
9%
7%
59%
25%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
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At a minimum, your software needs will include an operating system (e.g. Mac OS, Windows,
Linux) along with a standard suite of common office applications (e.g. Microsoft Office). These
may be included with a computer purchase or can be added later. The markets for many software
products are fragmented, although there are leading packages in some areas. Whether there are clear
market leaders or not, a deliberate process of system selection should be undertaken. We will discuss
this in more detail later in the guidebook. A study commissioned by Pershing Advisor Solutions in
20053 found that the following off-the-shelf products were used within the areas below:
Client relationship management
> Microsoft Outlook
> GoldMine®
> ProTracker Advantage
®
Investment policy and/or proposal generation
> Microsoft Word
> Fiduciary Analytics
®
Asset allocation
> Allocation Master
> Frontier Analytics
> Ibbotson
Data storage and document management
>
>
>
>
>
>
Worldox®
DLT
Investigo
Cabinet NG
Application Xtender
MS FrontBridge
Accounts payable and accounts receivable
> QuickBooks®
> Peachtree
> Quicken®
Financial planning
> Money Tree
> MoneyGuideProTM
> NaviPlan®
Alternative investment planning models
>
>
>
>
Advent Axys®
Microsoft® Excel
Portfolio Center
Zephyr
Portfolio reporting
> Advent Axys®
> dbCAMS+
Account aggregation, account processing and rebalancing, and trade confirmation processing are
areas where all advisors have struggled to find effective software solutions. Some advisory firms have
pursued the development of custom software packages to fulfill their needs, but a large portion of
the work associated with these functions continues to be done manually. While not ideal, many
firms have found that manual processing is the best solution available at this time.
3
10 Moss Adams LLP. Mission Possible: Finding the Optimal Operations Model For Your Advisory Practice.
AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Service Model-Specific Software Needs
Research4 indicates that there are no significant differences in the functions being performed across
the four service models: Investment Advisory, Financial Planning, Investment Management, and
Wealth Management. The only exception to this is in financial planning—investment management
firms were significantly less likely than the others to perform financial planning.
Table 3. Frequency of Functions Within RIA Firms
Function
Financial
Planning
Investment
Advisory
Investment
Wealth
Management Management
Financial planning
100%
86%
58%
97%
Alternative investment planning models
34%
41%
27%
42%
Account aggregation
38%
54%
45%
57%
Account processing and rebalancing
93%
86%
79%
93%
Trade confirmation processing
77%
82%
84%
82%
Portfolio reporting
82%
96%
97%
97%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
4
Moss Adams LLP. 2006 Moss Adams Financial Performance Study of Advisory Firms.
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Despite the relatively low variation among the four service models, there are likely differences in
how the functions are being performed, how many clients are involved in each area (volume), and
what the software requirements may be. While the majority of Investment Advisory RIAs may offer
financial planning as one of their functional areas, it likely has a significantly different meaning in
a financial planning firm. The tables below show how the functions are being performed in each of
the four service models.
Table 4. How Functions Are Performed at Financial Planning Firms
Function
Packaged
Software
Custom
Software
Manually
Performed
Outsourced
or Automated
Financial planning
67%
18%
15%
0%
Alternative investment planning models
15%
23%
54%
8%
Account aggregation
32%
32%
26%
11%
Account processing and rebalancing
20%
16%
59%
5%
Trade confirmation processing
20%
7%
57%
16%
Portfolio reporting
61%
7%
15%
17%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
Table 5. How Functions Are Performed at Investment Advisory Firms
Function
Packaged
Software
Custom
Software
Manually
Performed
Outsourced
or Automated
Financial planning
61%
22%
17%
0%
Alternative investment planning models
10%
10%
60%
20%
Account aggregation
47%
7%
20%
27%
Account processing and rebalancing
25%
21%
33%
21%
Trade confirmation processing
26%
4%
30%
39%
Portfolio reporting
41%
30%
7%
22%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
12 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Table 6. How Functions Are Performed at Investment Management Firms
Function
Packaged
Software
Custom
Software
Manually
Performed
Outsourced
or Automated
Financial planning
47%
22%
29%
2%
Alternative investment planning models
9%
13%
70%
9%
Account aggregation
58%
11%
18%
13%
Account processing and rebalancing
32%
17%
45%
6%
Trade confirmation processing
25%
9%
38%
28%
Portfolio reporting
71%
4%
12%
12%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
Table 7. How Functions Are Performed at Wealth Management Firms
Function
Packaged
Software
Custom
Software
Manually
Performed
Outsourced
or Automated
Financial planning
55%
24%
19%
2%
Alternative investment planning models
10%
21%
59%
10%
Account aggregation
48%
15%
24%
13%
Account processing and rebalancing
36%
18%
35%
11%
Trade confirmation processing
38%
5%
31%
26%
Portfolio reporting
69%
9%
6%
16%
Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms.
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Selecting Software
It is important to conduct due diligence when selecting software for your firm. Technology
is expensive to purchase and upgrade so your company should follow a comprehensive selection
process to operate in the manner you desire. As a general guideline, consider these steps:
1) Define your requirements. What do you need the software to do? Is integration with other
software and systems important? Which functional aspects are absolutely critical for a piece of
software? Which would you like to have, but are not necessary? Defining exactly what you need
the software to do provides you with a necessary benchmark with which to begin evaluating
individual pieces of software.
2) Develop a Request for Proposal (RFP). For large software purchases, an RFP may be a useful
step in the selection process. This will present your requirements in a format that is easily
understandable to software vendors. See the Appendix for a sample RFP.
3) Search for vendors. Prepare a comprehensive list of vendors who provide the software you are
looking for. Lists of commonly used products are available through trade publications and are
often a good starting point for your search. However, do not limit yourself to only the most
frequently used packages; there may be options available that are more appropriate for your
situation.
4) Contact and evaluate vendors. Initiate contact with potential vendors to begin assessments of
their software. If you have developed an RFP, use it to solicit responses. Through conversations,
or through the proposal process, evaluate vendors on the following criteria:
> Overall characteristics and underlying technology
> Capability to support your company long term
> Software and its functionality relative to your requirements
> Cost
5) Narrow the number of vendors. Narrow the number of potential vendors to two or
three real candidates.
6) Conduct a demonstration. Go through a thorough demonstration of the product and its
functionality. Provide the vendors with background information on how you will be using the
product and have them walk through a case study. The more relevant the demonstration is to
a scenario at your firm, the better. This will show you what the product offers and help you
narrow your search.
7) Conduct due diligence. Often a number of questions will arise from the demonstration, both
as it is happening, and after it is completed. Create a list of all your outstanding questions, and
follow up with the vendor. In addition, check the references you have been provided, solidify
the pricing and scope, and, if necessary, arrange for a second demonstration.
14 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
8) Evaluate your hardware. Determine whether your hardware can support the software under
consideration. Conduct an analysis of which hardware components may be needed.
9) Select a package. Finalize your selection. An attorney or contracting specialist should review
any contracts in major software purchases.
After selecting a package, you will need to develop a plan for having the software installed,
configured, and tested, and arrange to have the users trained. Typically, vendors provide the
training and some ongoing support. An implementation plan can be beneficial, as it creates a list
of actionable steps and a timeline to keep you on track. Additionally, before the software goes into
use, or after an initial period of usage, processes and procedures for using the software should be
developed to ensure consistency no matter who is using it.
Common Mistakes and How to Avoid Them
When confronted with the vast number of choices for your own RIA firm’s technology, it is easy to
become overwhelmed. Below are some common mistakes and suggestions for how to avoid them.
1) Looking for the all-in-one solution. It is tempting to believe that there may be a single
vendor who can meet all of your technology requirements. Unless your practice is very narrowly
defined in its service offerings, it is unlikely that a single vendor will fulfill every aspect of
the client life cycle process. For now, accept that you will likely need to negotiate, purchase,
and deploy systems from at least two vendors. If your practice will be more sophisticated in
its offerings, that number could easily reach six or even ten. Many of the vendor firms in this
“soup-to-nuts” space are rather small and new. The recent history of technology firms catering
to independent advisors is laced with examples of firms that are no longer operating.
2) Failing to plan for the future. Envisioning what your firm will look like in the future is
important. For example, if you think your clients will demand a more global view when it
comes to portfolio construction and management, do not purchase a portfolio accounting
platform that can only handle USD-based securities. Otherwise, you may face a timeconsuming, disruptive accounting platform conversion somewhere down the road.
Anticipating these types of challenges now, will save you time and money.
3) Failing to understand how much you rely on technology today. Think about the work you
do today, and create a list of the systems you use to complete that work (e-mail, client reports,
asset allocation strategies, phones, quote feeds, etc.). Now, list the work that will need to get
done in your new firm and the systems you will require to complete it. Chances are, you will
need most, if not all, of the same systems and likely some additional ones, too. Use the list you
created as a guide when building a technology platform.
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4) Overestimating your capacity to manage technology. Transitioning clients to your new RIA
firm is your most important job. Unless you spend most of your free time building servers
and overseeing networks, you will need help managing technology. For project-related work,
consider consultants and contractors. For ongoing interaction and maintenance of technology,
consider hiring a tech-savvy manager.
5) Failing to accurately assess your capacity for operational oversight. Most advisors who go
independent have the opportunity to do so because of their proven ability to raise assets and
manage client relationships. Operational oversight was done by someone else. Once you have
determined which systems need to be in place to operate your new firm, ask the vendors what
type of oversight is required to effectively manage these systems on a day-to-day basis. Ask if
their product lends itself to a service bureau or Application Service Provider (ASP) offering, and
if it does, consider one of those options. When trying to “migrate the money,” the help of a
service bureau can add comfort. If you plan to track or report on a lot of nonstandard assets
or offer esoteric tax-strategies, these functions cannot be outsourced easily. Consider staffing
your firm appropriately, especially if these services make up a key part of your new firm’s
value proposition.
6) Short-changing yourself of the training options and resources. Once you have your new
systems lined up, you need to learn how to use them. Most vendors provide on-site or webbased training. If reasonably priced, it may be a good idea to take advantage of it. Often, the
vendor’s professional services arm can inform you of any quirks the software package might
have, and can help you develop the correct workflow to maximize your investment and
troubleshoot any problems. Ask the vendor about users’ groups for their software and
systems. These can be invaluable resources for getting up and running more quickly and
with less frustration.
Conclusion
Sketching out your client service process and identifying the kind of operations and technology you
will need at each critical step can serve as your work map. The wealth of options and possibilities
for structuring your operations and technology may seem to suggest you need them all, but the
best solution is often to keep things simple. For instance, using an e-mail system such as Outlook
can serve as your e-mail retention system and client relationship management system. The essential
operations and technology strategy should not over-complicate how you work; rather, it should
maximize your productivity and efficiency.
16 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Office Space
As a new business owner, you have a wide choice of where to house your firm.
The selection of office space involves a consideration of the projected capacity
of your business’ growth, the location’s accessibility for your clients, and the
economic expense of carrying a long-term lease on your financial statement.
Rent expense for an established RIA firm can average from 3.5% to 4.5% of
your total annual revenue, depending on factors such as the location of the
market and its geographic region.5
Step 1: Explore Your Options
Securing your office is not only one of the largest
initial expenses you can incur as a business owner,
it signifies a long-term financial commitment.
Advisors typically have three standard choices
to consider:
> Select an “executive suite” service
> Join an existing business as a subleaser
> Rent your own commercial office space
Executive Suite
An executive suite best suits those advisors who
prefer to observe how their business will grow
over a six-to-twelve month period after leaving
the wirehouse, rather than commit to a long-term
commercial lease with three-to-five year terms.
It also appeals to advisors who appreciate the
“packaged” approach to building an office, with
standardized services and office support for a set fee.
The main proposition of this plug-and-play option
is the ability to keep both budgets and lease terms
to a minimum.
5
Things to Consider
> Office Space
Define the goals for the office
space—such as ideal client
service, location, and personal
expectations for workspace.
Determine your preference for
a short-term versus long-term
commitment.
Develop a budget and timeline
for making your decision
and occupying your new
office space.
List any specific requests, such
as upgrades or changes to the
office space.
Read through your leasing
contract (twice), consult an
attorney if necessary, and
finalize your leasing contract.
Moss Adams LLP. 2006 Moss Adams Financial Performance Study of Advisory Firms.
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Common advantages of this approach include no capital investment for purchasing or leasing office
equipment, the availability of comprehensive technology packages, trained administrative support,
and a degree of flexibility in customizing the services you wish to use. Moreover, many executive
suites are located in high real-estate cost locations, such as downtown office complexes, where an
individual breakaway advisor may not be able to gain access on his or her own.
As stress-free as this option appears, there are some drawbacks, as well. Standardized leasing
arrangements and contracts leave little room for significant customization. Hidden costs and
fees may be written into the leasing contract, particularly in the event of a premature breach
of the lease agreement. Rates may also be adjusted according to a predetermined and
nonnegotiable schedule.
An executive suite for one professional and one administrative staff member can cost between
$800 and $1,200 per month, depending on its location. Terms of the leasing agreement can be
month-to-month, for three months or six months, or for up to two years. Use of the facilities
and services are usually charged separately, as the table below shows.
An executive suite option is a viable and prudent option for many advisors leaving the wirehouse
environment. It can serve as an incubator space for your business, allowing you to observe and
adapt your layout and infrastructure needs as you adjust how you and your staff work in your new
business model. It is important to understand all the costs and potential risks and reserve enough
flexibility should your firm expand at a faster rate than originally anticipated.
Table 8. Office Costs
Included
Separately Charged Per Usage
Furnished reception room
Club office or conference room (set number of hours per month)
Kitchen and lounge area
Video conferencing
Listing of your firm in lobby directory
Broadband services
Utilities and maintenance
Video conferencing room and service
Janitorial service
Multi-line digital telephones
Dedicated receptionists
Administrative services
Mailroom processing
PC and network support
Phone answering service
Copying and fax transmissions
Facilities management
Courier and overnight services
18 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Subleasing from an Existing Business
Some new advisors find the packaged approach attractive, but are reluctant to relinquish the
collegial atmosphere of working in a branch office or with a team of other advisors and sales
assistants. Other breakaway advisors have extensive professional networks, which present
opportunities to share office space.
In many ways, subleasing mimics the executive suite alternative. The critical difference, though,
is that the leasing arrangement is fully customized; you will be negotiating directly with another
small business owner. That presents the chance to draft your own leasing contract language,
but also requires that you thoroughly prepare and understand the terms and conditions of the
leasing arrangement.
Choosing to sublet from an existing business should not be a solely financial decision. By sharing
physical space with the business, you implicitly acknowledge certain common characteristics between
your RIA firm and the business from which you rent space. Pursuing this office approach can be an
opportunity to align with another business, that offers complementary services to your client service
offering. This is known as clustering, or positioning your new office alongside other firms attracting
a similar clientele.
New advisors can sublet office space from a CPA firm or a small law firm and learn from their
practice management experience and technical expertise. Some can find success in exchanging
referrals between their firms. An advisor with a specific target market of clients, such as relocated
corporate executives or family trusts, may choose to share office space with a real estate office or
concierge service provider.
Benefits of this approach include:
> Ability to utilize administrative and support staff from the other business
> Reduced overhead expenses, largely resulting from avoiding start-up and
installation expenses for items such as utilities, phone, and Internet services
> Shared common areas such as meeting rooms, kitchen, and reception areas
Subleasing arrangements are negotiated between individuals and cost estimates will vary. Expect to
pay the price-per-square-foot estimate of the entire office space, with either a pro-rata charge for use
of common spaces (such as the reception area and meeting rooms) or a fixed-fee arrangement.
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Leasing Commercial Office Space
Leasing commercial space affords the greatest freedom to design and plan your own office space. It
also commits you to a lease term, typically between three and five years in most commercial office
buildings. Consequently, leasing commercial office space can be the most expensive of the three
options. However, there are significant advantages to this approach.
You can either work with a commercial real estate advisor to find office space and negotiate
the lease agreement, or you can undertake the search yourself. Contracting directly with the
commercial landlord allows you to customize your leasing contract. Regardless of how you choose
your office space, it is imperative to understand all of the commonly used lease terms in order to
secure the most favorable lease arrangement for your RIA firm.
1) Permitted use of the premises. This clause sets forth the permitted uses of the leased space.
If the landlord agrees to a broad range of uses, it allows you to be flexible in how you use your
office space.
2) Lease term. As a new advisor, a conservative estimate of your business’ growth and need
for the office space would result in a shorter term lease, with renewal options. On the
other hand, commercial landlords usually will offer either discounts or concessions, such
as reduced parking lot fees or reduced costs of upgrades, in exchange for a longer lease term.
3) Rent escalations. It is rare for a landlord to maintain a fixed rent rate; lease agreements contain
percentage increases usually determined by the Consumer Price Index or another
real estate index. If you are considering a lease period of three years or longer, you may be
able to defer rent escalations for the first two years. Frequently, you can also negotiate for a
cap on the amount of annual rent increase.
4) Tenant improvements. One of the most appealing aspects of leasing from a commercial
landlord is the ability to adapt the office space to your vision of the firm. Most standard
commercial leases prohibit you from making alterations or improvements without the
landlord’s consent. You may want to ask for a clause that permits you to make alterations or
improvements with the landlord’s consent, so long as the consent is not unreasonably delayed
or withheld. Also, consider including a separate clause for minor alterations or improvements
that are nonstructural in nature without having to secure the landlord’s consent.
5) Repairs, improvements, and replacements. Generally, commercial landlords protect
themselves by inserting a clause into the lease agreement stating that at the termination of
the lease, the premises must be returned to its original condition. If you are planning any
customization of the office space, make sure to spend some time discussing this clause
with the landlord.
6) Renewal options. This clause relates to your ability to renew your rent at a fixed,
predetermined price, rather than “fair market” value.
20 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
7) Right of first refusal or first offer for additional space. As you contemplate your firm’s
growth past the initial three-year time period, you may want to secure the right (but not
obligation) to rent any office space that becomes available before the landlord offers it to any
other third parties. Usually this means that the landlord will present you with the terms of the
deal being offered to a third party and give you the opportunity to match the deal. It may also
be possible to ask the landlord to pay for the moving and renovation costs associated with a
relocation, particularly if you lease a larger office space.
8) Personal lease guarantees. Some landlords may want to include a clause in the lease agreement
that makes the business owner personally liable, even if the tenant is a corporation or another
type of business entity.
It bears repeating that it is essential to read and understand all the terms in your lease. Also, carefully
examine the work letter, a document that accompanies commercial leases and describes standard
fixtures, upgrades, and repairs that your landlord is willing to pay for. If you plan on updating the
space, the work letter may include information about whether you, or the landlord, bears the cost
of the improvements.
The cost of commercial office space depends on your regional location, the building’s location
within the area, and the location of the office space within the building itself.
Step 2: Determine Your Spacing Needs
When evaluating an office space, you may at first only consider your professional office space, or
those areas used for client service or for performance and delivery of your work. However, office
space needs to include all areas that contribute to the operation of your firm, or the total usable
space—from the hallways to the kitchen and supply rooms. The table on the following page offers
guidelines for both the amount and type of office space necessary for your business’ various uses.
When calculating office space, keep in mind how you would like work to flow within your office,
and how you would like clients to perceive your office space. If, for instance, you conduct all your
client meetings at their residences or places of business, you may not require significant meeting
space. On the other hand, if your clients prefer coming to your office, then you may need to select
a layout that is conducive to client meetings and frequent visits.
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Table 9. Guidelines for Office Space
Type of Space
Square Feet
Items in Area
Staff
Professional
Office with door
150–200
Desk, 2-3 chairs, bookshelf
Support
Cubicle, partitioned 100–120
Desk, 1-2 chairs, bookshelf
Administrative
Open space
80–110
Open desk, 1 chair, 1 file
cabinet or shelf
Common areas
Reception area
Open 125–200
(2–4 people)
200–300 (6–8 people)
Includes receptionist desk
Sofa or chairs, coffee table,
end table, receptionist desk
Conference room Room with door
200–250
Medium to large meeting
table, 4–6 chairs,
bookshelf or credenza
Kitchen
Room with door, 50–75
counter space, cabinets
Refrigerator, coffee machine,
sink, water cooler
Room with door, 40–70
counter space, cabinets
Cabinets, shelves, copy
machine, fax machine
Other areas
Supplies and mailroom closet Hallway Open 20%–30%
usable area
n/a
Step 3: Review Your Lease
Before you sign any lease agreement, be sure to have the paperwork reviewed by an attorney or real
estate specialist. This last step ensures that you are aware of the implications and meanings of the
terms and conditions of the lease.
Conclusion
For the vast majority of new advisors, leasing office space represents one of the largest capital outlays
in your transition toward becoming an RIA firm. As you make the decision about an office space
that fits your business’ requirements, be aware of the long-term commitment and cash requirements.
In your evaluation of an office space, make sure it meets realistic financial considerations and offers
some degree of flexibility. Finally, be certain that the office space you select is one where you can
envision yourself working and meeting your clients.
22 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Human Capital
One of the most important tasks in transitioning to running your own advisory
business is determining how to staff your firm. Most wirehouse advisors are
supported by one or two sales assistants and rely on the branch office for a
range of resources, such as compliance, marketing materials and support,
investment research, and technology software and systems. The ability to
tailor your in-house capabilities is one of the attractions of owning your own
firm, but it can also seem daunting to create and implement an effective
foundation for business.
As the illustration on the following page shows,
the branch office and wirehouse firm create
an infrastructure that provides operational,
technological, and compliance systems. Most
wirehouses also partially cover the salaries and
benefits of the sales assistants utilized by the
advisors, and (as with all resources supplied by the
wirehouse and branch office) certain production
and tenure criteria must be met before you receive
another sales assistant. The wirehouse recruits
and hires the sales assistants and other support
professionals and may assign them to you,
allowing you little input into the hiring process.
When you start your own firm, you face the
challenge of establishing processes for hiring people.
You also gain the opportunity to design your own
staffing model to fit the needs of your business.
Depending on your business model, your firm will
require a unique combination of staff.
Things to Consider
> Staffing
Define the goals for the office
and identify your firm’s client
service model.
Define the technical needs
and cultural values of your
RIA firm.
Define the job positions, with
roles and responsibilities for
each position.
Develop a budget and timeline
for making your decisions and
prioritize key hires.
Create any employment contracts,
such as noncompete agreements,
and have an attorney review the
documents, if necessary.
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Figure 1. Traditional Wirehouse Staffing
Broker
Junior Broker
Sales
Assistant
Branch Office
Wirehouse Firm
Provides
compliance,
office space
and equipment,
administrative and
support staff
Provides
commission
processing, client
account custody,
investment
research,
technology systems
and support,
general compliance,
training and
development
Sales
Assistant
There are typically three categories of staff in an RIA firm:
> Professionals design and deliver the client experience
> Support staff focus on tasks and assignments generated from the client-service-offering
> Administrative staff handle the daily functions of the office
Professionals are advisors such as yourself, or junior advisors who are responsible for developing,
designing, and communicating financial strategies for the clients of the practice. If you plan to have
multiple partners in your new RIA firm, these partners will also be considered professionals if they
play any role in the delivery of advice to your clients. These professionals would also be responsible
for meeting revenue expectations and should be knowledgeable regarding the practice’s current
client base, as well as prospects. Also, if formerly employed at a wirehouse, these advisors and junior
advisors may have attained the necessary FINRA licences, such as their Series 7 and 65.
24 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Support staff may include sales assistants, technical analysts, and dedicated traders for the group.
These staff members may or may not participate in face-to-face client meetings, but they implement
specific components of the client’s financial strategy. Staff members within this group ensure the
timely and accurate processing of the client’s transactions. To the extent necessary, a support staff
member will also coordinate the compliance, operations, cashiering, and trading functions to make
sure that these transactions are settled in a timely and appropriate manner. A receptionist, personal
administrative assistant, or mailroom clerk represent types of staff within the administrative group.
This group performs secretarial and clerical duties, such as screening and routing telephone calls,
scheduling appointments, and managing correspondence.
Selecting the Right Staffing Structure for Your RIA Firm
How complex should your staffing structure be? What positions do you need, and how many
individuals will occupy these positions? To a large degree, the answers to those questions again
depend on the service model you adopt for your firm. It also matters if your RIA firm has multiple
owners or if you are the sole owner. As you consider the possible combinations of professional,
support, and administrative staff for your RIA firm, it is helpful to answer the following questions:
1) How many clients will your firm have? What is your desired client-to-staff ratio?
2) What kind of client service experience will you offer? Are you planning on being a high-touch
firm, with clients coming to the office for meetings? Do your clients prefer fewer meetings,
some of which can be done remotely via conference calls or videoconferencing?
3) What functions of your current role do you enjoy and want to do more of? What aspects would
you like to delegate to others?
4) Do you enjoy working independently, or would you rather work in a team-oriented environment?
5) What would be the essential functions at your firm? What would be complementary but
not strictly necessary?
6) What are the values and culture you want for your own firm?
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With the management and financial responsibility of hiring all levels of staff, as well as
compensating them by means of salary, bonus, and benefits, you face the choice of starting
with a lean organizational structure to minimize expenses, or investing in a larger staff to
ensure a consistent client service experience and prepare for future growth.
The illustration on the following page offers a simple, standard staffing structure, depending on
which of the four business models you choose for your RIA firm. The differences between the
models depend on the type of technical support you require. For example, a financial planning firm
typically requires a support advisor to assist in the compilation, preparation, and implementation
of financial plans, while an investment management firm would need technical support around
company or third-party manager due diligence, as well as a trader to execute the transactions.
26 AN Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Figure 2. Staffing Your Firm
Investment
Advisory Firm
Investment
Management Firm
Financial
Planning Firm
Lead Advisor/ Lead Financial Professional
Lead Advisor
Staff
Portfolio Manager
Planner
Support
Portfolio
Staff
Administrator
dministrative A
Staff
Administrative Assistant
Research Analyst
Support Advisor
Trader/Portfolio
Administrator
Client Service
Administrator
Administrative Assistant
Administrative Assistant
Wealth
Management Firm
Lead Advisor Junior Advisor
Research Analyst Administrative
Assistant
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Estimating the Cost of Your Firm’s Staffing Structure
There are a number of affiliated costs that accompany each staff position, beyond the cost of
compensation and benefits. In this section, we examine each of the costs separately.
Compensation Costs
Calculating the financial expense of compensation is fairly straightforward. Cash compensation
includes an individual’s salary and bonus. As an owner, you will be compensated for your role as
an experienced advisor; use the table below to establish a general compensation range. If you will
also serve as the CEO or President of the firm, compensate yourself for that responsibility as well.
In addition, you will receive ownership distributions generated by your firm’s profits—significantly
enhancing your total personal income. The chart below offers general compensation ranges for non
owner professional staff, support staff, and administrative staff. You may need to make adjustments
in the salary ranges due to your geographic location and cost of living.
Table 10. General Compensation Ranges for Your Staff
Salary Range
Bonus Range
$60,000 – $80,000
$12,000 – $15,000
Support advisor
$45,000 – $55,000
$5,000 – $8,000
Client service administrator
$30,000 – $40,000
$2,000 – $4,000
Professional Staff
Experienced advisor Junior advisor
Support Staff
Research analyst Portfolio administrator Trader
Administrative Staff
$45,000 – $55,000
$40,000 – $50,000
$35,000 – $40,000
$35,000 – $45,000
$5,000 – $10,000
$3,000 – $7,000
$2,500 – $5,000
$2,000 – $5,000
Office manager
$35,000 – $45,000
$2,000 – $4,000
Receptionist
$20,000 – $26,000
$500 – $1,500
Administrative assistant
28 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
$22,000 – $28,000
$1,000 – $2,000
According to SEC rules, every RIA firm must have a designated Chief Compliance Officer (CCO).
As you set up your firm, you may be the designated CCO. If, however, your firm will start as a
more complex organization with a large number of clients and a diversified client service offering,
you may need to have another advisor assume these responsibilities, or hire an individual to work
exclusively as the CCO. The CCO ensures the safety of client data, enforces adherence to federal,
state, and self-regulatory organization securities regulations, and creates and supervises the firm’s
code of ethics, policies, and procedures. While many companies sell compliance packages to assist
you with developing and implementing a compliance system at your own firm, it is important to
note that this does not eliminate the need for a chief compliance officer. Please refer to the chapter
on Legal Considerations within this guidebook for further discussion of this topic.
Retirement or 401(k) Benefits
Increasingly, a 401(k) plan is becoming a standard part of the compensation and benefits package.
A 401(k) is a valuable option for firms considering a retirement plan, providing benefits to both
staff and owners. When you consider establishing a 401(k) benefits plan, consider these preliminary
determinations:
1) Should you self-manage or outsource? Your firm can establish its own 401(k) plan with
administrative procedures, guidelines, and access to funds, or you can outsource to a
third-party institution like a mutual fund firm, bank, or insurance company.
2) What kind of plan should you select? The three types of 401(k) plans are traditional, safe
harbor, and SIMPLE. Many small businesses select the SIMPLE 401(k) plan, which applies
to firms with fewer than 100 employees. Research the tax advantages and employer duties
associated with each type of plan, and then adopt the written plan.
3) Who will be the plan trustee? You must arrange the trust fund for the plan’s assets. Because
the financial integrity of the plan and its assets are paramount, selecting the right plan trustee
is critical. If you choose to use an insurance company for your plan administrator, typically you
will not require a trustee.
4) How do you develop a record-keeping system? A third-party administrator usually handles
the accounting and record-keeping of the plan assets. Remember that the financial record is a
key part of the annual report that must be filed with the federal government.
5) How do you roll out the plan to employees? Most plans have a summary plan description
(SPD), which educates the participants and beneficiaries regarding the characteristics
and mechanics of the plan. The SPD is part of the plan document distributed to all
participating employees.
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6) Should you offer any additional perks, like an employer contribution to the 401(k)?
This is very much an individual business decision, resting on both your willingness and
financial capacity to make the 401(k) contributions. In your firm’s start-up phase, it may not
be financially feasible to promise employer contributions. From a management perspective, it is
easier to enhance a plan at a later date when the business can clearly afford it than to revoke a
plan contribution in light of a tight financial situation.
Equipment Costs
Each person who joins your firm will need a place to sit, a computer workstation, and a telephone
and Internet connection, among other things. As you plan your staffing structure, identify the
infrastructure components required by each position.
Table 11. Estimated Equipment Needs and Costs for Your Firm
Type of Equipment
Cost
Professional Staff
Experienced Junior Office, premium executive desk, executive chair, standard chair (2), computer workstation, telephone
and Internet connection, bookshelf
Executive desk, executive chair, standard chair (2), computer workstation, telephone and Internet
connection, bookshelf
$3,500 - $4,000
Desk, computer workstation, telephone, Internet connection, bookshelf
$1,800 - $2,300
Client service administrator Desk, computer workstation, telephone, Internet connection $1,800 - $2,300
Portfolio administrator Desk, computer workstation, telephone, Internet connection
$1,800 - $2,300
Trader
Desk, computer workstation, telephone, Internet connection
$1,800 - $2,300
Office manager
Desk, computer workstation, telephone, Internet connection
$1,800 - $2,300
Administrative assistant
Desk, computer workstation, telephone, Internet connection
$1,800 - $2,300
Receptionist
Desk, computer workstation, telephone, Internet connection
$1,800 - $2,300
$2,500 - $3,500
Support Staff
Research analyst Administrative Staff
30 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICEV
Management and Training Costs
An often overlooked but integral “cost” of hiring staff is the time you or other members of your firm
spend training new staff in your client service approach, processes, and systems. This training and
development time is an upfront investment as you build an RIA firm that will ultimately be able
to handle greater numbers of clients.
Table 12. Estimated Training and Development Costs for Your Staff
Management Time
Typical Continuing
Education and Development
Professional Staff
Experienced
Minimal initial supervision and training to learn client service offerings and protocols
Series 7, 65 or 66, CFP, CFA,
or other professional
designation
Junior
Ongoing supervision and training Series 7, 65 or 66, CFP, CFA,
or other professional
designation
Support Staff
Support advisor
Upfront orientation, with ongoing training
CFP
Research analyst Significant upfront orientation, then ongoing training
Series 7, 63, CFA, or CFP
Client service administrator
Significant upfront orientation, then ongoing training
Series 7, 24, 63
Portfolio administrator
Significant upfront orientation on portfolio systems, then minimal ongoing training
Series 7, 24, 63
Trader
Significant upfront orientation on trading systems and procedures, then minimal
ongoing training
Series 7, 24, 55
Office manager
Significant upfront orientation
n/a
Administrative assistant
Basic training on firm systems and procedures
n/a
Receptionist
Basic training on firm’s phone answering, scheduling protocols
n/a
Administrative Staff
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The Critical Factor: Firm Culture and Values
Your organizational and staffing plans should incorporate the firm’s culture and values. Indeed, one
of the most compelling reasons for setting up your own RIA firm is the opportunity to define its
identity. Every individual in your firm will impact your ability to adhere to those values.
Your firm’s culture and values include a respect for client relationships and an adherence to
standards of professional excellence. Also consider the following:
> What kind of behavior do you expect from your staff?
> What are the performance expectations for the staff?
> What kind of professional environment do you want to foster?
> What are the critical elements of the firm’s success and how can you articulate them in the
cultural value statement of the firm?
Each candidate for a position at your firm should be gauged against your firm’s value statement.
Look beyond the list of technical accomplishments on a resume and delve into how that person
will fit in at your firm.
Conclusion
Your firm’s staff represents one of the most significant investments you can make in the future
success of your firm. Selecting the right “fit” in terms of experience, technical skill, personality,
and alignment with culture will enable your firm to consistently deliver its services to an evergrowing number of clients while allowing you the opportunity to realize the economic and
personal fulfillment of a leveraged and productive organization.
32 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Recruitment
To start your RIA firm, you will need talented staff. You may not need to recruit
publicly if you bring over your sales assistant and junior advisor from the
wirehouse. However many new advisors need to reach out to attract new talent.
Follow these general guidelines to create an effective recruiting program.
> Be specific.
Describe the position in terms of the role and
its responsibilities. An effective job description
will list the major tasks required, as well
as define what kind of behavior you seek
from the candidate. If you would like your
firm to be collaborative and foster a teamoriented environment, explicitly mention that
in the advertisement. Provide educational
requirements, as well as any advanced degrees,
professional certifications, years of experience,
or certifications and designations desired for
the position.
Things to Consider
> Recruiting
Identify the specific positions you
need to recruit for.
Develop a budget and timeline
for making your decisions, and
prioritize key hires for your firm.
Create the job advertisement and
identify resources for publicizing
the position.
Create any employment contracts,
such as non-compete agreements.
> Differentiate your firm.
To attract the best candidates for the position,
Begin interviewing candidates.
differentiate your firm. Are there unique
aspects to the way you work with clients?
Does your firm value continuing education? Would you like to have individuals with a
strong community-service orientation? Would you like to have individuals that work well
with institutional clients? A description that enumerates these characteristics of your firm
will more than likely generate resumes that more closely match your needs, streamlining
the hiring process.
> Provide general compensation ranges and benefits.
Establishing a competitive compensation range, based on what your firm can afford, will attract
suitable candidates for the position. Publishing a general compensation range creates another
filter to screen the applicants. If a compensation range may dissuade some candidates from
applying, be judicious about including it. You may choose to advertise the compensation ranges
of some positions, such as administrative staff, but not others.
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> Examine behaviors, as well as the resume.
As a small business, each new person introduced into your firm will have a dramatic impact
on how your firm culture evolves. Once you have narrowed down your pool of candidates,
consider administering a personality profile to determine if the manner in which they work
aligns with how you envision your firm working. Commonly used profiles include Profile XT,
Myers-Briggs®, or Kolbe personality exams. Being proactive in the beginning can help you
avoid potential staffing challenges in the future.
> Keep it Legal.
When recruiting and hiring employees, remember that Federal and state anti-discrimination
laws are applicable to virtually every employer. Statements made in advertising or questions
asked during an interview that could be construed as discriminatory should be avoided.
The U.S. Equal Employment Opportunity Website (www.eeoc.gov) has information pertaining to
equal employment opportunity laws and the implications these statutes may have on your firm. In
addition, the U.S. Department of Labor website (www.dol.gov) contains a wealth of information
for new businesses, which often need assistance identifying and understanding the specific laws and
regulations that apply to them. On the site, you can find the introductory information you need to
develop wage, benefit, safety and health, and nondiscrimination policies for your RIA firm. As always,
seek the advice of cousel if you are uncertain whether your hiring practices are compliant with the law.
Advertisements or Job Postings
Choosing the right location for an advertisement can help you find the right candidate. You can
also select different strategies for filling different positions within your firm. For an experienced
professional, you may want to advertise on industry web sites and with professional organizations. For
an entry-level position, you may choose to place recruiting ads with colleges and alumni networks.
Common recruiting resources include industry publications and web sites. Geared to the financial
advisory community at large, many of these publications are tailored to the various business and service
models, such as investment management and financial planning. Examples of web sites include:
Web Sites
> FinancialPlanning.com
> Investmentnews.com
> Jobsinthemoney.com
> Local media
34 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Magazines
> Investment Advisor
> InvestmentNews
> Financial Planning
> Wealth Manager
Educational Institutions
Resources at colleges and universities tend to be best suited for entry-level positions. Typically,
the career services offices at the institution will place you in contact with the finance, accounting,
or financial planning programs in order to target the students with the appropriate academic
background.
> Office of career services
> Job fairs
> Alumni networks
Professional Organizations
These organizations offer a wealth of resources for individuals and businesses within the financial
advisory industry. The parent organizations have national membership bases, and regional or
local chapters, which can provide in-depth resources and access to qualified job candidates. These
organizations also host web sites with job posting and search capabilities. There may be a fee charged
for nonmembers to post job positions.
> FPA Job Board – http://careers.fpanet.org/
> CFA Institute – http://www.cfainstitute.org/memresources/career/index.html
> NAPFA Career Corner – http://www.napfa.org/career/index.asp
Local Media
Your local business journal or newspaper is another venue for finding talent. Well-recognized job
search engines may garner wider publicity for your positions as well.
> Newspapers
> Business journal
> Metropolitan newspapers
Online Job Search Engines
> monster.com
> careerbuilder.com
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Rules of Thumb
The staffing structure is the unique DNA of an RIA firm. The distinctive combination of positions
within the firm, and the individuals who fill those positions, create the foundation for the client
experience and the future growth of the firm. When you consider how to staff your firm, some
general rules apply.
> Think about your business model. First, define who your clients are and what your client
product and service offerings will be. In many ways, this determines how you can allocate your
financial resources to staff your organization. If you create customized investment portfolios for
your clients, then you will likely require a research analyst and a portfolio administrator. On the
other hand, if you are a financial planning firm, you may want to employ a junior professional
who will generate the client financial plans and assist you in building the client presentations.
> Use AUM or revenue category to determine staffing needs. Assets under management and
revenue size are two indicators that can assist you in determining your staffing structure. If your
firm has $500,000 to $750,000 in revenue, you may not need a junior professional. If your
firm generates $1,000,000 to $1,500,000 in revenue, you may need an additional experienced
professional to share the client relationship load, as well as a client service administrator to
ensure consistency and timeliness of client follow-up and communication.
> Calculate capacity. While you naturally expect to work long hours in the early stages of setting
up your RIA firm, you will need to manage your workload in the long-term. Use tracking
metrics (such as the number of client relationships per position) to determine a reasonable
and effective division of labor. For example, if your firm has 140 client relationships and two
professional advisors including yourself, the advisor capacity would be 70 client relationships.
Conclusion
As you look to add individuals to your firm, the chemistry and behavior of an individual are
just as important as his or her certifications and experience. With this in mind, rushing through
the recruiting process to simply get one more person sitting at a computer may have short-term
benefits, but has the potential to become significantly disruptive and disappointing over the long
term. Recruiting for many positions—particularly those that are primarily advisory or client service
oriented—can take between two and five months. Patience is one of the critical elements for a
successful recruiting strategy.
36 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Protecting Your RIA Firm: Risk Management
Starting your own RIA firm means that you are in total control of your
business. That sounds empowering, exciting, and rewarding—and it is;
however, “total control” includes managing the risk of your business.
Business Insurance Plans
As a financial advisor, you know that every client
interaction is accompanied by both a risk and a
reward. Just as you explain the risk and reward
relationship of an investment to your clients,
the risk of opening a business merits as much
consideration as the potential reward. As the owner
of an RIA firm, you have to plan effectively for your
assumption of business risk as much as you plan
for your future enjoyment of the business reward.
Before beginning any client work in your RIA firm,
it is necessary to address all of the business insurance
requirements that hedge your business risk.
Things to Consider >
Risk Management
Document the different kinds
of insurance you will require for
the business and for yourself
personally.
Develop a budget and timeline
for making your decisions.
Consult with insurance companies
and other third-party resources.
Align insurance coverage
activation with RIA firm
formation.
The essential insurance coverage is Errors &
Omissions (E&O) insurance, used by nearly every
RIA firm. Some RIA firms have chosen to add
additional insurance protections as they have grown
and specific risks have emerged. For most,
if not all RIA firms in the start-up phase, E&O insurance covers their risk exposure in the first
years of business. Additional insurance programs are available for advisors to consider as their firms
continue to grow and develop.
> Professional liability insurance. Commonly referred to as E&O insurance, this type of
insurance plan protects your firm and your personal assets against legal liability resulting from
any errors and omissions relating to your client service deliverable or process.
> Commercial property and liability insurance. Obtained through a commercial insurance
agent or firm, this insurance is also known as P&C (property and casualty). This coverage
offers protection against most risks to property, such as fire, theft, and some weather damage.
P&C includes specialized forms of insurance such as fire insurance, flood insurance, earthquake
insurance, home insurance, or boiler insurance. A casualty insurance policy covers losses that
are directly caused by unforeseen events, such as natural disasters like hurricanes.
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> Fidelity bonds. This type of insurance works to protect the firm from employee-dishonesty
losses. It covers those losses incurred as a result of fraudulent activity by a firm’s employees.
> Employment practices liability. This insurance coverage is designed to protect the firm, and
you as the owner, from charges such as discrimination in hiring, wrongful termination, and
other workplace liabilities.
> Directors and officers liability insurance. As the officer or director of your firm, you will
want to protect yourself and other firm directors and officers from liability. This type of
insurance provides indemnification from claims brought against the firm’s officers and directors
for breach of fiduciary duty.
Depending on what kind of clients you work with, you may require additional types of specific
insurance. For example, if you plan on working with ERISA plans, it is typically required to hold
ERISA bonds. Individual states may also mandate surety bonds or a surety affidavit, which is
designed to address the net capital/net worth minimums in each state.
Employee Medical Coverage and Insurance Plans
While the previous categories of insurance cover you and your business, you may want to offer
separate types of insurance to your employees. One of the most comprehensive resources for health
insurance information is your local chamber of commerce. The following types of insurance are
usually offered as part of a comprehensive benefits package.
1. Health insurance. This term refers to a range of insurance policies, from those that cover
the costs of doctors and hospitals to those that meet a specific need, such as dental and vision
coverage. To find out more information about the different types of insurance, visit your local
chamber of commerce, which can guide you through different options.
2. Group life insurance. Some firms also purchase group life insurance as a benefit to extend to
prospective employees. A rule-of-thumb estimate for the amount of coverage is life insurance
equal to the employee’s annual salary. The firm usually pays for the premiums, or an insurance
company may mandate a certain percentage of employees to participate in the plan. A group
life insurance plan may be enhanced through additional coverage of items, such as travel
protection or coverage for dependents and families, with the cost charged to the employee.
This is typically used at RIA firms with a more complex organizational structure, and is not
usually seen in RIA firms in their start-up phase.
Conclusion
Managing your firm’s business risk is just as important as creating and implementing a strategy
for its growth. The numerous considerations regarding liability and insurance may seem
overwhelming but there are a number of resources, from your commercial insurance agent to
your attorney or banker, who can help you perform the research necessary to make informed
decisions regarding these matters.
38 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Legal Considerations to Establishing Your RIA Firm
This section addresses the legal considerations of leaving your wirehouse
firm, transitioning, and ultimately setting up your own RIA firm. It is intended
to serve only as a reference as you begin planning your departure from
the wirehouse. It is imperative to consult with an attorney to review your
individual situation.
Defining “Investment Advisor”
The Investment Advisers Act of 1940 (the “Act”) is the primary body of law affecting investment
advisors. Various state and federal regulatory agencies (collectively, “regulators”) are charged with
implementing rules and regulations governing the actions of investment advisors. According to the
Act, an investment advisor is:
“...any person who, for compensation, engages in the business of advising others, either
directly or through publications or writings, as to the value of securities or as to the
advisability of investing in, purchasing, or selling securities or who, for compensation and as
part of a regular business, issues or promulgates analyses or reports concerning securities.5”
Certain groups of individuals or professions are exempt or excluded from the definition of an
investment advisor, including attorneys, accountants, engineers, and teachers. The definition of an
investment advisor excludes these professions if their investment advice is incidental to their other
practices under most circumstances. There are also other exemptions from registration, including
banks, certain broker-dealers and registered representatives, bona-fide publishers, advisors limited
to U.S. government securities, and government entities, among others.
The broker-dealer exemption, last revised in April 2005, allows broker-dealers to provide
investment advice to clients as long as: (1) the broker-dealer does not exercise investment discretion
over the account from which it receives special compensations; (2) any investment advice is solely
incidental to the brokerage services provided to the account; and (3) the broker-dealer discloses
to its customers that their accounts are brokerage accounts. The broker-dealer exemption allows
a registered representative to give advice incidental to brokerage services. If you decide to provide
investment advice as a larger (or sole) part of your business, you will be required to register as an
investment advisor.
This guidebook focuses on the employment track, but you should also become aware of the related
regulatory and corporate aspects of going independent.
15 U.S.C. § 80b-1 (11)
5
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Issue 1: Developing an Exit Strategy
Many registered representatives, financial advisors, and investment advisor representatives signed
agreements with their employers at some point during their employment. These restrictive
covenants may have been contained within such documents as your original employment contract,
a subsequent employment contract, or a promissory note. Each employment contract may contain
provisions unique to the individual employee, so be wary of basing your prospective transition on
another advisor’s strategy or experience, and be sure to consider your own needs, goals, objectives,
and resources.
Restrictive Covenants
First, determine whether you are subject to any restrictive covenants. A restrictive covenant is a
provision in a contract that prevents a party from undertaking a certain action. In the context of
employment law, specifically in the financial services industry, restrictive covenants generally include
nonsolicitation, noncompetition, and confidentiality restrictions.
The most common in this context, nonsolicitation provisions, generally prevent an exiting employee
from soliciting or contacting clients or customers that he or she serviced or learned of while an
employee of his or her current employer. This restriction is designed to prevent an advisor from
contacting his clients for the purpose of transitioning them to another firm. Nonsolicitation
provisions vary widely in scope and time, as well as from contract to contract. For example, some
nonsolicitation provisions only last for 30 days, while others may apply for years. Nonsolicitation
provisions also differ in terms of their breadth, with some applying to all customers or clients that
an advisor serviced while an employee, and others may provide an exception for clients that the
financial advisor exclusively serviced.
Another type of restrictive covenant, noncompetition provisions, intends to prevent an advisor from
competing with his or her former employer. As with nonsolicitation provisions, the scope and breadth
of noncompete clauses vary greatly. Some noncompetition provisions apply only for a short period of
time while others extend much longer, and for others geographical restrictions will also vary.
Courts have taken an increasingly critical view against restrictive covenants, especially noncompetes,
in favor of employees looking to leave their firms. Consult with legal counsel on the position that
courts in your state have taken on such restrictive covenants. Legal counsel can help you devise and
implement a sound exit strategy.
40 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Confidentiality Provisions
Many employment agreements contain a confidentiality clause preventing an employee from
disclosing confidential client information, including customer names, addresses, phone numbers,
account numbers, Social Security Numbers, statements, holdings and other financial data, customer
lists, and prospect lists. If you are subject to such a provision, you are contractually prohibited from
retaining this information after termination. These types of provisions also restrict financial advisors
from disclosing such confidential information to a third party (such as a custodian) during the
course of his or her employment.
As part of your exit strategy, you need to determine what information will be deemed confidential
and what information may be considered public so that it can then be disclosed to the custodian.
Generally speaking, public information consists of generic information available through public
sources, such as names, addresses, and perhaps telephone numbers. It would then remain your
client’s discretion whether to provide you with additional information, such as Social Security
Numbers and account information.
Even if you are not subject to a contractual confidentiality provision, state and federal privacy laws
still apply. The Gramm-Leach-Bliley Act (“GLB”), passed in 1999, protects consumers’ personal
financial information held by financial institutions. GLB consists of three main parts, the most
relevant being the “Safeguards Rule,” which requires all financial institutions to design, implement,
and maintain safeguards protecting customer information. Moreover, GLB prohibits financial
institutions from sharing an individual’s confidential information with nonaffiliated third parties
unless the individual: (1) is aware that this information may be shared with nonaffiliated third
parties; (2) has the opportunity to instruct the financial institution not to share the information;
and (3) fails to instruct the financial institution to keep the information confidential (does not
“opt out” of disclosure to third parties). Another regulation, Regulation S-P, requires SEC registered
investment advisors, broker-dealers, and investment companies to adopt appropriate policies and
procedures that address safeguards to protect confidential information.
Training Agreements
Many new registered representatives and financial advisors enter into training agreements with their
employer. These training agreements provide that—in exchange for employment and training—the
registered representative or financial advisor agrees to repay the firm for training costs should he or
she resign within a set period of time (generally two to five years). Most training agreements contain
a repayment provision, the repayment obligations vary widely. Usually, the advisor’s repayment
obligation is decreased by a certain percentage for each month of employment until the balance has
been forgiven. In other circumstances, the advisor will owe the entire cost of the training until the
entire specified period has concluded. If you believe you may still owe training costs, you should consult
with legal counsel to determine the legal and financial ramifications of your resignation in advance as
this may affect your transition timeline.
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Promissory Notes
Many registered representatives and other financial personnel are enticed to join a new firm
with the prospect of a big signing bonus or “upfront money.” Often, the “bonus” is, in fact, a
forgivable loan with significant repayment obligations in certain circumstances. Other individuals
sometimes receive loans from their existing employer. In both of these circumstances, the registered
representative or financial advisor must invariably sign a promissory note, often containing onerous
repayment terms and other restrictions. The promissory note is binding legal evidence of a debt
and serves as the lender’s security to collect any outstanding amounts if entitled to do so. In the
financial industry, promissory notes come in all shapes and sizes, with significant legal and financial
ramifications. Almost universally, the holder of the promissory note (your employer) will seek to
recover the balance of your loan when you terminate employment. It is imperative to seek legal
counsel regarding issues surrounding the note prior to your resignation.
Industry Rules
Several industry rules are designed to restrict your ability to conduct business outside the scope
of your current employment. For example, FINRA rules prohibit a registered representative from
engaging in an outside business activity without prior notice to his or her firm, including the sale
of both securities and nonsecurities products. Similarly, a registered representative must provide a
detailed written notice to his broker-dealer before participating in any private securities transaction.
A private securities transaction is defined as any securities transaction outside the regular course
or scope of a registered representative’s employment. Should you choose to engage in an outside
business activity, you are required to report the same on your Form U-4.
In addition to FINRA rules, common law imposes a duty on you to act with good faith toward
your employer. Even if you plan on resigning and accepting employment with a competitor,
common law dictates that you continue to fulfill all of your work obligations until the
moment of resignation.
Assessing Potential Legal Action
When a broker or advisor resigns, the former firm may seek court intervention to enforce any
confidentiality, nonsolicitation and noncompetition provisions in your agreements, among other
things. If this happens, your former employer would have to make a formal application for a
court order, likely a temporary restraining order (“TRO”), without notice either to you or to
your attorney. The firm’s purpose in seeking a TRO is to maintain the status quo pending a
determination of the matter on its merits.
42 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Whether or not a TRO is issued against you (it is unusual, but not unheard of for a court to issue
a TRO in cases such as these), the court almost always orders a full injunction hearing with all of
the parties present, usually within 24 to 72 hours of the filing of the application. It is important to
understand that neither a preliminary injunction or TRO entitles your former employer to monetary
damages, nor are any legal issues definitively decided. Issues of ultimate liability and damages would
be decided many months later at the end of an arbitration proceeding that your former firm would
be required to file against you. A strategy for defending against a TRO or injunction should be
worked out with legal counsel in advance of your resignation.
Consultation
Now that you are aware of some of the regulatory pitfalls and employment considerations that you
face, it is highly recommended that you consult with legal counsel regarding the best exit strategy.
Together you will determine your intended resignation date and use this to create an exit timeline.
An advisor who hopes to resign within a month or two will implement a different strategy than one
who is planning the transition six months to a year in advance.
Investigate any restrictive covenants in formulating your exit strategy. An advisor free from restrictive
covenants may openly plan his resignation, while an advisor employed at a large wirehouse known
for being aggressive in going after exiting advisors may have to take a more covert approach. Be
aware that confidentiality concerns and industry rules prevail regardless of the presence of restrictive
covenants. You must ensure that you and any business associates maintain a high level of discretion
throughout the transition process. Some advisors want to minimize their chances of litigation, while
others are more concerned with bringing clients over to the new RIA firm. While working on your
strategy, determine how aggressive you want to be in pursuing your clients and what level of risk
you are willing to assume. As part of this risk assessment, also consider your financial resources.
Defending an arbitration or litigation can be time-consuming and costly; be prepared to have the
resources in place to address your rights. Other advisors who have left your employer may have
insights into what action the firm may take. Consult with an attorney who has experience in this
area of the law and knows the general reputation of your employer to guide your strategy.
Throughout this employment exit process, common mistakes made by advisors usually result from a
lack of discretion, such as forming an entity using your name, registering a domain name for a firm
that clearly identifies you (such as John Smith Capital Management, LLC), and word of mouth.
The fewer people who know about your intended business plans means the fewer people who might
accidentally inform your current employer of your intention to leave.
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Issue 2: Regulatory Considerations
Registration
Once you have an exit strategy in place, you can begin focusing on the regulatory aspect of
your transition. In order to register a firm as an investment advisor, you must file Form ADV,
the cornerstone of investment advisor regulation. Based on your anticipated assets under
management, you may need to file for registration with either individual states or the SEC.
Form ADV consists of two parts: Part 1, a publicly available document, explains the advisor’s
business practice. It is used primarily for administrative purposes. Part II, primarily for client
disclosure, includes a description of the advisor’s scope of services, fees, and conflicts of interest,
among other information. Form ADV Part II is furnished to each prospective client and must be
offered to existing clients yearly. A well-constructed and accurate Form ADV Part II protects an
advisor from liability. Simply using another advisor’s Form ADV, either Part I or II, raises potential
regulatory and client liability issues.
As a new advisor, you need to determine where to register. If you anticipate having less than $25
million in assets under management, you should register at the state level. This means that you will
be required to register in states where you have clients. Each state has a different de minimis, some
states allow you to have up to a certain number of clients in the state before you are required to
register in that state. If you anticipate having in excess of $25 million in assets under management,
you should register at the SEC level. SEC registration is mandatory once an adviser has $30
million in assets under management; between $25 million and $30 million the advisor has the
option to register at either the state or SEC level. As a new advisor, you will not have any assets
under management when you file for registration. If you anticipate having at least $25 million in
assets under management within 120 days of your firm’s being approved, you qualify at the SEC
level under a specific exemption. Should you not acquire the required $25 million in assets under
management within 120 days of your firm’s RIA approval, you will be required to withdraw from
SEC registration and register at the state level. This rule should be taken into account when devising
your exit timeline. You should also consult with an experienced professional to determine what
constitutes assets under management.
In addition to firm registration, each person who will act as an investment advisor representative of
the firm must file a Form U-4. There may be filing requirements for other individuals within the
firm depending on the jurisdiction.
44 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Conflicts of Interest
Conflict of interest issues have always been a centerpiece of investment advisor regulation and
remain one of the most challenging issues in regulatory compliance. In general terms, a conflict
of interest can be described as an activity or relationship involving an investment advisor or its
employees that favors or has the potential of favoring the interests of the investment advisor, its
employees or affiliates, over the interests of the investment advisor’s clients or some other person
to whom the investment advisor owes a fiduciary duty. When structuring your business, beware of
those business practices that have the potential to sacrifice the interests of one set of customers in
favor of the interests of another. While certain conflicts can be overcome by proper disclosure, other
conflicts are considered too fundamental to be waived; you must refrain from these types
of transactions. Experienced counsel can help in identifying conflicts of interest and drafting
effective disclosure.
Development of Policies and Procedures
All investment advisors, regardless of whether they register at the state or SEC level, are required to
adopt and implement policies and procedures. SEC registered advisors must adopt and implement
a written compliance program, review the program annually for adequacy and effectiveness, and
designate a chief compliance officer to administer the program. The policies and procedures for
a registered investment advisor need only encompass compliance considerations relevant to the
operations of that particular advisor, as the rule requires that such policies be “reasonably” designed
to prevent violations of the Advisers Act. The rule does not specify topics and practices that should
be covered by the compliance program, but states that it should be designed to prevent violations
of securities laws and include provisions for detection and remedial measures should such violations
occur. While the rules for state advisors vary from state to state, most states require an advisor to
implement policies and procedures in some form.
Marketing Materials
As part of your new business, you will likely want to develop and distribute marketing materials,
possibly in the form of brochures, advertisements, or a web site. The Advertisers Act includes
strict rules relating to the use of advertising by investment advisors and violation of the advertising
rules remains one of the primary focuses of investment advisor liability. For example, the use of
testimonials by investment advisors for advertising purposes is strictly prohibited. Consult with legal
counsel to make sure that your proposed advertising materials are consistent with the Act.
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Issue 3: Corporate Considerations
The third area that you must keep in mind when establishing your firm is the corporate process.
In order to secure limited liability protection, your business activities must be conducted through
an entity such as a corporation or limited liability company. While entity formation issues may be
researched on the Internet, you should be wary of web sites that purport to advise you on where
and how to register or incorporate. There are many important issues to consider in deciding which
corporate form is best for your business, including tax and legal liability. Consult your attorney to
discuss the best approach to your situation.
Entity Formation
What type of entity best suits your firm? There are many to choose from: sole proprietorships,
partnerships, limited liability companies, and corporations are most prevalent. Each of these
types of entities has both benefits and drawbacks. For instance, corporations shield the owners
(known as stockholders) from personal liability (barring certain circumstances), but may result in
double taxation. Partnerships have only one level of tax, but do not provide the same protection
from personal liability. Limited liability companies offer the individual liability protection of a
corporation and the tax benefits of a partnership, but have other drawbacks for members in
terms of flexibility. The proper entity structure for you depends on the type of business you are
conducting, the state in which you conduct business, and how many owners of the firm you
have. Depending upon the structure of the company, you may need an operating agreement,
shareholder agreement, partnership agreement, or other agreements authorizing commencement
of business operations, issuance of ownership interests, designation of economic and voting rights,
and delegation of management responsibilities among the owners.
Where is the best location to form the entity? Different states have different regulations. Many
people know Delaware as the “corporation-friendly” state, for example, but forming in Delaware
may result in additional costs if you conduct business in other states. Be aware that you also may
be required to pay filings or registration fees to more than one state and have an agent for service
of process in both states.
Weigh these decisions carefully and consult with professional legal and tax advisors to discuss the
various legal and tax consequences of the different types of entities available.
46 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Legal Agreements
Client agreements. Just as the Form ADV provides adequate regulatory disclosures to clients and
regulators, the proper legal agreements are needed to reflect the relationship between the parties.
The agreement between you and your client forms the legal basis of the entire relationship, where
all rights and responsibilities originate. Well-drafted legal agreements do not just protect you, they
also protect clients by specifically enumerating the services they should expect. Using template
agreements represents a significant risk for new advisors because they are not created specifically
for the needs of a particular advisor. It is even riskier to utilize another investment advisor’s
agreements which may not reflect your proposed business needs and interests. An advisor’s
agreement contains certain mandatory provisions and restrict other provisions. Significant
experience in the business and legal issues facing the industry is needed to create these industryspecific and integral documents for your RIA firm.
Personnel agreements. It is important for advisors to properly set forth their agreements with their
representatives and administrative staff. Consult with an attorney to help determine which type
of relationship you wish to have with your employees. Particular areas that may need the expertise
of legal counsel include whether or not to have a noncompete and/or nonsolicitation provision,
compensation issues, and responsibilities of the representative.
Solicitors agreements. Advisors who wish to pay third parties for referrals must have a solicitor’s
agreement in place to satisfy investment advisor rules and regulations. If this tactic is part of your
business model, an attorney will help draft an agreement, depending upon the jurisdiction in which
you are registered and the relationships that you foresee.
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Marketing
Marketing your firm requires far more than a set of business cards and a glossy
brochure. It is an essential business function that addresses the all-important
question: How will you grow your business? Our useful checklist addresses
the essentials of a successful marketing plan, such as establishing a brand
and segmenting clients and prospects, and can help organize your marketing
efforts and keep track of your progress.
Situation Analysis
Like investing, marketing starts with a close examination of the environment, risks, and
possible opportunities.
Target market. Define the market you plan to serve. Often, a “look-alike” analysis of your best
clients can point to your most promising future prospects. If many of your clients are retired
lawyers, for instance, consider targeting other retired lawyers. Make sure your chosen target
market is sizeable enough to support your business goals.
Market segments. Subset your target market into groups of high-value clients and prospects.
Identify them by demographics, such as age, profession, income, net worth, investable
assets, stage of life, and geographic location. Also consider psychological aspects (called
“psychographics”), such as whether your best prospects are risk-taking “adventurers” or riskaverse “guardians.” Focus on the top two or three segments, clearly identify their needs, and
plan to meet them.
Competitive analysis. If you have chosen attractive targets, your competitors may also be
pursuing them. Identify your main competitors, strive to understand their value propositions,
and assess their success. Look for competitive advantages, as well as vulnerabilities.
S.W.O.T. analysis. Honestly assess your firm’s Strengths, Weaknesses, Opportunities,
and Threats (S.W.O.T.). Use this information to help shape your own value proposition
and messaging.
48 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Marketing Plan
A written marketing plan helps you leverage resources by tightly focusing your marketing efforts and
providing a baseline to assess your results.
Branding and positioning. As the advisory market grows ever more competitive, it is vital
to identify a single point of differentiation between your firm and its competitors. Strive to
explain your firm’s most important distinction in a succinct statement. Make sure every firm
communication is consistent with your brand and positioning.
Objectives. Set specific goals. In marketing, objectives should be focused, realistic, clear, and
measurable, and agreed upon by key members of your firm.
Strategies and tactics. Select marketing programs to implement over the next year, and tie
each initiative to a specific objective you hope to achieve.
Calendar and budget. Create a budget to help you choose between competing programs.
Schedule deadlines and assign responsibilities.
Measuring success. Review and measure results to fine-tune successful programs, eliminate
underperforming efforts, and target your marketing dollars for maximum return over time.
Identity and Collateral Materials
Professional marketing materials serve as the public face of your new company.
Logo. Ask a designer to create a logo that is professional, distinctive, and readable in every
medium, including letterheads, faxes, presentations, and online. Simpler is often better.
Business cards. Printing professional-looking cards right from the start allows you to respond
appropriately to unexpected networking opportunities.
Stationery. In addition to conventional office letterhead, order fax letterhead, envelopes, labels,
and multipurpose folders with your logo and contact information.
Presentation materials. Create a professional-looking presentation, and an easy-to-update
template for your presentations.
Brochures. Design and produce a firm capabilities brochure. If possible, add shorter brochures
for particular offerings or services you wish to highlight.
Web site. Set up a quality web site for clients and prospects. Be sure to include an overview of
the services you offer, as well as a clean statement of your positioning and value proposition.
Make it easy to contact you.
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Client Retention and Development
A well-planned communications program can help strengthen relationships with clients, as well
as present additional services to them.
Welcome materials. Combine startup forms, agreements, and useful information into one
mailing with a welcoming cover letter.
Statements. Ask your custodian to print your logo, as well as timely messages, on the one piece
of paper that clients typically examine most closely—their statement.
Newsletters. Write or syndicate short, useful articles to keep your name and expertise in front
of your clients. For maximum cost-efficiency, distribute by e-mail and include a forwarding
function.
Educational materials. Provide education on matters of interest to clients, such as tax-saving
strategies or estate planning tips.
Client events. Invite clients to prestigious public events as your guests, or share current
economic and financial perspectives at a seminar held exclusively for clients and their friends.
Web site. Offer your clients online access to information about additional products and
services that might benefit them.
E-mail. Send e-mails to clients with transactional alerts, as well as regular updates about
new hires, new offerings, or new ideas.
Acquisition Strategies
To grow over the long term, most advisors must look beyond their current book of business and
bring new clients on board. A number of promotional tactics can help attract qualified prospects.
Professional referrals. Tap attorneys, CPAs, and other professionals serving high-net-worth
clients to form a mutual referral network.
Client referrals. Invite clients to bring friends and colleagues to events you host or ask them
to pass along any informative materials that you create.
Organizational affiliations. Consider joining local organizations that appeal to high-net-worth
clients, such as charities, business councils, professional organizations, and sport or country clubs.
50 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Public relations. Among the least expensive promotions, press releases can promote events or
introduce new employees or products. You can build additional awareness by writing opinionleader articles on retirement, income planning, and other topics of interest for local news.
Advertising. Advertise in business journals, local newspapers, or professional publications.
Strive for a consistent schedule in a publication, rather than expecting scattered single ads to
produce results.
Seminars and events. Address captive audiences of high-net-worth individuals by speaking at local
events about financial and investment topics. Strive to be educational rather than promotional.
Collect prospect names by promising to send a book or copy of the presentation later.
Invitations. Send invitations to prospects to build attendance at seminars. Describe the insights
that attendees can expect to gain.
Direct mail. Use direct mail to reach prospects with personal, specific messages. Direct mail
can be used to generate leads, referrals, or seminar attendees.
Educational materials. Create materials that discuss problems and solutions unique to specific
market segments, such as senior executives, business owners, or attorneys. These “needs-based”
materials can be used to follow-up a seminar or direct mail offer.
Premiums. Reinforce awareness and build goodwill with attractive giveaways featuring your
firm name and logo. You can find a wide variety of choices online.
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A Final Word
We hope this guidebook will be a useful tool for getting your new venture
off to a strong start, and will serve as a road map to help you decide your
next steps. More help is available if, and when, you need it—including
business and operations consulting, technology outsourcing solutions, and
custom marketing support. If you would like to learn about other services
from Pershing Advisor Solutions that can help you make a smoother, easier
transition to an independent practice, contact us at (800) 445-4467.
This guidebook is part of Ideas Without Limits, a program designed to
help independent advisors identify trends, enhance operations, and grow
revenue. It represents Pershing Advisor Solutions’ unique approach to practice
management support—going beyond high-level guidance to offer actionable
information, personalized consulting, and ready-to-execute programs.
To learn more about Pershing Advisor Solutions call us at (800) 445-4467,
or visit us on the web at pershingadvisorsolutions.com.
52 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Appendix
In this section, you will find two additional resources to assist you in
establishing your firm.
>A checklist is provided to offer additional guidance in the selection of your custodian. This
checklist can aid you in organizing and simplifying the process. It suggests a consistent set of
questions to ask candidates, and provides a simple way to track and organize their responses.
>A sample RFP, discussed on page 56—to assist you with selecting the appropriate software
depending on the needs for your firm.
Custodian Selection Work Sheet
Finding the right custodian is a critical and essential decision to make as you create your new
firm. While information such as fees, technology, and services are critical, so is learning about a
custodian’s culture, history, and long-term plans in support of the RIA industry. Below are some
basic questions to help guide you as you contemplate your choices.
1) What is the general profile of the custodian?
2) Is serving the RIA firm a strategic priority? What is their depth of experience and familiarity
with the RIA business model? Who are some of their clients?
3) What are the capabilities of the custodial platform?
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4) How robust is the technology offering? What level of service and support accompany the technology?
Account access and information processing
Order management system
Portfolio management system and interface
Asset allocation
Financial planning capabilities
Online tools
Web site
5) What is the level of service at the custodial firm?
A service team or a service contact
Relationship consultant
Account manager
Dedicated team
All of the above
6) What are the products and investments available on the RIA platform?
Investment research vendors
Trading desk
Banking solutions
Trust capabilities
Managed account programs
Mutual fund programs
Alternative investments
54 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
7) What value-add resources are offered by the custodian?
Practice management
Marketing
Compliance
Mergers and acquisitions
Investment management
Operational efficiency
8) What is the custodian’s fee structure?
9) What is the transition process and what is the timeline?
Transferring client accounts
Conversion consultant available?
Remote or on-site support during the conversion?
10) Which kind of insurance and asset protection is available?
Privacy policy for client information
SIPC coverage
Contingency plan
11) Are there any unique benefits or advantages of this custodian?
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Sample Request for Proposal
Summary
Use this section to describe your RIA firm. Typically, introductory language for an RFP identifies:
> Your firm
> Scope and brief description of the project
> Purpose of the RFP
Example: “ABCD RIA firm is accepting proposals to design and develop a web site for use by its
employees and the firm’s clients. This RFP should address the project from design to completion,
with discussion of any resources and availability for training or ongoing support and maintenance.
The purpose of the RFP is to solicit and evaluate the submissions while sharing the key areas and
guidelines for the project.”
RFP Guidelines and Requirements
This section sets out your firm’s key dates, and other required information you need from the
vendors. This usually includes:
> Deadline for RFP submission
> Price quotes
> Use of any sub-contractors
Example: “Please return RFP by 12:00 pm [ET] on October 30, 2007. The price you estimate
for the work should be inclusive. If there are any additional charges or fees, then please provide
an itemized list of those fees with a description of each fee or charge.
If you plan on using any sub-contractors or third parties, please state this in the proposal.”
Purpose and Description
This section contains the information generally used in developing RFPs. It should cover
the following:
> Purpose of the project
> Description of the project and current systems
> RIA firm’s vision and strategies
56 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Purpose of the Project
This RIA firm serves a national client base, and our individual clients will require access to key
information about our firm, as well as information regarding their individual accounts. This is an
opportunity to create a user-friendly web site that will provide access for clients, showcase the firm,
and attract new clients.
Description of the Project
Create an informative and dynamic web site that is easy to navigate and maintain. It should
allow members of ABCD RIA Firm to be able to change content without having to engage in
programming or rely on vendor services. The design of the web site has to be visually appealing,
and user-friendly and intuitive for clients and others viewing the web site.
Key features of this web site should be:
> Easy to use
> Quick to load on any web browser
> Visually appealing
> Informative
> Secure
Systems Information
ABCD RIA Firm is interested in obtaining pricing information for web site hosting services, as well
as information about hosting its web site on its dedicated internal server, which is currently running
the Windows 2000 Server operating system.
Vision of ABCD RIA Firm
We provide wealth management services to high-net-worth clients in the United States. Our value
to the client relationships is the ability to provide a network of resources quickly and accurately. Our
specific strategy for the web site is to increase awareness of ABCD RIA firm, showcase our staff and
expertise, and display our unique approach to managing wealth.
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Timeline
This section lays out when your RIA firm needs to receive RFPs back from vendors, directions
for submitting the RFP, and the outline of the selection process.
> Due date for RFP proposals
> Phone call follow-up on RFPs
> Vendor selected
> Delivery of the phases of the project
Budget
This section is reserved for information regarding the prices to accomplish the project. It should
include all major stages of the project. If your firm will require start-up and ongoing services from a
vendor, be sure to articulate that in this section. It is also advisable to indicate your firm’s budget for
this section.
Users and Audience
Any description of the users of this product or service—clients, employees, affiliates, etc.—
should be enumerated here.
Scope and Guidelines
This section should describe the scope of the project with accompanying guidelines that describe the
types of features and other details of the project.
Qualifications
This section requests verification and identification of the vendor’s capabilities and track record
in executing the type of work sought by your RIA Firm.
Example:
> List of three to five references of prior work performed
> Description of vendor’s experience in working with RIA firms requesting similar services
> Vendor capacity to perform the work requested
> List or description of team members who would be working on this project
> Time frame for completion of the work
> Communication style, and project updates
> Terms and conditions
58 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Evaluation Criteria
This section will describe how your firm will evaluate the different vendors who have been
contacted or who have responded. This information will let vendors better tailor their proposals
to meet your desired needs.
Example:
> Suitability of the proposal
> Expertise of the vendor
> Vendor experience
> Value and pricing
> Proposal presentation
Also, be sure to reiterate the deadline and identify the contact person to receive the proposals.
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Notes
60 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
Notes
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Notes
62 an Advisor’S Guide TO ESTABLISHING AN INDEPENDENT PRACTICE
About Us
Pershing Advisor Solutions LLC (member FINRA/SIPC) is an affiliate of Pershing LLC and a leading provider of financial business solutions to independent,
fee-based registered investment advisors and dually-registered advisors working in conjunction with many of Pershing LLC’s introducing broker-dealer
customers. Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, is committed to service excellence and to providing dependable
operational support, robust trading services, flexible technology, an expansive array of investment solutions and practice management support. Through
an innovative custody platform, Pershing Advisor Solutions delivers superior expertise and scalable and customizable solutions to help its customers manage
and grow their fee-based businesses. Additional information is available at www.pershingadvisorsolutions.com.
GB-PAS-ATG-9-07