• Rita Rhodes

So, You Want to Start an RIA....

Updated: Oct 11, 2019

You’ve outlined your business plan, researched your investment strategies, considered your target client base, and maybe even thought about hiring some employees. Now you are ready to get your investment advisory services up and running. So, what do you need to do to legally manage assets and provide financial advice to clients? The first step is registering as an investment adviser, either with the state where your business is located or with the federal Securities and Exchange Commission (SEC). Sole proprietors, partnerships, limited liability corporations (LLCs), and corporations are all able to become registered investment advisers (RIAs) by filling out the Form ADV, or the Uniform Application for Investment Adviser Registration. Let’s talk about what you need to do. Whether you should register with the state or with the SEC depends on how many assets you manage. To register with the SEC, you need to have at least $100 million of assets under management (AUM), or have a reasonable expectation of reaching that threshold within 120 days. Most new advisers just starting out will not have any assets under management (AUM), and will register with the state in which their primary place of business is located. Certain exceptions apply. For example, you can register with the SEC with less than $100 million in AUM if you are: ● Located in a state that does not regulate investment advisers (currently, New York and Wyoming), and if you have more than $25 million in AUM. ● Providing services to clients that would require you to be registered in 15 or more states. ● Delivering your services almost exclusively through the Internet. ● Acting as an adviser to a mutual fund or business development company. ● Serving as a pension consultant to plans with an aggregate AUM of $200 million. If you register with the SEC, you do not need to also register at the state level; you will, however, need to list the states in which you do business on your SEC registration, which is referred to as “notice filing.” Most states follow a “de minimis” rule, which allows the adviser to have up to five clients in the state before requiring notice-filing in the state (for SEC-registered advisers) or registration (for state-registered advisers). There are some states that do not follow the de minimis rule, however, so it is important to check with the state securities division before accepting clients in a new state. Currently, Louisiana, Nebraska, New Hampshire, and Texas require notice-filing or registration upon accepting the first client in those states. State registration information can be found on the North American Securities Administrators Association (NASAA) website (see link below). Regardless of registration at the state- or SEC-level, the first step is to create an electronic account on the Investment Adviser Registration Depository (IARD) system, managed by the Financial Industry Regulatory Authority (FINRA) per guidelines established by the SEC and the North American Securities Administration Association (NASAA). (See the link for the IARD Entitlement Instructions below.) Upon approval of the account creation, FINRA’s Entitlement Group will provide prospective RIA with a Central Registration Depository (CRD) number, which is an identification number used by FINRA for all firms and individuals involved in the securities industry in the United States. The IARD system is used to electronically file the Form ADV, the form required for entities to register with states or the SEC as an RIA; to electronically file the Form ADV-W, the form required to withdraw registration as an investment advisor; to process fees and forms; for regulatory review; to renew or amend annual registration; and for public disclosure of investment advisor information. Form ADV consists of two parts. The first, aptly named Part 1, is an electronic form in a check-the-box and fill-in-the-blank format that requires information about the investment adviser’s business and services, ownership and management, clients, employees, business practices and procedures, affiliations, and any disciplinary actions at the firm or employee level. Part 1 further broken up into two parts: Part 1A and Part 1B. Part 1A is required by all registrants, while Part 1B is required only by state securities agencies and requires additional information depending on the state. Part 2 of the Form ADV is also divided into two parts: Part 2A and Part 2B. When you complete your Form ADV Part 1 electronically through the IARD, you will also need to submit your Part 2 documents in a text-searchable PDF format. Part 2A is a brochure written in plain language that contains information about the investment advisory services provided, fee schedules, conflicts of interest, backgrounds of key personnel and management, and disciplinary actions at the firm or employee level. This brochure is made public on the SEC’s Investment Adviser Public Disclosure (IAPD) website and is also to be provided to clients as a primary disclosure document. Part 2B is a supplemental brochure providing information about key individuals providing advisory advice on behalf of the RIA. Each individual who provides client advice and has direct client contact or who makes discretionary decisions about a client’s assets, regardless of client interaction, requires a supplemental brochure that includes educational and professional background for the previous five years, disciplinary information for the previous ten years, other business activities that may create conflicts of interest, additional compensation the individual receives by an entity other than the client for providing advisory services to clients, and how the individual’s advisory services are supervised and by whom. SEC-registered advisers only need to submit Part 2A; state-registered advisers need to submit both Part 2A and 2B. For the initial application process, the SEC generally only reviews Part 1A. The investment adviser, however, must also complete Part 2 and have client agreements, written policies and procedures, a code of ethics, and other regulatory documents prepared and available upon registration approval by the SEC. These additional documents will be reviewed by the SEC during a regulatory examination of the advisory entity. The approval process usually takes up to 45 days, though it may take longer if the SEC requires additional information. When registering with a state through the IARD, the application is automatically forwarded to the state securities division for review. State regulators sometimes scrutinize the applications more carefully than the SEC, and will often request copies of the adviser’s client agreements and written policies and procedures before approving the application. So you should have these documents prepared and ready for inspection if the regulator requests them. In some cases, the state regulator may request a meeting (by phone or in person) before approving the application, or may have an introductory meeting with the adviser shortly after approval. RIAs are also required to electronically file annual amendments to the Form ADV within 90 days after the fiscal year-end or within 30 days if there are any material changes to the RIA’s business. Material changes may include, but are not limited to, AUM falling below $100 million, turnover of key management, disciplinary action taken against the RIA or an employee, or notable changes in advisory services. Filing fees for SEC-registrants for initial Form ADV application and each annual Form ADV amendment are based upon AUM; initial set-up and annual fees are $40 for AUM less than $25 million, $150 for AUM between $25 and $100 million, and $225 for AUM over $100 million. State registration fees and notice-filing fees vary for each state. Funds must be deposited into a Flex-Funding account to cover all necessary fees and, it is worth noting, insufficient funds may prevent successful filing of documents in the system. Filing the Form ADV isn’t rocket science, and you can probably work through the process on your own with a little research. But the IARD website is not the most intuitive or user-friendly website. It can be time-consuming and confusing to navigate. And when you reach the point of the application process where you are interfacing with the regulators… well, they sometimes speak a language all their own, and it can be difficult to understand what questions they are asking or what documents they are requesting. If you run into some snags in the process, we’re happy to help. Key Links: Investment Adviser Registration Depository

IARD Entitlement Instructions

IARD Fee Schedule Securities and Exchange Commission, “General Information on the Regulation of Investment Advisers” Frequently Asked Questions on Form ADV and IARD Transition of Mid-Sized Advisers from Federal to State Registration NASAA State Investment Adviser Registration Information

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