Question for RIAs on Compliance

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Apr 24, 2009 11:22 am

Hello all


I have a "paranoia" type question for  RIAs. I formed my RIA after using a b/d for the past few years. During that time, I always heard "how hard the compliance is on the RIA side. How (from the b/ds) anyone could run a RIA and be compliant is a mystery."


Well, now I am on the RIA side. I am finding the compliance of it less burdening than I thought. With years of being brainwashed by b/ds, I am becoming a bit paranoid that I am missing something. I have a solo practice and fall under the SEC.


Does anyone else find it easier as an RIA compliance wise?

Apr 24, 2009 3:40 pm

Simple answer... yes.



I love to hear the wirehouses all preach the same thing - it's too tough... don't do it... we do it for you.... you won't be able to handle it.



Blah, blah, blah.



C

Apr 24, 2009 3:45 pm

I've heard about small guys doing some proactive work with their legal advisor - have the lawyer doing an annual audit. Then, time slips by, and no annual audit ... with apparently no consequences. I'm with a b/d and have wanted my own small IRA, but have been too paranoid about compliance. Aye aye, Captain.

Apr 24, 2009 4:23 pm

Yup, spot on. We have a semi-annual review with our compliance consultant. We pay a retainer fee to her, and have delegated the grunt-work CCO responsibility to one of our partners. It gets done and there is still plenty of time devoted to other activities.



Don't be too afraid... the water is just fine.



Aye-aye.



Captain.





Apr 24, 2009 4:24 pm

Thanks Captain. That's one of those things that keeps me up at night.

I think the b/ds are hanging on for their lives right now. Especially with more and more custodians offering a hybrid model outside of a traditional b/d.

Apr 24, 2009 4:30 pm

The hybrid looks cool. I notice LPL has E&O that covers both, and the dual deal makes a transition easier. But cold turkey RIA looks attractive, too.  B/ds have got to be freaked.

Apr 24, 2009 4:35 pm
CALI123:

Thanks Captain. That's one of those things that keeps me up at night. I think the b/ds are hanging on for their lives right now. Especially with more and more custodians offering a hybrid model outside of a traditional b/d.





I hear ya.



One of my partners is a CPA - we studied this thing forever before making the decision to split from the mothership. We had pro-formas all which ways, and the compliance piece was the one thing we, too, were worried about. But, even he'll admit that it was much more of a boogie man in the closet, rather than reality.



C

Apr 24, 2009 4:38 pm

I think they key is some of the custodians, like TradePMR will let you do comish biz with out taking a haircut from the RIA. (at least thats the way I understood it)



I was mostly fee based when I went RIA. My b/d was charging me 10% to watch over me. They tried to put the fear of god in mean regarding the compliance over the ria. Now I am super paranoid about it!



I am glad to be done with my 7 and finra. No more stupid rules.





Apr 24, 2009 4:42 pm

Hey Cap-



Who are you using as a consultant? I had National Compliance Consultants do my adv. I was wondering if it is worthwhile for a solo to have them do the annual audit. My stuff is pretty simple. I may just be thinking too much about this.



i had a question on being paperless and called the regulators about it last year. They are pretty backed up. I spoke to a field auditor that told me it may be three to five years before they even get time to visit a small guy like myself. How often are you finding they visit you.



Thanks for the input. This is good stuff.

Apr 24, 2009 4:59 pm

Just wait til FINRA becomes the SRO over RIAs.

Apr 24, 2009 5:01 pm

WB, if you don't mind, what do u think r think the implications?

Apr 24, 2009 6:59 pm
CALI123:

Hello all


I have a "paranoia" type question for  RIAs. I formed my RIA after using a b/d for the past few years. During that time, I always heard "how hard the compliance is on the RIA side. How (from the b/ds) anyone could run a RIA and be compliant is a mystery."


Well, now I am on the RIA side. I am finding the compliance of it less burdening than I thought. With years of being brainwashed by b/ds, I am becoming a bit paranoid that I am missing something. I have a solo practice and fall under the SEC.


Does anyone else find it easier as an RIA compliance wise?



You are correct SEC is much easier than FINRA.  The big difference is that the SEC has more of a guidance approach to their rules.  This way they can be flexible enough to treat a smaller RIA different from a wirehouse.

The one thing that SEC likes to see is a great Procedure Manual and internal testing process.  As a matter a fact you should have a binder ready for them explaining your firm and everything you do for compliance.  Also there are many changes that happen throughout the year with the SEC, you need to keep up with them and change your manual accordingly.  I work with a local attorney on this process, but he does not understand the tech and ops side that well.

Good Luck

ash
www.FAfreedom.com

Apr 24, 2009 7:57 pm

Cap'n, don't know if you have an idea for the breakpoint in AUM for justifying a stand-alone IRA. I get the impression it's around 50m. I think LPL wants 25m at the hybrid, but I get the impression there is a number where going from b/d does, or does not, make sense. I already have my own office and such, but this has been a sticking point. Down market to boot. Or anybody?

Apr 24, 2009 7:58 pm

That's "stand-alone RIA", of course.

Apr 24, 2009 8:29 pm

I think it depends on your fee schedule and if you bill for planning. At 100 payout you just neeed to manage your expenses. Mike Patton over at IA Mag started from scratch a year and a half ago. He has a blog that goes over his experience.

 
Again, I think there is alot of propoganda that the b/ds publish on size of AUM needed, the compliance, and the overall costs invoved. When I left my b/d, they told me good luck with all the expenses and compliance as if I had no shot in hell. I had the same knot in my stomach as when I left my old wirehouse to go indy.
 
Looking back, I should have gone RIA right after leaving the wirehouse - i just wasn't well  enough informed on the subsect at the time. 
Apr 25, 2009 11:45 am

I agree about the comment concerning keeping your expenses in check.



At a 100% payouts on the RIA, you just need to figure out your base expenses before you can conclude what type of AUM you'll need in order to make it work.



It really depends on what type of services you want to provide.



It's not cut and dry.... if you can live on $100k per year, then you can figure out your expenses and see what type of AUM you'll need. Fidelity and Schwab give you some nice templates for you to use in the construction of your pro forma numbers.



Sorry I couldn't be more specific.



C

Apr 26, 2009 10:28 am


The North American Securities Administrators Association has developed a wonderful high-level overview of RIA Compliance.  Having prior experience in the B/D side of the House, my opinion is that you'll find the RIA side to be "refreshing."
 
Many of the recordkeeping requirements can be easily maintained as long as your organized and some of the recordkeeping requirements, leverage your custodian firm (several items a good custodian firm) should enable you to help perform your required recordkeeping.
 
All the best to you and yours.
 
http://www.nasaa.org/industry___regulatoryresources/investment_advisers/456.cfm
 
RECORDKEEPING

An adviser is required generally to maintain and keep current the records listed below.  Additional recordkeeping requirements may also be set by the home state of the adviser.  It will be necessary to check with the home state regulator.


Records Required of All Advisers:



Receipts and Disbursements Journals
General Ledger
Order Memoranda
Bank Records
Bills and Statements
Financial Statements
Written Communications and Agreements (including electronic transmissions)
List of Discretionary Accounts
Advertising
Personal Transactions of Representatives and Principals
Client Records:
 · Powers Granted by Clients
 · Disclosure Statements
 · Solicitors’ Disclosure Statements
 · Performance Claims
 · Customer Information Forms and Suitability Information
 · Written Supervisory Procedures

Records Required of Advisers Who Have Custody of Client Assets:



Journals of Securities Transactions and Movements
Separate Client Ledgers
Copies of Confirmations
Record by Security Showing Each Client’s Interest and Location Thereof

Records Required of Advisers That Manage Client Assets:
(These records are required to be maintained in an easily accessible place for a period of five years from the end of the fiscal year during which the last entry was made and, for the first two years, the records must be maintained in the adviser’s principal office.)



Client Purchases and Sales History
Current Client Securities Position
Apr 26, 2009 4:16 pm

Fred- Good Stuff. Thanks for posting it

Apr 27, 2009 8:45 am
Mishigun:

WB, if you don't mind, what do u think r think the implications?

 

I could be overly cynical, but I would expect overall compliance to get more expensive with FINRA being the SRO.  If I had to pick specific areas, I see advertising being more restrictive.  Also, I could see FINRA trying to draft a rule for every little scenerio - like they do for B/Ds.

Apr 27, 2009 11:29 am

With Hybrid RIAs do you have to pay E&O twice, I would assume so because of the additional risk they take for both sides.