Starting out as an RIA

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Jan 20, 2009 6:54 pm

Hi guys,

 
After years of not working in the industry I have decided to get back in. I used to Work for Morgan Stanley and JpMorgan Chase and had a series 7, 66, 31 and insurance license. However, I decided to leave the industry at the end of 2003 and my licenses have, of course, expired by now.
 
Instead of working for a compny I have decided to start my own investment advisory firm and build my book on my own terms. I have just filled out my IARD entitlement forms so I can submit my form ADV. I've looked over the form ADV and there are questions such as "how many clients do you have" "what's the value of the assets under management" etc...etc..  The problem is, that I don't have any assets under management yet and no clients. Obviously, I will have to sponsor myself as a rep of my own investment firm and get licensed again. 
 
Has anyone gone this route before? Will there be any problems sponsoring myself and with submitting the form ADV without having any clients and/or assets yet?
 
Also, California seems to require RIAs to get certified by the state as an investment advisor. Does this certification happen automatically by just submitting form ADV or do I have to do anything special? (The state of california website wasn't all that clear about it).
 
Thank you very much in advance!
Jan 20, 2009 7:58 pm

If you can't answer these basic questions you really don't have any business starting an RIA.  Learn first, do second. 

In the meantime try using the search button.  If you have any delusions of starting an RIA you better start by realizing you have to show more effort and initiative than what you have demonstrated so far.

And out of curiosity, what makes you think you will succeed in this business after not succeeding the first time around? 

Jan 21, 2009 1:41 am

Thanks for making assumptions left and right without having any information beyond the little bits and pieces you got above. Shows your analytical skills or lack thereof.  How do you manage to get any clients with your simple black and white world view? It helps if you actually read the above post..I wasn't asking about the "easy questions" in form ADV but asking for personal experiences that people may have had in a similar situation, i.e. not transferring a book of business from anywhere but starting out with nothing as an RIA (and yes, I have money to support myself until my book supports me in a year or two). The search function is great for basic keyword searches but not for conceptual searches if you haven't already noticed.

 
Since you asked so nicely, I quit the business because "wall street" (and in this case it literally was wall street) wouldn't let me take care of my clients but wanted me to sell products. I'm not a vacuum salesman, I can sell myself, manage portfolios etc.,  but I refuse to sell inferior products that I already know are absolutely unsuitable for my clients.
 
I was also not willing to do the half-shady, half-illegal crap (dumping bad IPOs on people, selling them B shares they don't need (maybe someone remembers the B shares scandal with Morgan Stanley that finally became public many years ago)...etc...etc). I can do it my way if I am independent. I quit because I did not want to do it, not because I couldn't do it.
 
Don't bother answering if you don't have anything valuable to add. I obviously have my very good reasons to go this route and have set things in motion (and yes, did hours of research and still doing so).  I'm not just here to troll around or have people hold my hands.
Jan 21, 2009 9:10 am
pmanager:

Don't bother answering if you don't have anything valuable to add.


If you have read any of the older threads, you will know I have much helpful information about RIAs, including the answer to your ADV question, which contrary to your assertion is a basic question for anyone launching a new RIA, regardless of whether they have no clients at all or have existing clients elsewhere. 

I'll throw you a bone on this, as re-reading my response I was probably more blunt than I intended to be: on your initial ADV you show zero clients and zero AUM, because until your registration is approved your RIA cannot legally have any of either.  Once you are registered and begin adding clients (either by transfer of existing clients or by adding new clients) you will subsequently need to amend your ADV to show your client base at that time.  But to begin with every new RIA starts with nothing.

You also need to be sure you understand all the legal requirements regarding licensing and registration before you do anything.  Since you will be starting with less than $25 MM AUM, you will need to register with your home state rather than the SEC.  I have no experience with California so would not advise you on their requirements.  Although it is certainly possible to handle all the registration and legal entity formation (which you haven't mentioned in your post) yourself, and many in your situation do, there are also a number of firms that can do this for a reasonable fee.  Probably money well spent.

Either way, all this registration/legal stuff will be the easiest part of the puzzle.  It's really pretty easy to open your doors and hang out your shingle.  The real challenge will be finding enough clients fast enough to survive, especially starting from scratch.  The odds are certainly not in your favor.

Good luck. 

Jan 21, 2009 7:38 pm

Thanks for the bone.   The fact is that most people starting an RIA have a book of business elsewhere and hence would have clients and AUM. I was just trying to find out if the ADV form wanted to know about your clients and AUM before becoming an RIA. But I guess once you quit your job with your former employer you legally have no clients and no money under management. I just don't like ambiguities, that's all.

 
As for the legal part...I have already registered a DBA name with the county and will think about whether to become an LLC or S corporation once things get going and grow.
 
I realize getting the paperwork done is the easiest part...but also the most annoying. That's why I am trying to get it out of the way as soon as possible so I can start getting some clients...which is the fun (though obviously not easiest) part.
 
While I have you throwing bones...do custodian software platforms of the major providers (schwab, fidelity etc.) provide concurrent trading in all client accounts for the same holdings? I.e. can I execute one trade of a stock that either all or many of my clients hold instead of having to go into each account to execute a trade? I've checked their websites and they just try to get you to contact them and don't really provide all that much information about functionality.  I'm planning on running my business more like a fund with all discretionary accounts and such functionality would save loads of time.
Jan 21, 2009 7:51 pm
pmanager:
While I have you throwing bones...do custodian software platforms of the major providers (schwab, fidelity etc.) provide concurrent trading in all client accounts for the same holdings? I.e. can I execute one trade of a stock that either all or many of my clients hold instead of having to go into each account to execute a trade? I've checked their websites and they just try to get you to contact them and don't really provide all that much information about functionality. I'm planning on running my business more like a fund with all discretionary accounts and such functionality would save loads of time.





There is something to be said about being able to start from scratch, doing it exactly the way you want to do the business.... so, that being said, it looks like you are headed in the right direction.



Yes, and yes... both Fidelity and Schwab allow for block trading of a stock, while at the same time, splitting the block among a variety of different accounts. Global trading platforms are great, and it really does save time.



Also, to answer your first question - I think you'll find that setting up a shop is relatively easy to do. I know that you will not qualify for federal registration, since you don't have the required $25 million under management. So, that being the case, you'll have to pass your state's investment advisor exam. I'm not sure if you will need to pass the exam first prior to applying with the state for registration, or the opposite. I can say, it's not as easy as submitting an application, and voila!... you are good to go. It doesn't matter that you were previously licensed, and they lapsed... you unfortunately get to start all over again... but, the state's exam shouldn't be too daunting to pass.



I would strongly encourage you to consult a legal firm that can see you through the process. If you have a few $$'s to keep you floating until business kicks in, you will find it worthwhile investment to consult a professional. They will keep you from doing things in the wrong order, and can save you some time. I would consider using Marketcounsel.com - we were happy. Shouldn't be too expensive for a single-person entity.



Many of the larger custodians don't have much interest in getting you up and running, since you don't have any assets under management. But, you should still check with Fidelity, Schwab and TD Waterhouse. I don't know what they'll tell you...



Good luck.



C

Jan 21, 2009 8:34 pm

I'm going to jump in, as your original post talks about you becoming a "rep" of your firm and becoming licensed again.  Those terms indicate to me you would like to be an RR again and be Series 7 licensed.  That will not be possible unless you are affiliated with a broker/dealer and are sponsored by them.  In that case, your RIA becomes an outside business and some BDs will not allow that, some will.  I may be incorrect in my assumption, but I wanted to be sure you were getting all the info you needed.

Jan 21, 2009 8:36 pm

Other custodians to consider that may be more open to new RIAs with no AUM than Schwab & Fidelity are SSG and TradePMR.  In fact one of TradePMR's senior guys (Frederick Van Den Abbeel) is a participant here, so you may be able to connect with him.  His user name is FVDA_Trade-PMR.  I believe Frederick is in charge of their RIA arm.

Jan 21, 2009 9:40 pm
OldLady:

I'm going to jump in, as your original post talks about you becoming a "rep" of your firm and becoming licensed again. Those terms indicate to me you would like to be an RR again and be Series 7 licensed. That will not be possible unless you are affiliated with a broker/dealer and are sponsored by them. In that case, your RIA becomes an outside business and some BDs will not allow that, some will. I may be incorrect in my assumption, but I wanted to be sure you were getting all the info you needed.





I didn't see it that way at all.



Anyone that works through an RIA, is an IAR (Investment Advisory Rep), so I take his comments as well within the scope of setting up an RIA and completely running away from being a registered rep. Getting licensed again, for him, will be a requirement... he'll have to pass his state's IAR examination... just not the series 7.



He can be, and will have to be, an IAR, and not a RR. Either way, he'll still be a 'rep', as I understand it.



C

Jan 21, 2009 11:28 pm
Captain:

Getting licensed again, for him, will be a requirement... he'll have to pass his state's IAR examination... just not the series 7.

He can be, and will have to be, an IAR, and not a RR. Either way, he'll still be a 'rep', as I understand it.

 
Exactly, I'll still be a rep of my own RIA firm. One thing though...I always had the impression that I needed the series 7 if I wanted to buy and sell stocks for people in their accounts even if I am going to be all fee-based (% of AUM, transaction fees passed on to clients).  Your comment above seems to indicate that  as an RIA:
 
1. I cannot sponsor myself for the series 7
 
2. I don't need the series 7 at all if I am all fee based? Are both conclusions true? Do I really only need the 65 and maybe the 63?
 
It's just that always having had the series 7 I automatically assumed I had to get it again for anything I do that involves transactions for clients. Thanks for the answer to my question about block trading on custodian platforms, Captain. I assume most if not all custodians offer that (not just the major ones). I'll have to make sure with whoever I choose in the end.
 
Thanks for the help again Morphius. I'll look into those custodian firms and will research a few others, too.
Jan 21, 2009 11:54 pm
iceco1d:

You don't need the 7 or the 63 to form an RIA, or be an IAR of your RIA. You need either the 65, or the 66.



You don't need the 7 because you aren't selling anything. You are giving advice, in exchange for a fee. Your fee will remain the same, whether you recommend mutual funds (@ NAV), stocks, bonds, CDs, etc.



Your % of AUM fee is treated no differently (in the eyes of the regulators) than if you charged people $200 an hour for your advice, and let them implement your recommendations on your own.



So, if you want to do your own RIA, you shouldn't get the S7. And no, if you did want to ge the 7, you couldn't sponsor yourself for it (unless of course, you form your own B/D...which would be a whole other matter).





Spot on.



You are paid for advice, as noted above, but have the ability to trade anything you choose... stocks, bonds, funds.... for your clients - either on a discretionary or non-discretionary basis depending on the agreement with your client. Additionally, you'll need to craft your own advisory agreements - that's where you should get legal representation to help you. It's a worthy investment.



C

Jan 22, 2009 1:33 am

Thanks so much guys! Good to know, and just in time! I was about to get a bunch of series 7 and 66 Study materials (66 is only valid if you have the 7 so it would have been useless for me). I'll go look for Series 65 stuff.

 
And yes, I will get legal advice for the drafting of the advisory agreement.
Jan 22, 2009 10:24 am

You will definitely need the 65. 


The legal counsel advice is spot on for setting up your ADV & management agreements.


Don't forget about TD Ameritrade as a RIA platform.  Their platform is fairly simple to navigate without a lot of redundancy.


Jan 22, 2009 11:33 am
pmanager:

Exactly, I'll still be a rep of my own RIA firm. One thing though...I always had the impression that I needed the series 7 if I wanted to buy and sell stocks for people in their accounts even if I am going to be all fee-based (% of AUM, transaction fees passed on to clients).  Your comment above seems to indicate that  as an RIA:

 
1. I cannot sponsor myself for the series 7
 
2. I don't need the series 7 at all if I am all fee based? Are both conclusions true? Do I really only need the 65 and maybe the 63?
 
It's just that always having had the series 7 I automatically assumed I had to get it again for anything I do that involves transactions for clients. Thanks for the answer to my question about block trading on custodian platforms, Captain. I assume most if not all custodians offer that (not just the major ones). I'll have to make sure with whoever I choose in the end.
 
Thanks for the help again Morphius. I'll look into those custodian firms and will research a few others, too.


Not to turn negative on you again, pmanager, but this kind of misunderstanding about the fundamental differences between the RIA and B/D worlds is something you need to address quickly, and certainly before you get further into the implementation phase.  You'll need to learn a lot either way; better to do it before making the mistakes yourself.

Importantly, do NOT assume that what you learned at the wirehouse will be helpful or even applicable, at least when it comes to the legal and regulatory issues involved in starting and running an RIA.  There are two separate and distinct regulatory environments. 

If you haven't already done so, go back and do a search for RIA here and read some of the threads on the topic.  I'd also encourage you to spend time on Schwab & Fidleity's RIA web sites, as they both contain quite a bit of free information to help speed your learning process:

http://fiws.fidelity.com/index.shtml?focus=home

http://www.schwabinstitutional.com/public/index.shtml

There may well also be good info at TDA or other custodians, but the above two probably have the most freely available info to start with.  You can - and should - spend many hours learning about what is involved in becoming an RIA.  All it costs you is your time.

There is no shame in not knowing this yet, but for those that are serious there is a learning curve, and no one will spoon feed this info to you.  You have to go after it yourself.  That hurdle alone eliminates many people, and that's probably a good thing.  Those people wouldn't survive as an independent long anyways, although they may well thrive in a wirehouse.  Different environments call for different skill sets and aptitudes.

Good luck.

Jan 22, 2009 3:33 pm

Again, thank you for your help guys! I'm not making any assumptions at this point and just starting out with a clean slate. I'm very independent by nature so I'll continue doing my research until I am 100% (or close to it anyway) knowledgeable about anything revolving around the RIA business. One thing I know for sure already, being an RIA is the only acceptable way for me to return to the financial advisory business.

Feb 1, 2009 10:07 am
iceco1d:
 You are giving advice, in exchange for a fee.  Your fee will remain the same, whether you recommend mutual funds (@ NAV), stocks, bonds, CDs, etc. 
 



Does the fee need to remain the same for the entire relationship?  For example, I charge different %s for options strategies than I do for CDs.  What about for the client who has MMs in company stock that he is not going to do anything with?  Do I need to just drop this wirehouse mentality and come up with relationship based fees regardless of what I do for them?

Alias

Feb 1, 2009 10:52 am

Quick answer:

You are ALLOWED to charge different fees for different assets, including not charging on certain agreed assets (such as company stock or whatever) so long as you disclose this practice clearly in your ADV. However, if you DO, you will have additional regulatory issues to address, as you could be challenged to document and justify why you recommended a strategy that paid you more vs one that paid you less.



In other words, you CAN do it, but you may not CHOOSE to once you better understand the implications.



And yes, not surprisingly, a big challenge at this point for you is to learn enough to realize you can't simply operate with the same "mentality" (to use your word) as you have at the wirehouse. Key to this is an important legal distinction that as an RIA you are being paid for your ADVICE, not for the transaction. That being the case, why would your advice for one person (or strategy) be worth less than your advice for another person, or strategy? Until you really understand this distinction you will not get it. Contrary to what some my think, this distinction is NOT simply semantics - it is an important LEGAL difference.

Mar 15, 2009 10:07 am

Pmanager,  How did you finally make out?

 I have been reading the thread and thought it was quite interesting.   I am creating an RIA with ZERO in AUM but with a significant pipeline.  I have pased the CFP exam, Series 7, Series 66 and am currently preparing for the Chartered Market Analyst (CMT) designation.  I love a challenge and was completely frustrated working for a Global Wirehouse.  I ran a Info Tech company for 17 years and I can now use my programming skills to take advantage of the sophisticated software that is now available.  At UB_, I felt I was just a monkey, lurking around every social event looking for new contacts..OUCH!!
Now I can offer one on one custom solutions and change peoples lives.  Dont get discouraged, there are 77 million baby boomers and you only need 100!
 
Mar 18, 2009 4:46 am

I would suggest you get an attorney to file your registration and he can also answer all the questions you have. Most attorneys will charge you in excess of 10K.  Send me an email and I have relationships where the attorney will charge a lot less.  Do not forget your compliance manual.  Registration is just the first part of this mess. 

Also you do not need any assets to register at the state level. 

Good Luck
ash
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www.FAfreedom.com - Breakaway Experts

Mar 23, 2009 6:35 pm

I was not aware of the b/d requirement of 25mil AUM.  How do the mechanics work on putting clients in stocks and bonds if you are an RIA?  Do you execute the trade for them and can you pick up the phone and sell WMT stock or some other bond as long as you are not paid a commission on it?

 
Are you requiring a minimum account size and then charging a percent for up to so many trades per year?