Whether you’re transitioning from another firm or starting from scratch, setting up your own independent registered investment advisor (RIA) firm is a tremendous opportunity that can provide higher earning potential, freedom, flexibility, and the opportunity to build a legacy. However, it’s vital to take the proper legal steps at the outset to protect you and your RIA firm. In this article, we highlight six key steps advisors should take to launch their own RIA and discuss some of the key considerations when making decisions on how to become an RIA.

First, if you are transitioning to independence from another firm, it’s vital to ensure that you understand any obligations owed to your prior firm and your clients before launching your own RIA. Most advisors have employment and/or other agreements with employers that impose restrictions on their activities even after they leave the firm which could include, among other things, restrictions on the use and disclosure of confidential information, competing with the existing firm, and/or soliciting the firm’s clients or employees. It’s vital to understand the intricacies of these restrictions as they will significantly impact your move to independence. In addition to any contractual obligations, advisors often owe their prior employer a duty of loyalty during the transition which imposes restrictions on what activities advisors can undertake during the transition. Advisors are also subject to privacy rules and regulations that restrict their ability to take client information to them with the new firm that must be strictly adhered to in order to avoid potential sanctions from regulators. For a more in-depth discussion of the legal considerations that advisors must navigate when transitioning to independence from another firm, please click here.  

Second, whether you are transitioning from another firm or starting from scratch, it’s important to choose the proper structure for your RIA firm. This will require an analysis with respect to the plans for ownership and operation of your RIA including how many owners you will have, what types of economic and management arrangements you wish to have with your fellow owners, if any, the amount of compensation the owners expect to make, and other important factors. The most common structure chosen by most RIAs is the limited liability company (LLC) structure. This is often chosen because it affords the owners protection from unlimited liability and flexibility in structuring the ownership and operation of the firm. In few instances, RIAs may choose to organize as a corporation or limited partnership instead of a limited liability company. However, in general, RIAs should avoid operating the business as a sole proprietorship or general partnership because this could expose the personal assets of the owner(s) to forfeiture in the event of a lawsuit. Regardless, it’s vital to consult an attorney and accountant to determine the most appropriate structure for your RIA. For a more in-depth discussion on structuring ownership of your RIA firm, please click here.

Third, it’s important to give serious consideration to the name of your firm. While considerations of branding come into play, it’s also vital to conduct a search to ensure that other firms are not using the same or similar name because, depending on the circumstances, using a substantially similar name could lead to a lawsuit from another firm for trademark infringement. Advisors can conduct online searches as well as searches in the states where they are looking to organize the entity to determine if the name they desire to use is being used by another firm. If you decide to trademark the name of your firm to protect it from use by other firms, attorneys well-versed in intellectual property law can assist with this task. 

Fourth, it’s important to consider the state where you will formally file to organize the RIA. While historically many firms have organized in Delaware because Delaware has well-defined caselaw governing limited liability companies and corporations, many RIAs now simply organize in the state where they principally conduct their business. This is because even if the RIA is organized in a state where the RIA does not conduct most of its business, the RIA would nonetheless need to apply for authority to conduct business in the state where it conducts its business, and, therefore, in order to avoid duplicate filings, some RIAs simply organize the firm in the state where they conduct their business to avoid having to separately apply for authority to conduct business in that state. Nonetheless, the choice of jurisdiction for formation of your RIA should be something you discuss with an attorney. Once the entity is formally organized, you can then open bank accounts in the name of the RIA and begin to enter into any agreements with custodians and other service providers who will support the RIA’s business. It’s important to note that if you organize the RIA as an entity such as limited liability company or corporation, it’s vital to keep a bank account for the RIA separate from the personal accounts of its owners and not to commingle RIA and personal funds as commingling could lead to loss of liability protection for the RIA’s business.

Fifth, once organized, it’s vital to determine whether the RIA must register as an investment adviser with one or more states. The determination of whether the RIA must register as an investment adviser with the SEC or one or more states depends on a variety of factors including the type of business being conducted by the RIA, the number of clients the RIA will have and where they reside, the amount of assets under management the RIA will have, and the places of business from where the RIA will conduct its business. For a more in-depth discussion of when and how an RIA must register with the SEC or one or more states, please click here. The RIA will also need to determine which individuals will need to register as an investment adviser representative with one or more states. The determination as to whether an individual must register as an investment adviser representative depends on, among other things, whether the RIA is registered as an investment adviser with the SEC, the state(s) where the individual is conducting advisory business from, where the individual’s clients reside, and other factors.

Sixth, once you’ve determined where the RIA must register as an investment adviser, it’s vital to understand the investment adviser regulations that will govern the RIA’s compliance obligations. In general, the rules of the jurisdiction (e.g., the SEC or a state) will principally determine what investment adviser requirements are applicable to the RIA. The RIA should then develop a compliance program designed to ensure it will comply with the applicable investment adviser requirements. Often, these policies will address issues including fiduciary duties, trading and portfolio management, marketing and advertising, retention of books and records, and cybersecurity. For a discussion of what components comprise an RIA compliance program, please click here.

In summary, starting an RIA requires careful planning and analysis, but fortunately there are firms like ours that can help you navigate the pitfalls that could create undue risk as you’re planning your path towards independence.

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