Would you be interested in learning how to earn more money and better serve your clients at the same time? With large firms under increasing distress, many brokers and bankers have grown more concerned about the future of their employers (and their careers). As a result, the advantages of starting one's own investment firm have become more appealing. The faint hearted, however, should seriously consider the challenge of this opportunity, as it entails long hours, hard work and the constant scrutiny of government regulators. But in exchange for giving up some of your privacy, you can create a business that is more in line with your personal goals and relatively less stressful, all while earning profit rewards by better aligning your interests with those of your clients.
This article will outline the steps necessary to form a Registered Investment Adviser ("RIA") under the Investment Adviser Act of 1940 ("1940 Act"), which is registered with either the Securities and Exchange Commission ("SEC") or a specific state. This article does not offer legal advice, and such advice should always be obtained from the appropriate source before pursuing the creation of a registered RIA.
- Skill level:
Things you need
- Money (in most cases, about £22,750)
- Completed business plan
- General idea of the amount of assets under management your firm will manage
- While there are no educational requirements, you may need the appropriate license to sell investment adviser services (these vary by state)
Determine how your investment firm should be organised. In general, the investment business can have many liabilities, so selecting an organizational structure that protects your personal liability is important. These can usually include some form of incorporation ("C-Corp" or "S-Corp"), a Limited Liability Company ("LLC") or a Limited Liability Partnership ("LLP"). Please note that states differ both on liability protection and tax advantages, so you must review your options with both an attorney and an accountant.
If you have multiple owners, you must agree, even before starting the investment firm, on a buy-sell agreement and whether you'll carry "Key Man" insurance. (While the insurance term "Key Man" is most often used, it can also be referred to as "Key Executive" and, more rarely, "Key Person" insurance.)
You must consider your own personal estate planning implications in deciding which form of organisation is preferred for your investment firm. You must contact your personal accountant, as opposed to your corporate accountant.
If you haven't already, you must integrate an operating plan, including your organizational structure, within your business plan. In the investment business, there are four parts to an operating plan, some of which have issues you must address at start-up.
Determine your corporate officers and the individuals who responsible for filling in your organizational structure. Once you identify these individuals, go ahead and form your legal organisation.
Be prepared to spend £3,250 or more in legal and incorporation fees, depending on your state and method of organisation.
Obtain from the SEC a copy of the 1940 Act, the appropriate rules, guidelines and booklets for starting a new RIA. The SEC website (see Resources below) contains these materials.
Determine if you need to register with your state or with the SEC. In general, RIAs with less than £16 million in assets under management must register with their state, while those with greater than £19 million in assets must register with the SEC. Since these rules are fluid, you'll need to consult the latest rules on the SEC website.
If Step 2 indicates your investment firm must register with the SEC, go right to Step 4. Otherwise, before registering with a state, determine if your state has de minimus rules that exempt you from registering. You must contact the appropriate state department for your state to find this information.
Whether you register your investment firm with the SEC or with your state, you'll need to start by setting up an Investment Adviser Registration Depository ("IARD") account through iard.com, including completing your investment firm's SEC Form ADV. This site will also indicate if you need to pay anything to register.
Assign someone the position of chief compliance officer who must create the firm's compliance manual.
Be prepared to spend £3,250 or more for this step.
Select a chief operations officer ("COO") for your investment firm who must now select an appropriate portfolio management system and corporate accounting system.
Your compliance manual will address a number of regulatory issues for your investment firm, including how you will maintain your accounts, conduct your trading and undertake your trade processing. Your COO must match each of these compliance requirements with an appropriate procedure to build a standard operating procedures manual.
Be prepared to spend £9,750 in this area.
Select a director of research for your investment firm. Your director of research must select appropriate stock research databases and must determine your investment firm's investment philosophy.
Your compliance manual will address a number of regulatory issues for your investment firm, including how you monitor your company research, how you allocate trades and how you handle personal trading. Your director of research must match each of these compliance requirements with an appropriate procedure to build a standard research procedures manual.
Be prepared to spend £3,250 or more in this area.
Select a director of marketing for your investment firm. Your director of marketing must identify and insure all sales personnel have appropriate licenses (these vary by state). Your director of marketing must also work with your director of research to create a series of investment objective statements to present to prospective clients and which incorporate your investment firm's investment philosophy.
Your compliance manual will address a number of regulatory issues for your investment firm, including how you protect the privacy of your prospects and clients, how you handle Patriot Act provisions and how you go about selling your firm. Your director of marketing must match each of these compliance requirements with an appropriate procedure to build a standard marketing procedures manual.
Be prepared to spend £3,250 or more in this area.
Tips and warnings
- Always make sure you have valid legal advice before creating a new business.
- Many popular retail brokers---but not all of them---offer significant operations support for RIAs.
- Although expensive, consider purchasing Directors and Officers/Errors and Omissions ("D&O;/E&O;") insurance.
- This information does not offer any legal advice.
- This is a highly regulated industry that is currently under an unusually large amount of scrutiny---proceed with caution.
- The two most difficult areas for new RIAs are compliance and operations.
- Be careful: The easiest way to do something often violates compliance provisions.
- Although you can purchase "off-the-shelf" compliance manuals, these may expose your investment firm to greater liability.
- The SEC does not permit individuals to use the initials "RIA" after their name, as an RIA refers to the organisation, not the individual.
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