According to the U.S Investment Advisers Act of 1940, individuals must first acquire a license or registration before they can charge clients for their services. As the area of investing and securities trading are considered “complex operations”, potential advisers who want to do it professionally should meet the criteria under the scope of SEC laws.
In this article, we’ll take a closer look at the steps aspiring investment advisers must take to obtain that license; their duties and responsibilities; and the skills needed to be one.
Registered Investment Advisers (RIA) are individuals or businesses who offer investment advice to clients in exchange for certain fees. Their clientele includes high-net-worth individuals and firms who want to manage their investment portfolios. That said, RIAs need to be SEC-registered and well-versed in all regulations covering financial and investment management.
Simply put, RIAs are often the firms or businesses IARs work for. This means that there can be multiple IARs employed by an RIA. RIAs and IARs both need to pass the Series 65 exam, or pass the co-requisites Series 7 and Series 66. Some states allow candidates to take the certified financial planner (CFP) or chartered financial analyst (CFA) exams instead of the Series 65.
Becoming a Registered Investment Adviser can take several months and numerous fees, and involves registering with your state or SEC, incorporating a business, and more. Here are the steps to becoming a RIA.
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In order to start founding an RIA business, you need to prove your investment credentials with regulators. The typical path for this is passing the Series 65 exam, though if you have an active Series 7 license, you can take the Series 66 exam instead. Achievable has excellent courses for the FINRA Series 7, FINRA Series 65, and FINRA Series 66 exams. Some states may waive this requirement if you have a similar advanced financial planning designation such as the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA).
Next, you will need to set up and incorporate your business. It is recommended that you use an S-Corporation (S-Corp) or Limited Liability Corporation (LLC) structure, with the LLC being more popular, to minimize your personal liability. However, note that this does not mean you are protected from regulatory action if you violate the law.
After that, you will need to register your RIA in your state or federally. You will need to register the firm and individual representatives (including you), and then create compliance documents for your firm’s state of residence. Many hire a consultant for this step, and even with a consultant the process could take 2-3 months. Registering your RIA firm is done through Form ADV, and then after that process is completed, you can file yourself and any other employees as investment adviser representatives (IARs) using Form U4.
Once the firm is registered, you will need to pay an initial and annual firm filing fee, as well as individual adviser representative (IAR) fees for all representatives you are bringing into your firm (except in NY, MN, WY, and LA).
Finally, once registration is completed, you’ll need to set up the required compliance policies, rules, documentation, and a code of ethics for your new firm. It is also recommended that you acquire insurance for Errors & Omissions (E&O) coverage, which essentially acts as professional liability insurance for this kind of business. Your state may also require you to obtain a surety bond or hold a positive net capital balance.
And of course, you’ll need all of the tools that will make your firm run: domain name, computers, client billing software, marketing software, CRM software, reporting, and more.
After passing your FINRA exam or waiving the requirement, you must register either at the federal level with the SEC or the state level with your state’s regulator. To register with the SEC, you must either have $100M assets under management (AUM) in order to qualify for registration, or you can register via the “internet investment advisers” exception, or Rule 203A-2(f).
The “internet investment advisers” exception “is available only to an adviser that provides investment advice to clients exclusively through an “interactive website,” which is defined as “a website in which computer software-based models or applications provide investment advice to clients based on personal information provided by each client through the website.” They specifically call out that “The rule is thus not available to advisers that merely use websites as marketing tools or that use Internet vehicles … in communicating with clients.”, so it is only reserved for people who take the time and effort to build an interactive website and tool.
Due to the $100M AUM requirement, the majority of registered investment advisers are initially filed within the state of residence of the business. If you’re filing within your state, there is no need to have $100M AUM or to use the “internet investment advisers” exception, but you’ll need to look up the specific process for your state and any additional regulations or requirements that you will need to meet.
In order to register in either case, you must file Form ADV by the SEC. The form consists of several parts, and is filed online on the Investment Advisor Registration Depository (IARD) website. The SEC typically responds to the application for registration within 45 days.
Your firm will now need a custodian to hold your client’s assets and securities holdings. This is often a large firm like Bank of New York Mellon or Charles Schwab. When choosing a custodian, consider your firm’s size, the custodian firm’s size, what level of service you’ll receive, what investment platforms and technology they support, and your personal relationship with the firm or your representative.
If you are currently employed by another FINRA-registered firm, you must follow Broker Protocol, which dictates which information you can ask of clients, what you can say about your former place of business, and what information or contacts you can take with you when you leave your current role.
It is recommended that you not tell anyone about your new RIA firm before the day you leave your old job, especially your clients. Resign in writing, and be sure to list out what client information you are taking, which cannot include account numbers. Some advisers get a lawyer to prepare them for this step, and to help get clarity on what information they’re legally allowed to take.
Once an RIA acquires their license, they commit to fulfilling the following duties and responsibilities:
What mainly sets RIAs apart from financial advisers is the fiduciary responsibility put onto the former by SEC laws. This means that RIAs are obligated to put a client’s best interests first, offering the lowest-cost options, and informing them of more efficient alternatives.
Being an RIA isn’t just about merely giving investment advice; they must also possess the qualities and skills needed to be effective growth partners for their clients. Core skills and competencies include:
Compared to commission-based roles in the investment advisory space, RIAs have much more leeway in terms of services and investment advice they give to clients. But with this greater freedom comes greater competency requirements — stronger skill sets and higher regard for regulation are expected from RIAs. With an ever-changing business and economic landscape, it’s only right for finance and investment professionals to live up to these exceptional standards.
Visit the official SEC website for more information on how to be an RIA.