National Compliance
S e rv i c e s
Successful Breakaway Requires Planning
Successful Breakaway
Requires Planning
by Rita G. Dew, Esq. and Alan J. Foxman, Esq.
Introduction
T
he financial turmoil of the last decade, and
particularly the 2008 financial crisis, have left many
financial advisers questioning whether working
for a traditional Wall Street brokerage firm is worth the
trouble. Mergers, scandals, and proprietary products
combined with sales quotas have left many in the industry
wondering whether they could better serve their clients
and achieve greater job satisfaction by breaking away
from their current broker-dealer and going independent.
Protect Against A Botched Breakaway
Learn what might go wrong
• Court issued restraining order
• Lawsuit between ex-firm and departing
broker
• Regulatory intervention
• Clients not moving to new-RIA
• Damaged reputation
To these professionals, running an independent registered investment adviser (“RIA”) presents many
possibilities. Diligent advance planning is critical to a successful transition from a traditional brokerage
arrangement to an RIA. This paper identifies those areas that an individual should consider, and provides
some practical guidance on how those areas can be managed when transitioning to RIA independence.
1. Define Your Goals
Clearly defining your goals will give you long-term vision and short-term motivation. This will help you
organize your time and resources, and allow you to measure your progress. Start by listing the reasons
you are considering breaking away from your current broker-dealer. This list will serve as a starting point
to help you begin to define the profile of the business you want to build, and the market niches in which
it will specialize. The key to a useful assessment is based on a realistic and thorough evaluation of your
long-term and short-term goals with a focus on success. You should define your goals on at least three
different levels:
• What is the big picture? Identify where you would like to see yourself and your firm in the next
5, 10, or 20 years. Knowing what you ultimately want to achieve will help you in the day-to-day
decision making process.
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Successful Breakaway Requires Planning
• Next, break down your big picture goals into short-term targets that you must hit to build your
business and realize your big picture goals.
• Now, start working on hitting your targets, and measuring your progress in reaching your longterm goals.
You should identify the things that you can accomplish next year, next month, next week and today to
start moving the process forward. Ask yourself a series of questions focused on why you are considering
this specific career change. These questions might include:
• Do you want to provide more personalized service to your clients?
• Are you unhappy with a sales-oriented environment?
• Do you prefer fee-based compensation?
• Would you like to increase your fee-based compensation?
• Are you limited to selling proprietary products?
• Has your broker-dealer’s brand become more of a liability than an asset?
• Do you want to become an entrepreneur?
The reasons people give for wanting to breakaway are too numerous to list and are as varied as the
individuals themselves. In reality it is most likely a combination of reasons that have you considering
setting up your own firm.
After compiling your list of reasons, you should examine each reason realistically, one by one, and decide
whether breaking away will, in fact, help you achieve your goals. For every reason you write down for
leaving, make sure you ask yourself, “What’s the downside?” and determine whether that makes it a “deal
breaker.” What you find may surprise you.
2. Choose an Entity Structure
Now that you have identified your goals, the next step is choosing a business entity structure. This is a key
decision in establishing the correct foundation to grow your business. Your three basic choices are: sole
proprietorship, partnership, or corporation. Sole proprietorships are self explanatory, but partnerships and
corporations can take on a variety of different options. You might also consider a hybrid entity structure,
such as a limited liability company. Because each structure offers varying degrees of liability and tax
advantages, you should consult with legal counsel to determine the most suitable type of legal structure
for your business model.
To make an assessment of the risks involved and the protections you will need, you should consider the
types and scale of advisory services you will provide. No easy formula exists to help you decide what type
of structure is best suited for your business. Nonetheless, once you have collected reliable information
from a tax professional and legal counsel on the various options available to you and the related risks
involved in each choice, you can make an informed decision about how best to structure your firm.
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Successful Breakaway Requires Planning
You must also decide if you will be the sole owner of the firm, or if you will take on one or more partners.
You should determine if you have the industry knowledge, drive, energy, resources, and stamina to be
the sole owner of an investment advisory firm. Equally important is the consideration of taking on a
business partner. A few questions you might ask yourself before taking on a partner include:
• Do we like each other?
• Is this person reliable?
• What do you know about this person?
• Do we have common business goals and professional objectives?
• Does this person have relevant business experience?
• Are our professional strengths and skills complimentary?
• Are the financial investments each partner is making equal?
• Do we have common views on codes of ethics and morals?
• Is this person motivated and hardworking?
• Has this person been disciplined by securities regulators?
A corollary to having a partner is having the right partner. Frequently, new entrepreneurs are not ready
to make a decision on whether or not they should have a partner. A viable alternative is an office share
arrangement that offers a partnership environment, but no legal obligations. In these cases, your clients
and workload are separate, but you have access to other professionals to discuss ideas and get a second
opinion on client or industry related questions. This arrangement can serve as the basis for establishing a
formal partnership in the future.
3. Prepare Yourself Financially
Now that you have set your goals and decided on a business structure, it is time to evaluate your financial
status and capital funding obligations to address, minimally, the steps you intend to take in the next six
months to a year.
As part of this process, you must consider if you will require start-up business loans or if you have the
personal finances to fund the venture. You must be willing to set aside the time and finances it will take
to succeed in your new advisory business. This will involve traditional business planning costs, as well
as those costs that are specific to the registration of an investment adviser and its investment adviser
representatives (“IAR”).
The entire breakaway process including RIA registration approval can take several months, and may
range up to a year depending on various factors inherent to the individual RIA. Since you must have an
approved investment adviser registration in effect before providing advisory services and earning fee
based compensation, you must, likewise, be financially prepared to forego income, pay startup expenses,
and payback loans during that period of time while you are awaiting approval.
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Successful Breakaway Requires Planning
Before you make the move, determine if you will lose deferred compensation or owe your broker-dealer
money if your representative agreement or retention agreement stipulates instant repayment of otherwise
“forgivable” loans. If you anticipate that commissions (from brokerage or insurance) will make up a larger
part of your income than advisory fees, you might need to make arrangements to keep your securities
licenses active. Conversely, if advisory fees will make up the majority of your revenues, then you should
decide whether the additional compliance oversight of a brokerage firm is worth the added income.
Start-Up Costs
Expect to budget money for certain ordinary startup and on-going business expenses. Startup costs are
the expenses incurred during the process of creating a new business. All businesses are different, but as an
RIA, minimally, the following areas should be considered:
• Compliance and legal assistance
• Rent and utilities
• Hiring and payroll
• Hardware and software
• Taxes and accounting
• Minimum net capital or bonding requirements (as applicable)
• Examination, registration, and licensing fees
• Errors and omissions insurance (optional in most states)
• Marketing expenses, including website, business cards and letterhead
• Research
• Equipment and supplies
• Miscellaneous
Ideally, your new RIA will generate enough income to offset your business expenditures. In practice, having
sufficient funds set aside to cover expenses (including your own household expenses) for at least one year
is a prudent and sensible idea. Remember, this is a business you are creating, and as in any new business,
a liquidity crunch when you are just starting out can have devastating consequences.
4. Review Registered Representative Agreement(s)
Issues concerning your present broker-dealer can create a compliance and legal nightmare. Prior to
proceeding with your breakaway plan, you must review your representative agreement(s) since the typical
representative agreement contains a non-solicitation and non-compete clause. There may also be client
privacy issues to consider if records are being transferred to a new RIA or broker-dealer. Without exception,
you should consult with legal counsel to determine what activities are lawful in view of your specific
representative agreement(s).
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Successful Breakaway Requires Planning
Your representative agreement is generally the place to look to determine whether or not you can take
your clients with you to your new firm. If you have any questions on this topic, seek legal counsel. Do not
guess at the answer, or rely on the opinion of a non-attorney.
5. Registration of Your Advisory Business
Before you can begin offering investment advisory services, you must first file a registration application
with the appropriate regulatory agencies (state or federal) and then monitor that filing until it is approved.
With few exceptions, you should not start providing investment advisory services until your firm and
individual registrations are approved.
You must determine whether or not you can start the registration process while you are still registered with
your broker-dealer. Many brokerage firms may view these actions as “engaging in an outside business activity.”
In these cases, if you failed to notify your broker-dealer in advance of starting the registration process, your
broker-dealer can immediately terminate your registration for cause. Additionally, once you resign from your
broker-dealer, the broker-dealer has up to 30 days to file the Form U5 with FINRA. This 30-day period could
further delay your regulatory approval depending on the state or states in which your registration is pending.
It is important to have a complete understanding of the jurisdictional registration requirements for your
firm and each individual providing investment advice on behalf of your firm. Absent a valid exemption,
this generally includes each jurisdiction where you have one or more clients, or where you have a place
of business, to ensure you submit any needed filings in advance of providing services to or from that
jurisdiction. Whether you register with one or more states or with the Securities and Exchange Commission,
you will need to draft and file a Form ADV to address disclosure requirements for your firm and your
employees. You may also have to file a Form U4 for each individual providing investment advisory services
on your firm’s behalf.
In addition to submitting the Form ADV, most states require additional documentation, and different
states frequently require different documents. For example, a state may require that you submit samples
of your client agreements, balance sheets and income statements, affidavits of no unregistered advisory
activity, proof of incorporation, and a copy of your written compliance procedures customized to your
firm. These are just a few of the additional items that may be required.
Preparing and collecting all of the required documents to submit the registration application can take
upwards of thirty days. Once filed, the regulators may take a month or more to review your application and
provide an initial response. Frequently, the initial response is in the form of a comment letter that itemizes
deficiencies in the application and requests that you submit additional information. Once you respond,
it may take several more weeks before you receive a second request for additional information, or before
your registration is approved.
An SEC registration typically takes thirty to forty-five days for approval. State registration approval of the
RIA and the IARs may take longer, especially for those firms that must report disciplinary matters.
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Successful Breakaway Requires Planning
6. Professional Assistance
Legal
You should hire legal counsel that specializes in corporate law and is also familiar with the peculiarities
of the brokerage and investment advisory industry. Legal counsel might assist you, for example, with the
following:
• Review non-compete and non-solicitation issues
• Entity structure decision
• Draft partnership or operating agreement
• Draft client advisory agreements
• Disciplinary matters
Compliance/Registration
As an RIA, you have on-going compliance, filing, and regulatory obligations. Even if you are a one-person
firm, you must still meet your compliance obligations. You may benefit from hiring a compliance consulting
firm to help you:
• Determine whether you may (or must) register with either the state(s) or the Securities and
Exchange Commission (SEC)
• Draft your compliance procedures
• Prepare and file the RIA and IAR registration application
• Assist with on-going compliance and filing obligations
7. Other Considerations
Custodian
A primary concern is the choice of custodian. This choice will determine what types of investments you
can include on your platform, how much your client’s pay to trade and ultimately how far -- and in what
directions -- you can expand your service offerings. The right custodian will provide a rich selection of
subsidiary services, including business financing, business development, reporting, coaching, back office
support, trading software and much more. Always conduct due diligence before choosing a custodian to
determine whether they provide suitable support and services.
IAR Registration – Form U4/Disciplinary History
One of the forms that must be filed when you register as an IAR is the Form U4. This document is filed
electronically via the Investment Adviser Registration Depository (IARD), an electronic filing system for RIAs.
When a Form U4 is filed, your broker-dealer receives an automatic electronic notification that a registration
request was initiated on your behalf. If you do not have prior written authorization from your broker-dealer
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Successful Breakaway Requires Planning
to proceed with the outside IAR registration, your broker-dealer may take the position that your actions in
preparing to leave constitute engaging in an outside business activity (“OBA”), and immediately terminate
your registration for cause. An unfavorable entry on your individual record could cause you long-term
career problems. There is some precedent indicating that these preliminary activities do not constitute an
OBA until your RIA is actually approved, but there are no guarantees your broker-dealer will agree.
Dual IAR Registration Prohibition
Even if your broker-dealer will permit you to remain registered with them until your new registration
is approved, be aware that some states do not permit you to be dually registered with more than one
firm. This may result in a delayed approval with your new firm, and prevent you from servicing your client
accounts until you have formally terminated your current registration.
IAR Licensing Requirements
Confirm that you meet the licensing requirements for IAR registration. The Series 65 is the most common
examination for IAR registration; however, a combination of the Series 7 and Series 66, or one of several
professional designations, may be used in lieu of the Series 65.
Marketing
You will need new marketing materials in order to establish your new professional identity apart from
your old firm. This generally means a new website, new letterhead, perhaps a logo, brochures and other
print materials. RIAs should use caution to avoid inaccurate or misleading statements in their marketing
materials. You should consider having all marketing materials reviewed by your attorney or compliance
consultant prior to distribution.
Securities Exams
If you do not register with another brokerage firm, your securities licenses will expire two years after
termination from your current broker-dealer. This may not seem important if your long-term goal is a
fee only business model; however, for someone that is paid on commission, you might have difficulty
adjusting to a fee only platform. If, after two years, you decide to re-enter the commission based side of
the industry, you will find that your securities licenses have expired and you must then re-take the exams.
Conclusion
Every aspect of breaking away from your current broker-dealer and going independent poses a range of
questions. These questions will arise at all points from the moment you begin to consider the transition
until the moment your RIA registration is approved. The prudent professional will take the time to consider
all of the issues discussed in this White Paper before making the decision to breakaway.
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Successful Breakaway Requires Planning
About the Authors
Rita G. Dew, Esq. is the founder and president of National Compliance Services, Inc. (NCS),
a compliance consulting firm formed to assist state and federally registered investment
advisers, hedge funds, mutual funds, and broker-dealers nationwide. Ms. Dew is also the
managing partner of The Law Offices of Rita G. Dew, P.A. The focus of her legal practice is
on investment management and representing investment advisers and broker/dealers on
issues dealing with corporate and securities law in the financial markets.
Alan J. Foxman, Esq. is a past Chairman of the Government and Regulatory Committee
of the National Association of Investment Professionals (NAIP) and writes the monthly
“Compliance” column for “On Wall Street Magazine.” From April 1989 through June 1997
Mr. Foxman was a staff attorney with the National Association of Securities Dealers, Inc.
(“NASD” n/k/a The Financial Industry Regulatory Authority or “FINRA”) in their Office of
Dispute Resolution. After leaving the NASD, Mr. Foxman had his own law practice, with a
concentration in securities law. He is currently practicing law through The Law Offices of Rita G. Dew, P.A.,
and also services as a senior consultant with NCS.
Disclaimer
This publication provides general information about securities regulation and is not designed to help
readers address their specific compliance requirements. This information is provided strictly as a courtesy
to readers for educational purposes. It should not be construed as, and does not constitute, legal advice
on any specific matter. NCS does not warrant or assume any legal liability or responsibility for the accuracy,
completeness, or usefulness of any information found in this White Paper.
NCS advises clients on the full spectrum of regulatory and compliance issues confronting registered
investment advisers. For more information about this publication or to discuss how any of these items
might impact you, contact:
Chad Jones
561.330.7645 ext. 210 [email protected]
For more information about National Compliance Services, Inc. and its products and services, visit us online
at www.ncsonline.com.
© 2013 National Compliance Services, Inc. All Rights Reserved. Any reproduction all or in part is strictly prohibited without prior written consent.
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