THE RIA BREAKAWAY GUIDE
BREAKING AWAY THE RIGHT WAY
The core elements of successfully leaving a broker-dealer to launch an RIA.
PHASE i
• Compliance Oversight
• Custodian Selection
• Legal Representation
PHASE ii
• Business Structure
• Tech Stack
• Investment Management
Start Your Journey
We hope you find this guide helpful as you evaluate your next chapter. If you have questions or just want to talk through your specific situation, feel free to reach out — we’d love to hear from you.
why advisors go independent
THE BUILD UP TO THE BREAKAWAY
When an advisor at a broker-dealer leaves to start an RIA, a number of factors contribute to making that decision. For example, an advisor may feel that compliance oversight in the broker-dealer structure is overly burdensome. Additionally, a lack of flexibility in the operation of their practice may be unattractive to representatives as it limits the full range of solutions they can offer their clients.
THE APPROACH
A TWO-PHASE TRANSITION
Advisors should educate themselves on important considerations and decisions in order to execute a successful transition. Finding the right partners and vendors is key in navigating potential issues. While any transition is inherently cumbersome, there are steps advisors should take to make their move to an RIA smooth and without unnecessary drama. This guide covers the core steps as well as the partners that must be leveraged to complete them.
REGISTER & BUILD THE FOUNDATION
Begin by getting registered and setting up the foundation: compliance, legal representation, and the right custodian.
Timing for Phase I
Successful transitions require multitasking.
The best method for kicking off the process is to select a compliance consultant, custodian, and lawyer concurrently. The steps below are organized in a typical order of operations, but the order is not set in stone. Advisors on the move should strive to address all of them as soon as practical.
Consider Engaging a Compliance Consultant
A compliance consultant gets the new RIA and advisor(s) correctly established from a regulatory standpoint.
If the new firm will manage at least $100 million, it will be required to register with the SEC. If the assets under management will be less than $100 million, the firm will need to register at the state level. This could require multiple state registrations depending on client locations. The compliance consultant can create and submit all necessary documentation to the appropriate regulatory body to get the new RIA registered. Additionally, the consultant can create new ADV Forms for the firm (Part 2a), advisors (Part 2b), Form CRS (Part 3), and Discretionary Investment Management Agreements.
Post-registration, consultants can work with the firm to establish an ongoing compliance program. This could include document updates, ongoing submission requirements, and audit preparation, among other services. It should be noted that there is a range in the level of service consultants provide. Some offer little support other than a periodic checklist of items to complete. On the other side of the spectrum, there are consultants that will act as an outsourced Chief Compliance Officer, and of course, there are a variety of options in between. Advisors should determine how much of the compliance load they want to handle internally and then choose an appropriate provider to match that level.
Understand Custodial Requirements
Choosing a custodial partner is very important for a new RIA and will dictate client paperwork requirements.
Based on the size and structure of the practice, some custodians will be better suited than others. For example, some apply custodial fees, while many do not. Some offer robust transition support, while others do not offer any at all. Once a new custodian is selected and contracted with, the clients’ accounts will need to be moved to the new RIA if applicable. The intensity of the repapering will depend on the type of transition. If the accounts need to be moved to a new custodian, a complete repapering will be necessary, which includes new account applications, Automated Customer Account Transfer Service (ACATS), etc. If the client accounts will stay at their existing custodian, a signed Limited Power of Attorney (LPOA) will usually suffice in moving the accounts to the new RIA.
In addition to transition support, custodians will sometimes offer soft dollar credits that can be applied towards the new firm’s technology fees. Usually, this benefit is only extended to larger firms or firms that will be transferring all their client accounts over from a different custodian.
Advisors should carefully weigh the transition help offered, the level of ongoing support needed, and potential technology credits when selecting the best custodian for their business.
Consider Engaging a Legal Advisor
The circumstances for any advisor breaking away from a broker-dealer are unique.
Advisors leaving traditional “wirehouses” may require legal representation to manage the process. Specifically, lawyers specializing in the Broker Protocol can consult advisors on the steps they must take to limit the legal risks involved. Lawyers will educate advisors on the client information that can be taken, the resignation process and timing, the timing of RIA registration, the timing of contacting clients, and a host of other considerations that need to be adhered to in order to stay within the protection of the Broker Protocol. Advisors that leave wirehouses who are signees to the protocol will be protected from lawsuits as long they honor the confines of the agreement.
Some notable wirehouse firms have exited the Broker Protocol agreement. In the absence of protocol protection, advisors are subject to local employment law. There are a couple additional steps that need to be taken to execute the transition successfully. One thing to note is that law firms that specialize in Broker Protocol typically do registrations. If an advisor needs legal support from one of these entities, the law firm usually packages registration with transition representation and handles both.
BUILD THE BUSINESS YOU
ARE MOVING TOWARD
Set up the operating business: business structure, technology stack, and investment management.
Explore Insourcing vs. Outsourcing
Inside a broker-dealer, the home office handles billing, trading, and performance reporting.
Advisors moving to a new RIA will need to build out that infrastructure. One key decision new firms have to make is whether they want to handle those tasks internally with Operations employees or whether they would prefer to outsource those tasks to an outside third-party. The outsourced third-party providers are known as Turnkey Asset Management Platforms (TAMPs). Advisors that choose to outsource operations to a TAMP do so for many reasons such as ease and speed of operational transition, and ongoing support.
Evaluate Your Technology Needs
Choose technology to best serve the structure you've decided on.
At a minimum, firms handling operations internally require a portfolio accounting system and rebalancer to trade models. Custodian representatives are great resources in evaluating all of the options available for this group.
For RIAs that choose to outsource, the TAMPs will package all the technology into their service offering. Advisors should not consider using a TAMP solution that would require the firm to sign a licensing contract with another technology provider. Additionally, TAMPs that have their own technology often offer more competitive pricing as they can better control their costs.
In addition to portfolio management technology, advisors will also have to evaluate CRM, financial planning, and risk profiling software, among others. Again, the technology consulting teams at custodians are great resources to evaluate these options.
Build Models or Leverage Marketplace
RIAs also differ in the investment management structure of their firms.
Many advisors at broker-dealers are used to utilizing third-party managers. If an advisor wants to retain those managers as they move to an RIA, they need to establish how to access the models. For advisors utilizing a TAMP, they should verify if the models are available already via the TAMP’s model marketplace. If the TAMP does not currently offer the models, many will consider contracting with a manager on behalf of the advisor.
Other advisors may decide to build and manage their own model portfolios when they move to an RIA. For many, that flexibility was one of the reasons they left the broker-dealer in the first place. Some TAMPs are better than others in facilitating advisor-managed programs. Be sure to find a provider with extensive experience and flexibility when it comes to advisor-managed models and combining advisor-managed models with third-party models.
Every business also needs non-industry specific items and functions to operate as well. Those items have not been explicitly addressed here but also consider things such as:
- An office and office equipment (or virtual office)
- Insurance and registrations
- A logo and website, marketing strategy, and more
While the details can seem overwhelming, lean on your custodial partners here for best practices and preferred referrals for vendors.
Your partner, not just a platform
Does your new RIA need a TAMP?
Breaking away is a big decision. Crucial to your success is planning and choosing the right partners. GeoWealth utilizes proprietary technology to power our TAMP, which has been built to provide RIAs with scalability, flexibility, and competitive economics. Furthermore, GeoWealth has the experience and staff to provide consultative support to advisors making this jump. And our support does not end post-transition. Rather, GeoWealth will continue to be a trusted partner as RIAs build the businesses of their dreams.
Ready to begin your breakaway process? Our team can help.
SOURCES:
* Schwab Advisor Services 2024 Supported Independence Study, page 21.
DISCLOSURES:
The information contained herein does not constitute investment advice or a solicitation. This article is for dissemination of general information only. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. Certain functionality may not be available to all users.