Roadmap To Independence Hot

Andrew Gluck:          Good afternoon everybody.  Hi there.  Welcome.  This is Andrew Gluck from Advisor Products and I am your host today for this second in our series for Advisors Going Independent.  Thank you for joining us.  It’s a pleasure to have you all here.  We have a lot of content to cover today, so I’m going to get right to it.

I’ll be your host today.  I’m the founder of Advisor Products, which was started in 1996.  My background is as a reporter.  I still write a column for Financial Advisor Magazine.  I was in personal finance journalism for many years at the New York Daily News and Worth Magazine. 

Most recently, since 1996, I started a company that makes marketing solutions for financial advisors – secure client communication systems and websites and client newsletters.  Most recently, I’ve started a new venture called Advisors4Advisors.  I’ll just tell you about that real quick.

It’s a practice management website for independent advisors.  Every day we give you links to marketing industry news.  Really, about the neatest thing that we’re doing is giving advisors access to ratings by other advisors of practice management applications.  What we’re seeing is that advisors are going in and rating apps.  It’s the power of the internet that we tapped at Advisors4Advisors.  There’s a lot of other content there for advisors who are interested in becoming independent or are just starting out, so I would urge you to stick around.  At the end of this presentation today I’m going to talk about how you can get a free six-month subscription to Advisors4Advisors and the AdvisorAssist Guide to Independence, which is a free giveaway that you’ll get once you join up for Advisors4Advisors and fill in your profile and rate one of your practice management applications.

I just want to remind you that we also host the Financial Advisor Webinar Series every Friday.  While this webinar series is really devoted to advisors who are interested in independent, who are making that transition, the other webinar series every Friday, which has been going on since the market break just over a year ago, we’ve got about 50 or 60 of those by now and they’ve included some of the best minds in the business.

Tomorrow we have a session where we’re going to be discussing new privacy laws.  Massachusetts recently enacted a new privacy law.  We’re going to have an attorney who specializes in that type of issue from Proskauer Rose LLP, Brendon Tavelli, will be with us talking about that.  Please join us for that session tomorrow at 4 p.m. EST time.  You can get more information about that at www.advisorproducts.com and at www.advisors4advisors.com.

Today we’re going to first cover operations and technology issues for making the transition to going independent.  Then we’re going to cover registration compliance program design.  And then finally, we’re going to talk about getting that free membership to Advisors4Advisors and also how you can get your Guide to Independence, and we’ll take questions.

To get started, I want to introduce you to Blane Warrene.  Blane has been in this business for close to 20 years, I guess it is, and he’s really an expert steeped in operations, processes, planning, and implementation.  He’s a Technology Expert and I’ve worked over the years with lots of operations people.  Blane really stands out.  He’s just so hands-on and well-organized.  He’s also really easy to work with.

Blane is a blogger on Advisors4Advisors and he regularly writes about how you can implement technology and operations and processes.  He really focuses on that in his blog.  So what I’m going to do now is turn over the reins to Blane, who will talk to us about operations and technology issues. 

Thank you for joining us today, Blane.

Blane Warrene:         Absolutely.  Thanks a lot, Andy. Thanks everyone for coming.  We certainly have some good material to cover today and ongoing in this series.  Actually, it’s a nice complementary set of information when you think about operations and technology and then also the risk management and the compliance requirements around building out a practice.  So I think you’ll find a lot of value and also you may find that some of the items that I cover in these slides may generate some questions from you on the technology and compliance and hopefully what will happen is when Chris comes on after me, he may answer those questions as he goes through the roadmap of how to set up your practice from that front.  So we certain appreciate your coming today.

We certainly want to get started on the right foot, and there’s nothing like building a good foundation for any practice, whether you’re in the process of building that practice, or considering that practice.

There’s a couple of areas to really think about.  Some of them are common themes no matter what type of business you’re setting up:  things like training, documentation, and planning.  But specifically, when it comes to advisors, there’s a lot of technology in the universe that you can use and quite honestly, a lot of it is very good technology.  Some of it is multi-dimensional and has a lot of functionality, and others you really have to think through your practice and your approach to working with clients to really pinpoint the type of tools you need.  So what we’re going to focus on today are what we would consider core functions of an operations and technology and practice, and that is CRM – your client management tool (your client database, how you interact with your clients from a planning or analysis approach, and then also the reporting approach.

So that’s kind of like a three-pronged piece that sits on top of the fourth leg of the stool, which we’ll get to in this presentation which is how to deliver those communications to your clients.  So really, this framework you build out from and seat the core of your practice.

The best place to start is certainly to identify the type of practice and the type of practitioner that you are.  Now, the common theme through these three bullets you’ll see of the Money Manager, the Financial Planner and the Relationship Manager is largely, we all have a little bit of each in us, but if you really think down into how you like to work with your clients or how you plan to work with your clients, the likelihood is that you can probably find a majority rule in one of these three areas and that certainly helps you think differently about the vendors and the tools that you’re going to need and also largely impacts the kind of information that Chris is going to share with you compliance.  You’re going to think differently about what steps you need to take in your roadmap.

So there are certainly these three approaches that are most common and I won’t read all of this out to you because you can get these slides and use them as a resource afterwards, but certainly the Money Manager’s focused on analytics, details.  I need to be able to set allocation models up.  I need to be able to think about trading strategies.  I need to be able to get equity research, fund research, fixed income research now, on demand when I need to talk to a client and there’s definitely a layer of tools out there to satisfy that need. 

Likewise with financial planning and relationship management, you use your resources and your time differently and you need tools to support that approach.  So most certainly as a planner, you’re going to be thinking more long-term.  You’re also going to be thinking about stages and looking at a portfolio differently than a manager.

Likewise with a Relationship Manager, you may decide you don’t want anything to do with the operations.  You want to invest the majority of your time and energy exclusively with your clients.  So as I said before, there’s a little bit of this in all of us, but you’ll certainly be able to identify the key component that will help you define and profile your initial practice setup.

Based on knowing this, there’s a number of things that you can do and there’s obviously a set of activities that you’re going to need to carry out with your clients.  There are processes that you can define – and we’ll cover a couple of simple ones in this presentation – but it’s as simple as “How do I gather all of my client information?  How do I communicate with my clients on a regular basis?  How do I go through the financial planning process?  What steps do I need and what information do I need to gather?” 

The number of functions that you’re going to want to be able to satisfy, and so by knowing that profile, you then find it much easier to pinpoint whether you’re doing it on a legal pad or an electronic document or a flowchart.  It’s very easy to itemize out.  These are the kind of things that I need to do and my staff needs to do to support me and our clients.

Once you have those requirements in hand, it’s a lot easier to start talking to vendors.  You know what you need; you know what you need to accomplish; and there’s not that doubt in the back of your mind when you go to talk to a vendor and they start rattling off their features, you’re able to go to them and very clearly say, “This is what I need to do.  Can you satisfy these requirements for me?” and actually, it’s not combative with the vendor to do so because they love knowing that it’s a lot easier for them to give you a very relevant presentation that was worth your time to sit through to find out what works. 

So this will help you get to that point where you can very much so identify key vendors that you want to begin talking to, and a point that I like to bring up here is when you get to that stage where you’re saying Vendor A is going to be CRM and Vendor B is going to be my planning tool based on our conversations, great time for your staff to start looking at very specific details – or what I like to call “getting into the weeds.  That’s a chance for you to step back before you sign any agreements with the vendor and say, “Let my staff talk to you about the very specific things that they’ll be doing.”  It’s a much easier way to get off on the right foot with the relationship with a vendor and also very likely your whole team will congeal and get behind a particular vendor.  It makes it a lot easier when we get to the training stage and implementation stage and the kind of things you need to do on your system.

So one of the things I like to bring up at this point is there’s a debate that goes on forever about “Do you want software that’s installed on your machines versus do we want software that’s web-based, or what’s called software the service.  There’s an argument for both, however in the modern age where we’ve come in technology – especially in the financial services field – these vendors that have been out there for seven (7) to ten (10) years on the web perfecting this process are now at a point to where there’s really not a significant noticeable difference between using a piece of software and using a web-based provider.  What I would like to cover is the advantages of putting together that web-based solution.

One of the beauties of getting started on the right foot with your practice is that you can look at what you need from a complete perspective.  I like to use the wheel approach to illustrate this.

There’s a number of thing that you’re going to be doing.  We’ve mentioned CRM.  That’s the hub of your business.  Everything about your clients is going to be in CRM.  Everything from as simple as birthdays and the date they became an active client, to sophisticated information about them and their family and their employment or their businesses, significant confidential information that you need to keep track of and utilize when you’re working with your clients, that’s all aggregated in one CRM system, and if you pick the right CRM system, the reason I use this wheel – you see the cogs going out into the wheels of Custodian Tools, Portfolio Reporting, Analytics, Illustrations and Proposal Generation – your CRM can power sharing the data with a lot of those tools to eliminate data entry and redundant typing mistakes. 

If the data is clean in your CRM solution and you select tools and solutions that work with that CRM and integration, you not only get useful tools that help your practice be more efficient, but you’re getting a lot of scale there because you can handle a lot more work with a lot leaner staff without people feeling overworked or overrun with tasks.  So there’s a lot of automation and efficiency you can achieve, and this wheel illustrates where you’re going from the perspective of setting up your business often times to start potentially at a very small level and grow 100%, 200%, 300% over the course of three to five years, and you can sustain that growth without having to start re-evaluating vendors each year or selecting new systems.

I mentioned at the beginning that there are four legs to the chair, and that’s really where we’re at with this wheel in that you need to start with CRM.  It’s going to be the core of your practice and then you’re going to layer in the tools that are the biggest part of the processes that you will have to undertake and manage in the practice.

I’m using very broad categories here when I talk about Planning and Analytics.  That spans everything from a simple financial plan to an assessment for a prospective client, to significant analytics and research that you may do to back-test a portfolio, to forecast or run a Monte Carlo simulation on a future performance, and also largely, these tools will then allow you to do measurement or provide metrics to your clients on how you’ve progressed. 

A simple example is a tool like MoneyGuidePro where you input the financial plan based on goals – life goals, business goals, personal goals.  The data that comes in on your customer’s accounts can update that financial plan and it has a visual ______ graphs indicator that you can show your customers that they have gone from 10% to 30% of accomplishing their goals to 50% towards accomplishing the goals.  So there’s a lot of log built into these tools that allow you to not only do things internally for yourself, but with deliverables that you can give to your clients, as well as tools that your clients can use on their own on demand, depending on how you set up your practice.

So these four legs work very well.  So from a CRM hub to the Planning and Analytics component, to the Reporting – critical, regardless of the profile of your practice – we think about the Money Manager versus the Planner versus the Relationship Manager – reporting affects everybody.  You not only want to know how your accounts are dong, but you want to monitor performance; you want to have practice metrics; and you want to be able to deliver tools to your client, whether that’s in a meeting, whether that’s online, or in some other fashion.

And then finally, certainly a communications hub to deliver this certainly rounds out the chair.  A place to not only use the marketing component of your new practice branding and promotion and interacting with the public, but more important, also a mechanism to deliver to your clients all of this information you’ve accumulated, manipulated, managed, and then aggregated based on their activity with you so that there’s a nice, clean deliverable that they can walk away with.  Whether that’s as simple as them calling and saying, “Where am I at?” or if it’s as complicated as an annual review meeting where you have a significant pack assembled to review with.

So to give you a sense for some of the vendors that are out in the space – and many of these you may have heard of – there are vendors specifically in these areas we’ve covered that do the kinds of things that I’m suggesting, so meaning the integration component.  You pick a CRM tool from this window and you also pick a Financial Planning and a Reporting Tool.  These work together in integration and we’re going to show an example here in a moment.

This certainly isn’t all-inclusive of every vendor in the state that supports this, but these are certainly the significant vendors at the top of the food chain that are mature, that have experience in this space and that understand the value of integration and practice management.  So they certainly would be in your larger list to look at to whittle down to your final selections. 

So thinking about integration, I certainly use a very simple example just to get us ticked off.  From an integration perspective, the simplest is entering a prospect in your CRM.  So you’ve gathered a limited but certain amount of information that you got either from a lead or from an interaction with a client who has a referral, or even from the prospect directly speaking with you, but you certainly don’t have everything you need to proceed.

Over the course of time you work with that prospect and ultimately they make a decision to become your customer.  You’re going to convert them to a client in your CRM and certainly that’s when the client intake begins.  You’re gathering a much larger set of information that’s going in the CRM to round out their record, certainly to complete paperwork, the output of Financial Plan.

The beauty of this integration scenario is once all of that data is entered in a CRM solution, you then can send that base information – name and address, other demographics, date of birth, tax ID, employment information – you can route that information with a click of a button over to the Financial Planning tools.  I really do mean with a click of a button.  These aren’t pie in the sky scenarios.  These are everyday functional exercises that people do with these tools.

The obvious is that it saves you a lot of time in getting started and working with a new customer, but more importantly, it just streamlines your data.  You and your team have one place to clean up data and make sure it’s working properly and from there you can syndicate it with clicks or by setting up a new client in a new system and then it integrates.  That data comes over in your Financial Planning application.  It can pre-populate the majority of forms you need to fill out  There’s obviously always going to be 10%, 20%, 30% of forms that are going to be completed on a client-by-client basis, but all of the base information that every form needs is in your CRM solution.

Then more importantly, when reporting data comes back from the institutions where you’re hosting their accounts, that data can come back and update Financial Plans and CRM so that you have holdings information at your fingertips. 

And then finally, if you’re using a portal that allows you not only to market a website to the public, but allows your clients to log in, then again, that data can flow into that portal and then suddenly you have the same capabilities as an independent practice as a much larger organization that has spent millions upon millions to build portals.  You have that same functionality – that end-to-end deliverable that you can offer to a client as an independent practice.

So if we thing back across the steps that we’ve covered, we’ve talked about profiling your practice.  We’ve talked about the kinds of tools you’re going to need and the way that they integrate.  This is a simple scenario.  Now I’m going to show you an example layout – which will be in the slides for download – that gives you a much larger picture that you can take away as a tool to consider when you’re choosing your technology, and that is to look at kind of the 10,000-foot view over your practice of what it looks like to build out an integrated platform for yourself.

I caution you not to start thinking dollar signs when you think about a diagram about this.  You might be pleasantly surprised if you haven’t looked at this technology before.  There’s certainly an investment to get started, but it’s probably not as bad as you might think.  You’d be surprised at the competitive nature and the efficient nature of these tools.

I especially like the tools that pick a major and become the best at that particular function – CRM, Portfolio Analytics, or Financial Planning – because you’ll find that those are economically the most feasible tools to buy and they’re the most open to integrating with their partners and your partners.

What I would like you to take away from this diagram is the fact that you can provide that complete solution to your clients.  You can see that your CRM, your Analytics, and your Financial Planning and forms, those live together as a part of your operations practice and their encapsulated in the box appropriately.

A lot of these tools will be very friendly to synchronizing with your laptop or your desktop.  More importantly, they’re going to synchronize with your Blackberry, your Palm Pre, your Google phone, your iPhone, whatever you’re using, these tools largely have a synchronization capabilities and actually, I’ll make a point that on the Advisors4Advisors site, which you’re going to get offered six (6) months of access to, there’s some recent commentary on there about these kinds of functionalities, about synching with these tools and how they interact with your practice.

So you can see as you break this chart apart, there’s tools for you and your staff and then certainly, there’s tools for your clients.  What’s nice is by the time it comes to your clients, they have one simple place to go.  They don’t need four or five logins.  They don’t need to manage a bunch of bookmarks.  It’s a very simple process.  Just like in working with your custodians and your other providers, they get a simple quarterly or monthly report consolidating from them the same process with your technology.

So on this outsourcing perspective, I wanted to cover a little bit of ground on exactly what it means to outsource operations.  It’s certainly the most popular with the Relationship Manager practice, but it certainly spans to everybody.  There are plenty of Money Managers, I know, how have decided that there’s a portion of their business that they’re going to outsource because they really don’t want to build that infrastructure out of their practice.

Just like with the technology tools, the functionality and features of these outsourcers on a custodial and asset management side are phenomenal.  They’ve been doing it for ten (10) years or more and they just do great work.

You obviously get what a lot of people like to call more of an end-to-end solution, so from trying to develop a proposal for a prospective client, implementation and trading, to providing reporting and to delivering your brand.  That’s what an outsourcer needs to focus on to promote your practice and still solve the issues that you need to resolve.

There’s a number of things they offer.  I want cover all of these, again, because these are a takeaway, but certainly if you decide to outsource, there’s some benefits at the custodial and at the asset management level primarily because of the scale that they have.  They certainly have access to a much larger group of people.  It starts to behave just like group insurance.  The larger group of users they have, the lower your prices on technology get and the more functionality you get to use in your practice reparations.  As you can see, there’s a lot of ground to cover.  Certainly outsourcing some of this will make life a little bit more convenient. 

I covered some ground on these outsourcing providers.  On the left you’ll see Custodians; on the right, a sampling of third-party Asset Managers.  First of all, they’re in alphabetical order.  Secondly, it’s certainly not a complete list, although on the left you are looking at the top four Custodians in the independent space.  But on the right side, there’s a much larger universe of Asset Managers.  These are some of the largest, the most mature, and the most well-know, but you certainly can include these as part of your review process.

Now if you remember on the first slide of our agenda:  training, training, training.  This is something that I am starting to sound like a skipped record sometimes, but it is really, really critical not only at the outset, but keeping your staff up to speed on the latest craze from that vendor.

One of the greatest ways to do that is to pick a champion in your practice because certainly there’s different kinds of staff and different levels of detail that you need to get into, so you may have one or two people in operations who are going to do a large amount of work across a lot of systems, other critical people who have to touch those systems, but not in as much detail.  So certainly, train for what you do, but I always encourage the Principle, the Owner, to train as well to make sure they’re comfortable going in and out of systems.  You never know when half the staff is going to be at a conference and half the staff is going to be suddenly sick.  You might need to grab a report.  It’s worth knowing how to do that.

Secondly, on the simplicity side, as I mentioned in the beginning, focus on those core processes, do good due diligence with your whole team and demand from vendors that they support integration and that they provide consistency to your clients because it’s going to represent your brand.

Plenty of the vendors in the space are very sensitive to these areas and know how to be a partner and rather than someone who just sends you an invoice.

The one thing I will mention – certainly try to do some sort of a scorecard with your vendors every year.  It’s worth it to not only let them know where your problems are, but to let them tell you a little bit about their roadmap and where they’re going.  You may find that there’s some interesting things you can consider for your own practice or your own processes as they tell you about what they’re thinking of doing next, and you may have input for them that will help them make better decisions about priorities.

So kind of to close this out, don’t lose sight.  There’s a lot of detail that you have to pay attention to this implementation process, but don’t lose sight of simplicity and training.  It will make the implementation process much less painful and it will give you a much better feel for your technology and a much better experience for your whole team and for that matter, for your clients because service runs so much easier when you know how to get to the information that you need.

So I appreciate you taking the time to look at this.  Certain slides that had a lot of detail, I didn’t want to read everything off to you.  You can certainly download those slides or play a replay and take that away in a detail that you can use in the process, and I’ll be glad to take any questions at the end after the final presentation.

Andrew Gluck:          Okay, that’s great, Blane; thank you for that.  And also, if you have questions for Blane, then you can please comment on his blog.  Check it out on A4A.  He addresses a lot of the issues that come up at these webinars.  They do get addresses over on the blog, and I’m going to have a few questions for you as we move on.  I’m going to have some questions for you at the end here.  I’m going to put you on the spot, Blane, to follow up, but we’re going to have to wait to get to that because right now we’re going to have Chris Winn talk about the road to independence. 

Chris is also an industry veteran.  He’s been in the industry for close to 20 years and he’s the cofounder of AdvisorAssist, which supports start-up firms, whether you’re in RIA or a registered Rep. 

If you’re making the transition to independence, AdvisorAssist offers a lot of help in a number of different directions, including compliance.  Chris actually blogs about compliance and has spent the larger part of his career focused on the compliance issue.  He really helps advisors get the registration process nailed down, figure out whether to affiliate with a Broker-Dealer, whether to affiliate with a custodian, and how to select the right partner. 

What I’m going to do now is turn it over to you, Chris.  Welcome, thanks for being here and talking to advisors going independent.

Chris Winn:                Thanks for the introduction, Andy.  Hello everyone. 

Just to get us kicked off, I’ll try to move along quickly so we have ample time for questions, but being the compliance guy, I’ve got to run through a couple of disclosures here, so I’ll be quick.

You can read these, but real quick, each person is going to have a unique situation as they go and plan for their potential path down the road to independence, so whether it’s signing their own RIA, becoming an Investment Advisor Rep as someone else’s RIA, or affiliating with an independent Broker-Dealer.  Everybody’s situation is going to be different.  Don’t look at it and don’t try to use a one size fits all approach because there’s a lot of thought and planning that needs to go into it.  So let me move along here.

So as many of you know on the FINRA end, had this been a conversation and a webinar on how to sign up for a FINRA firm, I’d be reading you all of these conflicts and all of these disclosures and having you confirm for me what’s on page 1,219, but in my seemingly pathetic compliance humor, basically what I’m getting at is with moving towards an RIA model, there’s a lot of flexibility, but also a lot of change that you need to get used to here.

So where you may avoid a lot of conflicts that integrated, or part of your day-to-day dealings in your current business model, there’s also a lot of change and a lot of things you need to be aware on the RIA side as well.

On the way to independence, we’re going to talk about these in kind of fixed core groupings here.  Starting with any business, the core strategic planning is the key.  We’ll talk briefly about the registration of your firm, whether that’s SEC or State-Registered.  I won’t go into deep detail on technology and Ops.  Blane did a wonderful job there, but I’ll point out a couple of things that support what Blane was talking about from a compliance perspective. 

Marketing and branding and promotion, Andy will likely have plenty of things to say at the end if we have time here, but that’s something you really need to be planning throughout the process.  And of course, the part that most folks have stress on is the actual transition process itself, so dealing with the client transition, the potential of giving notice to an employer, and the actual live date of your business.  And then quickly, we’ll touch on how to protect your firm on an ongoing perspective.

So in the planning process—I won’t read through all of these, but I’ll just hit through the key things—you really need to create a formal business plan.  The custodians, service providers, others are likely going to require that a good formal plan in writing to evaluate whether you’re a good cultural fit for them.  Any potential investors will also want it.  But it’s also a process to make sure that you think of all the things in advance and make good decisions.

So starting with who are your clients?  What does your model look like?  Are you going to go it alone as a solo practice?  Are you going to take partners?  Are you going to continue an independent Broker-Dealer relationship or go with strictly a fee-only model?

As Blane was talking about, technology decisions are crucial.  They can really mean the difference between a profitable and unprofitable practice.

So where do you get started?  With any business, the planning process is an important step.  In addition to a formal business plan, develop an action plan because there’s literally hundreds of tasks that you’re going to have on everything from getting registered with the SEC to picking out the color of the furniture in your office, technologies and so forth, so you really need a timeline, an action plan, and a budget that goes through all of these key components.

Don’t be afraid to get advice from folks that are either industry professionals or folks that have recently started their firm or have mature firms and find out what has worked well for them, what they would have done differently had they had the opportunity to do it over.

And last – very important here – make a realistic timeline and pace yourself because there’s a lot of things that you’re going to need to do.

So on the business plan, just real quick, you can download there here, but some of the key things that most people are looking for in a plan is what your keys to success are, who your clients are, and this is a real important time to go in and segment your clients.  Is everyone going to come with you to the new firm?  And I guess another important question is do you want them all to come with you?  So those are things to think of, and then especially as we get into the compliance discussion, your communication plan – knowing how and when to communicate with prospective clients as well as those that you’re hoping to transition with you, is very important.

I won’t go through with the checklist, but at the end of this, you’ll be able to go into Advisors4Advisors and complete a couple of additional reviews and steps there and pick up this Guide to Independence which AdvisorAssist created here.

Okay, so timing on going independent is going to vary for virtually every individual.  There are some timelines such as the State workflows or the SEC timeline in terms of your review, where you’re not going to have any control over it.  But then there are other aspects of the timeline where you do have control and really, that’s where a good plan comes into play.  Really conservatively, you want to at least allot 60 to 90 days for the start of a new RIA business, and that’s going to give you the ability to get through all of the initial planning, the registration with the SEC or the State, the selection and the implementation of technology, and the transition of clients.  As we’ll talk about a little later here in the presentation, timing of some of these events becomes a real critical decision point.

When you get started is also important based on commitments to your existing employer, payouts you may have, and certain responsibilities that you have to clients with their existing needs.

Let’s talk a little bit about the licensing and registration.  So generally speaking, the State versus SEC Registration – there’s legislation proposed out there to make all advisors under $100 million become under State jurisdiction, and we’ll continue to follow that on the blog for Advisors4Advisors, but currently the rule is any advisor with $30 million or more must register with the SEC and the range from $25 to $30 is an optional range, but south of $25 million, you are required to register with each state in which you’re doing business with, and generally speaking with a few exceptions, if you have five (5) or fewer clients in a state other than yours, you are not required to file, but prior to you taking on that sixth (6^th) client, you are required to file with that state and recognize that additional state also becomes a primary regulator and can ask you for anything at any time.

The required forms are Form ADV Part 1, which is filed online, and then Form ADV Part II with the Schedule F, which is not only filed online for a State Registrant, it’s optional for an SEC Registration, but that’s a document that you’re going to be providing to your clients.  Most advisors provide the standard form and layout that needs to go to the regulators also to their clients, but you have the ability to create a customized one to the extent that it contains at least all of the components of the standard form and of doesn’t contradict anything, of course.

With respect to fees, there are all over the map and many of you, this is the time of year that you have to update an fund all of your fees for 2010.  The fees range from a couple of states that don’t charge at all, up to $400 per firm per state, and there’s not prorating, so if you were to start your firm today, you would have to pay the same fees prior to January for 2010.

In terms of your registration, when you’re dealing with the State Regulators, they will come back with questions.  They’re only mechanism for communicating with you is in the form of a Deficiency Letter, so they will have comments.  If you do get a Deficiency, don’t be alarmed by the letter.  The regulators are there to work with you to resolve those, so don’t take that too personal.

In terms of licensing, each firm is required to have at least one licensed person.  The licenses are required for an RIA or Series 65 or Series 66, but certain exemptions and grandfathering are available on a state-by-state basis.  There’s some uniformity, but it’s not fully consistent.  So designations like a CFA, CFP, and so forth, often exempt you from the examination requirement there.

As I mentioned, at least one registered person needs to be with each RIA firm.  Some of the other things to consider there are the timing of when you’re starting up your own firm, especially if you have a team with a number of individuals, it may be enticing to you to have one person start early and the rest jump in down the road, which is a good strategy, but some states also have rules where if there’s a 25% change in control, you could potentially have to reregister.  So be very careful when you go through that process and consult either the State or a Compliance Consultant to make sure.

Fees on this – generally the average is around $50 per year per IAR.  You’re not required to register—it’s basically similar to what I mentioned before—the IARs are only required to register in their home state or in states in which business exceeds five (5) clients in that particular state.

For those of you who already have an active firm out there, the renewal deadline for your 2010 fees is coming up on December 11.

So what do you do while you’re affiliated with another firm and you want to get started? This is one of the challenges that many of our face and, again, one of the key things as I recommend tht you don’t take a one-size-fits-all approach  Everyone’s going to have a unique situation with their employer, potentially different non-solicit, non-competition contracts, and many other aspects there.  The things that you should be aware of here is that FINRA-based firms are required to have their registered reps get approval for any outside business activities, so you’ve likely already signed a form stating that you’ll follow that policy and procedure, so you’ve got to be very careful about how go about planning for your new business venture.  You want to make sure that you are the one that is communicating the potential to part ways with the employer, and not the other way around.

So some of the questions I often get asked are whether I have the ability to go out and form my own legal entity, whether I can sit for the Series 65 or 66 exam or file the ADV while I’m still employed with a FINRA firm?  The answer is maybe.  I wish I could give you one that’s more definitive, but everyone’s going to have a unique situation, and of course, in an ideal world and an ideal scenario, everything would be handled in advance and on a straight forward basis.  I recommend that you do talk to a compliance consultant or an attorney on your specific situation, but I will mention that none of these three items here that I mentioned have a formal trigger that would go back to your firm, but that does not mean that there’s no ability for them to find out.  So make sure that you’re covering all aspects of covering your basis here and that you’re continuing to act in the best interest of your firm’s while you’re employed by them.

On the legal entity, there’s numerous options for the type of entity you select and it’s become kind of a commodity type of business in terms of getting these entities set up, so it’s a real simple process.  The real key decision here is more of an accounting question than it becomes a legal question.

With respect to a sole proprietorship, I’d advise everybody not to – in most circumstances, that’s probably not a good idea because there are no corporate protections, but the things to think of when you’re going to choose an entity type is really who’s going to be in your firm, is everyone going to come at the time, will you have investors.  In other aspects, it may necessitate either a share structure as opposed to a partnership structure or a limited liability where you’re sharing in the operating process.

If you have any questions, there’s numerous resources aside from your attorneys and regulatory consultants like myself.  You can directly call the State Corporations Commission, go to your accountant, and there are also numerous online resources.

Another core thing that you must have in place before your approval of your firm (and I’ll say that again) before you’re approved there’s a compliance program.  So back in 2004, Rule 206(4)-7 was enacted to require a compliance program to be prevent, detect and correct any violations of the securities laws.

So some of the core components of it, the most notable is obviously your Written Supervisory Procedures which governs how you conduct your business and manage conflicts and risks and other aspects there.  But other components like your Code of Ethics, your Privacy Policy, your Business Continuity Plan, and then plans for maintaining books and records are equally as important.

It’s important to note that a cookie-cutter compliance program is actually no longer something that’s acceptable by the regulators.  There’s been numerous recent cases where there’s been serious fines and even some advisors shut down for basically just taking a compliance program that was handed to them by another firm and wasn’t reflective of the business activities that’s being performed by your firm.  So if you are going to go through this process yourself and leverage materials you’ve received from others, please be certain that you do go and customize it to what you’re actually doing and don’t leave in things that you’re not.

Technology and Operations – I’ll go through this really quick.  The questions that you’re going to want to ask yourself is whether you need to own the hardware.  As Blane was saying, there’s numerous operations out there, so I won’t go through all these, but the core things you’re going to need:  You’re definitely going to need a system to manage your books and records and maintain those for the required holding periods and you’re going to need a system to document any of your clients’ interactions and records.

So as Blane mentioned, CRM system is often a great place for that.  Another great choice to compliment that is a secure internal website or intranet site.

On the upside, again as Blane was mentioning, just think of what activities do you want to do in-house, what fits yours core competencies, and evaluate the pros and cons of having an outside party do this to assist you.

On the marketing end, Andy can help us a little bit more on this, but really this is a key thing to be thinking about while you’re waiting for your firm to get approved by the regulators.  You have plenty of time to be focusing in on what are the pillars of your brand, how do you create a consistent message, how do you handle your various distribution channels for marketing – print, web, and social media, and so forth?

The foundation for advertising is a little bit different for an RIA than it is on the FINRA side.  The difference is that there isn’t anybody pre-approving your advertisements.  The foundation is really in truthfulness and accuracy and you’re responsible for making sure that those statements stand true in anything you send out and to know all the other rules.

Social media is an area that I often get a lot of questions on and I’ll be continuing to blog on that on Advisors4Advisors, but the answer is yes, you can use LinkedIn.  You can use Facebook, and you can use other mechanisms there.  You can create your own blogs, but you need to stay away from testimonials.  Try to avoid having folks on LinkedIn recommend you and make reference to anything relating to your qualifications as an investment advisor.

Since we’re talking about promotional aspects here, check out Advisor Products for assistance on the marketing and promotion, and certainly compliance consultants like myself can certainly help you with anything to make you aware of all the advertising rules.

Okay, here’s what everyone’s been waiting for:  the transition.

This is going to be the most stressful part for you.  This is when it all comes together.  Your firm gets approved or is about to be approved any day.  You try and decide what information about your clients do you need to have in order to transition them.  You, hopefully at this point, have figured out the particulars around the ownership of the client relationship and any contractual arrangements, but what I suggest here is that you have all of these things buttoned up in advance of talking to any existing clients or even any potential clients out there.  So you can’t hold yourself out as being a Registered Investment Advisor until you are, in fact, registered.

The timing of your transition – we touched on a couple of these triggers, but if you’re going to start this while you’re employed, there’s ways that you can incubate your firm and, in some instances with some states, start while having somebody else get the aspects of your firm up and running while you continue to do business and serve your clients.  Look around if you have such a situation, but be careful in terms of how you go about this.

Outside business activities is one of your key risks.  The other things to consider is to make sure that you’re doing this on your own time with your own technologies.  Don’t use the company emails and other phone systems and things where you’ve signed a Code of Ethics or other policies that you’re required to adhere to that state that you will not do this.

And of course, seek legal advice if you have any unique situations.

Okay, so we talked about this one, so I’ll more forward.  If you do have multiple partners, you sometimes can have one or more of them start in advance, but just be careful as to what the state rules are going to require, as the states will register the investment advisor reps and the change in control can potentially result in a re-registration.

In terms of planning for your transition, it’s advisable, of course, to always wait until you are approved, but sometimes that’s not always practical, so I can’t give you advice to talk to people in advance but if you do, make sure you are following the Broker Protocol and that you are not creating any potential conflicts that may come back to affect your firm.

From an ongoing perspective, there’s many things you’re going to want to do as an RIA in terms of how to maintain your compliance program.  On an annual basis, it’s advisable to have a compliance calendar that outlines the activities for setting up your compliance program and executing the tasks.  And throughout the year for that rotational program, you want to keep a diary of all of the tasks and activities so when you do go do an annual report, that annual report is not something that you’re trying to remember or recast an entire year’s worth of activity.

We’re running out of time, so I’m going to jump forward here. 

The key thing to take away is that if you try to build the compliance into the daily operations of your business, it will make you much more efficient and it will be much more cost-effective for you, and again, it’s an evolving process with compliance.  Don’t make it a once-a-year activity.  It not only makes it harder, but it won’t stand up to regulatory exams.

On Advisors4Advisors, you’ll be able to get the Guide To Independence which summarizes some of these key activities and I’ll pass this over to Andy in just a moment and he’ll give you a little bit more background here.

Andrew Gluck:          Okay, Chris, well, thank you for that.  I do want to mention that since some of what you’re talking about is pretty sensitive issue for advisors going independent, that on Advisors4Advisors you do get screen names and we encourage users to use screen names so that you can protect your identity.  We know who you are, but nobody else on the site nobody knows who you are.

A couple of things I want to mention, Chris, you just eluded to the free giveaway that we have this week.  I just want to tell people exactly how to get that.

When you registered for this webinar, you filled in information about your firm and a couple of basic things and you gave us your email address.  As long as you didn’t opt out of getting a free 6-month membership with A4A, you’re going to get an email after this webinar and you’re going to get in that email some temporary credentials where you can sign into Advisors4Advisors and all you have to do is rate one of your practice NAPFA applications, fill in your profile, and then you can get the Guide to Independence.

You can also use your points to get some of the other giveaways that we have.  We previously had a guide to setting up your firm in a paperless way, and we also had one on compliance – a compliance calendar for the year.

I just want to quickly show you how the A4A interface looks.  When you go into Advisors4Advisors, up here is about the coolest thing that we’ve got – I think.  You can click on a review and see different applications and what advisors are rating them.  So if we click on, say, this one about PortfolioCenter – and I love doing this because the advisors, you just never know what they’re going to say.  But you can see the average user rating of PortfolioCenter from nine (9) users and you can see the individual ratings by the advisors of PortfolioCenter.

So that’s one of the ways that we’re helping advisors go independent, by giving them support, telling them very detailed information about different applications.

One of the other things you could do is really get information specifications about each application and very detailed information, in this case, about Portfolio Management software.  You can compare the Portfolio Management software applications one to the next just by clicking over here and just comparing two applications side by side.  So you can do that with several applications at once, so please check out Advisors4Advisors.

Both Chris and Blane were kind enough to mention that I would talk about marketing.  Actually, I didn’t leave time today.  I wanted you guys to really have the full one hour.  We’re just about out of time, but if you have any questions, I’m going to encourage you to please text them into us.  Chat your questions into us now.  But I have some questions for both of you.

Blane, you came out pretty strong in favor of using software as a service – web-based applications – and I’m wondering, what are the negatives to using the software as a service?  Because you came out in favor of it, but what are some of the negatives?

Blane Warrene:         Well certainly one of the obvious negatives is that it requires an internet connection to get to all of your tools, and certainly 5–7 years ago, that would have created a lot of doubt in a lot of folks’ minds.  But as we’ve all experienced, predominantly we get the 99% uptime that we get out of our internet connections.  Even as simple as a home office on a cable connection or elsewhere, we’re getting that connectivity.  So that’s one negative. 

The other negative that often is an item of discussion is data security and the redundancy of your information, and that’s where, when I mentioned a couple of times in my presentation, due diligence is critical because when you talk to your vendors about that, I’ve written about this on A4A as well, is that you use those vendors that can demonstrate a proven way that they secure data as affirmations that they provide you that offer that functionality, and what you’re getting with that added layer of security then, is you get the convenience of the integration between your partners, your custodians, and the vendors.         

You can certainly get a level of that with your offline tools, but it’s a lot more difficult and often times, a lot more stringent to do it with offline software.

Andrew Gluck:          Another thing I wondered about is you spoke about these different applications advisors need – and please keep your answers brief, if you can Blane, because we’re already out of time – but as far as financial planning software goes, here’s this advisor who’s out of Wire House or Regional.  He’s going independent.  He may not even have used financial planning software himself very much.  How important is it to get a financial planning software program and do most advisors when they’re leaving a Wire House or a Regional, do they move in that direction, or do they just stick with the portfolio management part of the business?

Blane Warrene:         I think it’s absolutely critical on a couple of fronts – and I’ll keep the 10-second answer – one is the fiduciary front and the other is it enriches your relationship with your clients.  Even if you’re not a true financial planner, you can use the assessment and the planning tools to give your clients great deliverables from a demonstration standpoint of what you can do for them.

Andrew Gluck:          Another thing, here you are.  You’re an advisor at one of these large Wall Street giants, let’s say, and you’re going to transition over to maybe a Turnkey Asset Management Provider (a “TAMP).  Are the TAMPs the same, or are they different when you go independent, and when you’re making that transition from being a Wire House or Regional Broker to go independent, do you have that – when you move over to say, an Investnet or one of the other TAMPs that you mentioned in that slide, how easy is that transition?

Blane Warrene:         You’re actually on the actual operations side of the managers and the equities and the assets and the process are largely identical.  What’s different is you get a whole new channel of tools and solutions that before you didn’t need that were all straight through processing and what they’ve done is they recreated that end-end solution for you as an independent advisor.  So there’s certainly a transition period and those TAMPs provide you with a relationship manager to mentor you through that process.

Andrew Gluck:          Hey, Chris, when advisors are going independent, my guess is that most of them hang onto the B-D relationship, that they’re going to go and hang their license over on as an independent Broker-Dealer.  Is that the case, or do some of them just give up their Securities License and become RIAs?  I’d imagine doing the latter would be more difficult.

Chris Winn:                Two questions there:  It’s really an even distribution.  There are a lot of advisors that continue with the hybrid relationship and seek an independent Broker-Dealer that’s not going to take a heavy revenue share on the RIA side of their business, but recognizing that FINRA has this Rule 3040 that covers your outside business activities and necessitates that they do some oversight there, generally if an advisor has a significant portion of their book of business that’s still in a commission form, whether it’s in variable annuities or other commissionable products, it’s either used as a transition relationship or there may just be business that’s always appropriate to be transactional in nature.      

So if that’s the case, many advisors do seek those type of relationships.  If they’re predominantly already in a fee-based business as part of a corporate RIA of the independent Broker-Dealer, we see most firms go directly for either their own RIA firm or look to partner with another pure RIA.

Andrew Gluck:          Chris, you mentioned the Broker Protocol a couple of times.  Could you explain a little bit about that mysterious document and what it is?

Chris Winn:                Sure.  Well, dating back a ways, the wire houses where most of the firms were losing their best players back and forth between each other, a pact was initiated by Merrill Lynch and others on what types of information an advisor can take with them when departing, and to keep the answer short, the things that are prohibited are really the intimate details about a client account.  So you’re not allowed to take with you, as a participating Protocol firm, you’re not allowed to take things like the client account numbers or their actual positions or social security numbers.  You are allowed to take basic contact information to resume a professional or non-professional relationship with them.

Andrew Gluck:          Okay.  Well, very good.  We’re a few minutes over.  I apologize to those of you that attended.  We’ve gone over by about 5 minutes, but I think it was well worth it.           

Just in case you joined us late, there will be a replay available of this.  This will be posted on www.advisorsgoingindependent.com, by the way, which is a new site that we have started up that is publicly available and a lot of this material will be available to advisors at www.advisorsgoingindependent.com.

I just want to thank our guests again today.  Chris Winn and Blane Warrene, you can see their contact information up over here.  Blane and Chris and I will be blogging in the days ahead about some of the issues discussed over here today, so please check out Advisors4Advisors.  Please also fill in our survey.  As you exit, you’re going to be asked how we did over here today.  We really would appreciate your input.

Again, www.advisorsgoingindependent.com – check it out; and Advisors4Advisors, you can also see all of the replays of these webinars.  We’re doing them the third Thursday every month.  You can get access to them on Advisors4Advisors and please give us your questions, give us your comments.  Thank you for attending.

To Chris and Blane, thank you again.  For all of you out there, have a great deal.  We’ll see you next time.

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