Registered Investment Advisor Startup Guide. A guide to owning and operating your own investment firm

Transcription

1 Registered Ivestmet Advisor Startup Guide A guide to owig ad operatig your ow ivestmet firm

2 Table of Cotets Thikig of startig a Registered Ivestmet Advisor firm?... 1 Stage 1: Makig the commitmet Stage 2: Defiig your busiess etity Stage 3: Preparig your orgaizatio Stage 4: Maagig ad growig your practice

3 Thikig of startig a Registered Ivestmet Advisor firm? If you have a etrepreeurial spirit ad you wat to build your ow busiess while helpig others maage ad pla their ivestmets ad fiacial goals, the startig a Registered Ivestmet Advisor (RIA) firm may be a great busiess decisio for you. This referece guide is tailored to fiacial services professioals who have decided to start a RIA busiess. Whether you are a solo practitioer or a multiparter team, this referece guide is iteded to help you prepare for certai critical busiess cosideratios ad decisios you may eed to make alog the way. This referece guide ca be particularly helpful durig the first 6 to 12 moths of lauchig ad buildig your ow busiess, ad provides the followig iformatio: Cosideratios i formig a RIA firm The Fidelity products ad services available to help support your busiess Sample worksheets to assist you i preparig to ope your advisory busiess

4 Stage 1: Makig the commitmet 2 FIDELITY INSTITUTIONAL WEALTH SERVICES

5 Uderstadig the potetial fiacial, legal, ad professioal obligatios is key to determiig whether startig a RIA firm is the right ext step toward idepedece. Whe udertakig this aalysis, it will be importat to cosult with your professioal legal, compliace, ad tax advisors. 1.1 Explorig a ew busiess opportuity Uderstadig the potetial beefits of formig a RIA firm Examiig your cosideratios durig this process Aalyzig the fiacial implicatios of ruig a RIA firm Developig a busiess pla Startig your firm with cofidece REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 3

6 1.1 Explorig a ew busiess opportuity Now that you re cosiderig startig a RIA firm, you have take the first step to idepedece. This RIA Startup Guide offers you a detailed overview of four stages you may wat to cosider whe opeig ad operatig your ow ivestmet advisory firm: Stage 1 Makig the commitmet Stage 2 Defiig your busiess etity Stage 3 Preparig your orgaizatio Stage 4 Maagig ad growig your busiess This RIA Startup Guide provides useful iformatio o each of these topics, as well as a detailed, approximated timelie to help you pla each stage of your busiess over the first 6 to 12 moths from developmet ad setup time to the first few moths of operatio. We kow you ll have questios ad cocers as you move forward. Guided by a experieced Fidelity team, we will work with you to provide ogoig support ad access to resources to help you succeed. As you take charge of buildig your busiess, i additio to the advice you receive from your professioal legal, compliace, ad tax advisors, you ca leverage the expertise we have developed to help professioals like you make a smooth trasitio to maagig a successful RIA firm. THE ROLE OF AN RIA Ivestmet professioals who perform the followig activities may eed to register as a Ivestmet Advisor Represetative (IAR) ad register the RIA firm with the Securities ad Exchage Commissio (SEC) or the appropriate state(s)/regulators: Rederig fiacial plaig or ivestmet advice about securities, or maagig a portfolio of ivestmets Receivig compesatio for this plaig or advice Presetig oeself to the public as offerig this advice As you might imagie, the regulatios defiig ad goverig the practice of a RIA are quite complex ad sigificat. That s why it is advisable for you to seek the advice of a professioal such as a attorey or registratio ad compliace cosultat who is kowledgeable i this field. Through our busiess alliace program, your Fidelity Represetative ca provide you with ames of some of the legal ad compliace firms that serve your market area. 4 FIDELITY INSTITUTIONAL WEALTH SERVICES

7 1.2 Uderstadig the potetial beefits of formig a RIA firm Formig a RIA firm may eable you to take cotrol of your future ad gai the satisfactio that comes from helpig ivestors meet their fiacial goals, while growig your ow busiess. There are may other potetial beefits depedig o your specific backgroud, your curret situatio, your goals, ad areas of iterest. These may iclude: Likig your success directly to the success of your cliets ivestmets through fee-based pricig Servig your cliets i a ew way by helpig them uderstad ad achieve their fiacial goals Developig deeper cliet relatioships by offerig more services Developig ad customizig your ivestmet philosophy ad strategy to focus o the types of ivestmets you specialize i Sittig i the driver s seat whe it comes to makig decisios that you believe to be right for you, your busiess, ad your cliets Developig your brad, protectig your reputatio, ad stregtheig cliet trust 1.3 Examiig your cosideratios durig this process As with ay major career move, the process of trasitioig to a idepedet model will hold may factors that you may wat to cosider. While there certaily may be other factors you may eed to cosider, we ve targeted the followig actio steps for your review. These actio steps have bee desiged to help you get focused ad give you more cofidece as you start your ow RIA firm. You ca review the topics applicable to your specific situatio, ad take the ecessary steps to address ay particular issues. Established ivestmet professioals If you are curretly a established ivestmet professioal ad are leavig your preset firm to become a RIA, you may wat to cosider the followig: Check with a legal advisor to address ay legal or regulatory cosideratios related to your trasfer. Uderstad the terms of ay o-compete agreemet you may have with your curret firm, as well as ay cofidetiality agreemet or other legally bidig agreemets. It is advisable to cosult with your legal cousel to fully uderstad all the legal implicatios of the trasitio, takig ito accout the terms ad coditios of ay agreemets you have i place with your curret firm. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 5

8 Cosider your optios to realistically uderstad promissory otes, traiig expeses, ad other obligatios with your curret firm. Realize that the time to establish your RIA busiess may be loger tha aticipated. Uderstad the implicatios of trasitioig from a commissio-based to a fee-based busiess (e.g., how to deal with trailer fees ad auities, ad your broker s liceses). Obtai your cliets authorizatio to trasact busiess i their brokerage accouts i order to maage their portfolios, i accordace with your o-compete ad other writte agreemets with your former employer. This aalysis may also eed to take ito accout ay o-compete agreemet ad the other legally bidig agreemets that are curretly i place with you ad your curret firm. Cosider your cliets portfolios that are ivested i proprietary securities, ad the tax or expese implicatios of liquidatig them. Kow the types of assets that you ca easily trasfer from oe fiacial istitutio to aother, ad explore optios for assets that caot be trasferred or surredered, as applicable. Uderstad that if you are leavig a bak trust eviromet, the broker-dealer you select will be resposible for clearig, custodyig, ad executig trasactios pertaiig to your cliets assets, while you will be resposible for all aspects of ruig your busiess. Esure that you have appropriate fiduciary isurace coverage, such as professioal liability, ad errors ad omissios isurace. 6 FIDELITY INSTITUTIONAL WEALTH SERVICES

9 Certified public accoutats (CPAs) ad other oivestmet professioals If you are a CPA or other oivestmet professioal, you may wat to cosider the followig: Uderstad the costs ivolved i trasitioig to startig a RIA firm. Lear how to balace your time betwee your resposibilities as a RIA ad your preset professioal duties, if you have decided to do both. Uderstad how your duty as a fiduciary ivestmet advisor may affect your other busiesses ad services. Discuss with your compliace cousel the appropriate disclosures, icludig, but ot limited to, potetial coflicts of iterest ad how best to describe your outside busiess activities o your Form ADV. AS A REGISTERED INVESTMENT ADVISOR, YOU MAY HAVE NEW RESPONSIBILITIES. Your ew RIA busiess will iclude tasks you may ot be familiar with. These may iclude, but are ot limited to: Maagig ad moitorig multiple accouts Tradig ad recocilig accouts usig a ew platform Maitaiig cliet histories Followig regulatory guidelies ad laws Reportig ivestmet performace to cliets Supplyig back-office maagemet of accouts Executig a marketig pla ad creatig marketig materials Maagig employees Oce you decide to make the move to idepedece, your dedicated ad kowledgeable Fidelity team ca help guide you through these areas by providig you the experiece of our team of professioals, as well as access to other professioal service providers, products, ad services. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 7

10 1.4 Aalyzig the fiacial implicatios of ruig a RIA firm As you may already kow, startig your ow RIA busiess ca be a rewardig experiece both persoally ad professioally. However, it has fiacial implicatios you may wat to cosider. You may eed to assess your startup costs, your ogoig costs, ad forecast profit ad loss. The sample Fiacial Worksheet o page 12 is desiged to help you aalyze some of the fiacial implicatios of startig your ow RIA busiess. Talk to a Fidelity Represetative about the ecoomics ad other cosideratios ad have your worksheet reviewed by your accoutat, lawyer, ad other advisors. Part of aalyzig your fiacials icludes choosig a pricig structure. Three commo pricig models ofte see are: Percetage of assets uder maagemet (AUM feebased billig) Hourly billig, typically for fiacial plaig Flat fee or project-based billig RIAs typically choose to bill based o assets uder maagemet. There are several advatages to this arragemet, icludig: The opportuity to tie your compesatio directly to the growth of your cliets assets The ability to establish pricig breakpoits, which ca ecourage cliets to cocetrate all their ivestable assets with you If you wat to start a firm that supports both fee-based ad commissio-based icome streams (also kow as a hybrid or dually registered model), registratio is required with both the SEC ad the Fiacial Idustry Regulatory Authority (FINRA) for commissio-based busiess. Additioally, you will eed to affiliate with a broker-dealer firm for the commissio-based icome.* 1.5 Developig a busiess pla Oce you are cofidet that startig a RIA firm is the right choice for you, you ca begi to develop a detailed busiess pla ad establish milestoes for your firm. While busiess plas are as idividual as you are, it is importat to cosider that your pla iclude at least the followig five compoets: Services offered. Describe the types of services you wat to provide for your cliets at the start ad as you grow. For example: Wealth advisory services Comprehesive fiacial plaig Ivestmet maagemet Estate ad retiremet plaig Geeral portfolio maagemet Target market. To focus your busiess activities effectively, you should clearly defie the type of cliets you ca serve best. Here are a few characteristics you may wat to cosider: Ivestmet goals ad eeds Miimum accout size Age ad geographic locatio Service eeds Commoalities i cliet professios (e.g., doctors or small-busiess owers) *Please ote that there are differet regulatory restrictios ecessary to coduct commissio- ad fee-based busiess. 8 FIDELITY INSTITUTIONAL WEALTH SERVICES

11 Stregths. Kow your stregths ad write them dow. This ca help you stad out from the competitio i your commuity. It may be advatageous to determie: Why you will be i a positio to satisfy the eeds of your specific target market The skills you have to offer cliets that your competitio caot The value-added services you ca provide Timelie. Create a detailed timelie for your trasitio. Oce you decide o a target date for opeig your RIA firm, cosider usig the approximated timelie chart provided i this guide to develop a detailed pla for meetig that date. This approximated timelie chart ca assist you i startig ad operatig your firm efficietly ad effectively. If you are already workig closely with a Fidelity Represetative, cosider sharig your busiess pla with them for additioal isights ad best practices they may be able to share with you. Busiess developmet ad marketig pla. Oftetimes, advisors do t create formal marketig plas, makig it hard to measure success ad create a culture of accoutability. Tactics without a pla or a strategy rarely provide the retur you may be seekig. As you cosider developig a customized pla that eables you to drive actio for your practice, thik about the followig: Idetify growth areas ad assess practices alog the lies of: Firm story: Cosistetly ad effectively tell your firm s story. Relatioship quality: How strog are curret relatioships, ad are the relatioships beig leveraged for growth? You might also wat to iclude a discussio of opportuities to etwork ad/or gai referrals* from busiess associates ad other cliets. Commuicatios program: Will you be proactive ad provide quality commuicatios o a variety of platforms? Tools ad tactics: Oce opportuities are outlied, idetify specific marketig techiques ad tools that ca be applied to the executio of your pla (e.g., olie ad social media strategy, advertisig, cliet commuicatios) with a cost-beefit aalysis for each. Please ote: There may be state ad federal rules ad regulatios regardig advertisig, depedig o your firm s registratio. 1.6 Startig your firm with cofidece You ll beefit from seeig your plas, costs, ad estimated icome i black ad white. The followig sample worksheets are provided to assist you i preparig your detailed trasitio pla. Develop firm goals: Defie what success looks like for your firm i three chaels of growth cliet referrals, ceters of ifluece, ad ew prospects. While growth is ofte reflected i et ew assets uder maagemet (AUM), it s importat to uderstad which chael will geerate that AUM so that the appropriate actios are i place to drive the desired results. *Be aware that the direct or idirect paymet of a referral fee may trigger SEC or state regulatios, ad esure that both you ad your referral sources clearly uderstad these regulatios before you offer to pay a referral fee. You may wat to cosult someoe kowledgeable about such regulatios, such as a attorey or compliace cosultat. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 9

12 Activity timelie sample worksheet You may wat to cosider creatig a pla to help you orgaize the lauch of your firm, usig this approximated timelie. INTRODUCTION Fiacials Trasitio issues 10 FIDELITY INSTITUTIONAL WEALTH SERVICES Cosider the beefits of startig a RIA firm Cosider your busiess capital eeded Cosider the trasitio issues ad cosult with your legal ad/or other professioal advisor STAGE 1 MAKING THE COMMITMENT Busiess pla Trasitio issues Determie a target date for the official opeig of your busiess Start writig a busiess pla Uderstad the terms of ay o-compete agreemet you may have with your curret firm, ad cosider seekig professioal legal advice with respect to ay such agreemets as you deem ecessary Develop a operatios guide goverig accout opeigs >6 moths 6 moths BEFORE YOU OPEN 5 moths 4 moths Office setup Begi lookig for office space Custodia Begi lookig for a custodia/service aget Isurace Payroll Beefits Determie the eed for ad costs of errors ad omissios isurace ad other isurace. If you have employees, make sure you have all federal ad/or state-madated isurace. Obtai your Employer Idetificatio Number (EIN) ad work with your accoutat to determie eeds for state/city/local tax purposes 3 moths Determie how payroll will be hadled with your accoutat Discuss with your accoutat the types of beefits you wat to provide for yourself ad ay curret or future employees STAGE 2 DEFINING YOUR BUSINESS ENTITY Registratio Compliace Determie your corporate etity ad select the appropriate corporate structure Prepare Form ADV with professioal help File Form ADV with the SEC, or a comparable form with the state* Develop compliace policies ad procedures to esure that your firm is i compliace with the applicable SEC or state requiremets. You could cosider workig with legal ad compliace advisors if you do ot have i-house support. STAGE 3 PREPARING YOUR ORGANIZATION Custodia Office setup Marketig Staffig Wage ad hour laws Uderstad the process ivolved i the asset trasfer from a legal ad operatioal perspective. Talk to a custodia/service aget about the services they ca provide. Begi preparig for the trasfer of assets that are permitted to be trasferred Obtai accout forms ad trasfer forms Determie your ivestmet selectio Lease office space Defie techology eeds Order computers, portfolio maagemet ad busiess software, peripherals, etc. Set up telephoe ad Iteret provider services Purchase or lease furiture Order office equipmet (e.g., telephoe, fax machie, copy machie) Determie goals, develop pla, ad idetify appropriate tactics Develop firm story Begi Web site developmet Develop social media strategy Start search for a assistat, if ecessary Hire assistat to start o day oe Work with your attorey or HR cosultat to be sure you are compliat with all federal ad state regulatios *Depedig o the state, registratio may take up to three moths or more. 2 moths

13 STAGE 3 PREPARING YOUR ORGANIZATION (CONT.) Compliace Marketig Obtai compliace referece materials to keep updated o the latest compliace requiremets Determie a target date for the official opeig of your busiess Prepare a list of prospects Compile cliet list for direct mail ad/or commuicatios BEFORE YOU OPEN 1 moth 2 weeks Techology Review procedures ad software offered by custodia/service aget Office setup Istall computers, software, peripherals, etc. Istall portfolio maagemet, fiacial plaig, ad accoutig software Fialize details o office space Staffig Set up appropriate employee files Marketig Prepare mailigs Prepare press release or advertisemet aoucig opeig of your ew busiess STAGE 4 MANAGING AND GROWING YOUR BUSINESS OFFICIAL OPENING 1 week Custodia Start trasfer to custodia Lauch Web site OFFICIAL OPENING 0 week 1 week AFTER YOU OPEN 2 weeks 1 moth 3 moths Orgaize a receptio for your cliets Marketig Ru your ad ad press release STAGE 5 ONGOING DEVELOPMENT Marketig Professioal developmet Ivestmet decisio Sed thak-you otes to cliets who have trasferred their accouts to you Follow up o cliets who have ot yet retured trasfer forms Refie pla as eeded; execute o marketig efforts to promote your ew busiess Cosider professioal orgaizatios to joi Cosider cofereces, semiars, traiig courses to atted Joi professioal orgaizatios Atted cofereces, semiars, ad traiig courses Cosider research materials you eed for ivestmet decisios (e.g., Iteret, research reports) Note: This approximated timelie is iteded oly as a guidelie for developig a detailed pla for settig up your busiess. Depedig o where you are i the trasitio process, your time frames may be loger or shorter tha what is illustrated o this sample worksheet. You may eed to use it i cojuctio with other resources. The iformatio cotaied i this approximated timelie is geeral i ature ad is provided for iformatioal purposes oly. Fidelity Ivestmets is providig this sample worksheet as a service to your firm. You are resposible for evaluatig your ow practice ad makig appropriate decisios for your firm. Those decisios may be based o these ad other factors you deem relevat, icludig the terms ad coditios of your curret employmet. This approximated timelie is ot meat to be exhaustive of all possible optios you may cosider. Fidelity Ivestmets is ot resposible for your actio or iactio as a result of this service. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 11

14 RIA startup fiacial sample worksheet Use this sample worksheet to help estimate your startup ad ogoig costs. It may be useful to compare what you curretly ear with your potetial earigs as a RIA. EXPENDITURE STARTUP COST ONGOING COST YOUR ESTIMATES Iitial cost Aual First-year busiess cost EXPENSES Salary expese Advisory Staff (full-time employees [FTEs]) Juior Advisors Payroll Tax & Retiremet Cotributio Legal Busiess Etity Formatio Cotracts SEC Registratio ADV Preparatio Registratio Cliet Cotracts Compliace Maual Licese Trasfer Busiess Liability Isurace Errors ad Omissios (E&O) Health Beefits Additioal Family Member Ret Expese Deposit Office Space Teat Improvemet (pait, wirig, walls, etc.) Furiture Art Miscellaeous/Office Supplies Fiacial Plaig Software MS Office Suite or Google Docs Portfolio Maagemet Software CRM System Techology Fiacial (e.g., QuickBooks ) Ativirus (budget per FTE) Compliace System Documet Maiteace System (Server) Documet Maiteace System (User) Network Backup Software (budget per FTE) Marketig Geeral Marketig Costs Web Site Desig Workstatio Additioal Moitor Office Equipmet Phoe(s) Switch Router Priter Uiterruptible Power Supply Scaer (Documet Maiteace) 12 FIDELITY INSTITUTIONAL WEALTH SERVICES

15 EXPENDITURE STARTUP COST ONGOING COST YOUR ESTIMATES Iitial cost Aual First-year busiess cost EXPENSES (CONT.) Other Tech Supplies Office Equipmet (cot.) IT ad Network Maiteace Services Phoe System Network Backup Drive ad Mothly Fee Server Statioery (budget per FTE) Iteret Service (mothly) Office Utilities Other office Backup ad Disaster Recovery Pla Postage Machie ad Meter Retal (mothly) Mothly Phoe Charges Mothly Postage TOTAL TOTAL CASH OUTLAY FOR FIRST YEAR* * *Trasfer this total to the First-year busiess cost row below, i the Projected as a RIA colum. Profit ad loss sample worksheet Uderstadig the risks ivolved i startig ad ruig your firm ca help you make iformed decisios about expeditures. PROFIT AND LOSS Assets retaied (%) Gross productio (%) Payout (%) Reveue (%) CURRENT PROFESSION PROJECTED AS AN RIA First-year busiess cost DIFFERENCE BETWEEN CURRENT AND RIA Profit ad loss From Total cash outlay for first year i the table above. The iformatio cotaied i these sample fiacial worksheets is geeral i ature ad is provided for iformatioal purposes oly. Fidelity Ivestmets is providig these sample worksheets as a service to your firm. You are resposible for evaluatig your ow practice ad makig appropriate decisios for your firm. Those decisios may be based o these ad other factors you deem relevat. These sample worksheets are ot meat to be exhaustive of all possible optios you may cosider. You may eed to cosult a professioal such as a accoutat. Fidelity Ivestmets is ot resposible for your actio or iactio as a result of this service. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 13

16 Stage 2: Defiig your busiess etity 14 FIDELITY INSTITUTIONAL WEALTH SERVICES

17 Fidelity ca help make it easier for you to get your busiess set up ad ruig smoothly. The cotet provided i Stage 2: Defiig your busiess etity has bee prepared by ad reviewed with the assistace of third-party providers, icludig The Law Offices of Patrick J. Burs, Jr., PC, ad Advaced Regulatory Compliace, Ic., a legal, regulatory, ad compliace services orgaizatio dedicated to assistig idepedetly registered ivestmet advisors with their legal ad regulatory eeds. 2.1 Establishig yourself ad your firm Abidig by professioal ethics ad stadards Uderstadig registratio ad compliace Choosig the form of orgaizatio Uderstadig the scope of registratio Preparig Form ADV ad draftig your disclosure statemet Creatig a cliet agreemet Regulatory filigs Electroic filigs State otice filigs Represetative qualificatios Writte supervisory procedures Other elemets of the compliace foudatio Maagig risk Gettig the cousel you eed REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 15

18 2.1 Establishig yourself ad your firm Operatig a RIA firm requires you ad the members of your firm to adhere to particular professioal ethics ad regulatio requiremets. May of these rules chage over time ad vary from state to state, so you should always verify that you have curret iformatio. It is advisable to cosult a attorey or a RIA registratio ad compliace services compay, to help you address complex issues ad aswer questios that you may have. 2.2 Abidig by professioal ethics ad stadards Your cliets place great trust i the services you provide as a ivestmet advisor, ad rely o your soud fiacial guidace. Abidig by the highest stadards of professioal ethics ad itegrity will be essetial to your log-term success. Here are some poits you may wat to cosider i developig the ethical stadards for your firm: Laws ad regulatios. Make sure that you fully uderstad the state ad federal laws ad regulatios affectig your practice. Take steps to esure that everyoe i your busiess avoids ay coduct or activities that would violate ay of these regulatios. Advisor s code of ethics. Each advisor s code of ethics should set forth a stadard of busiess coduct that the advisor demads of all its supervised persos. Diligece. You should be diliget i performig busiess duties for your cliets. Hoorable relatioships. You should maitai hoorable relatioships with cliets, with other ivestmet professioals, ad with all those who rely o your professioal skills ad judgmet. A iformed public. You should seek to ehace the public s uderstadig of the RIA busiess. Itegrity. Through proper coduct ad the exercise of good judgmet, you demostrate the value of your service to the public. Your cliets iterests are paramout. It is importat to keep i mid the trust your cliets place i you. Always hold your cliets iterests above your ow. The field is always chagig. The ivestmet busiess is a complex ad ever-chagig field. It is importat that you maitai ad improve your professioal kowledge ad skills. Also, offer ivestmet advice oly i those areas i which you ad your associates have professioal competece, ad seek outsourcig parters who ca offer additioal kowledge i areas where you ad your associates lack expertise. Note: This chapter is iteded as a geeral iformatio resource, ad the cotets do ot costitute ad should ot be costrued as legal advice or legal opiio. The third-party providers are idepedet orgaizatios ad are ot affiliated with Fidelity Ivestmets. 16 FIDELITY INSTITUTIONAL WEALTH SERVICES

19 2.3 Uderstadig registratio ad compliace Whe it comes to ruig your RIA busiess, good compliace is ecessary. The federal ad state laws, rules, ad regulatios goverig ivestmet advisors are complex. You should cosult a attorey ad/or compliace professioal for assistace ad iformatio with respect to your idividual circumstaces. Clear ad cocise disclosure alog with a itegrated set of structural documets, legal agreemets, ad compliat iteral policies ad procedures based o idustry best practices as they apply to your specific busiess as a RIA are importat. 2.4 Choosig the form of orgaizatio You do ot have to form a corporatio, LLC, or partership to register your compay as a RIA. The regulators will allow a sole proprietorship to register as a RIA busiess; however, a sole proprietor may be more likely to subject his or her persoal assets to potetial liability. May people cosider formig a separate legal etity as a alterative, as it may, depedig o your facts ad circumstaces, allow you to: Provide greater protectio of your persoal assets Limit disclosure of your persoal iformatio Take advatage of sophisticated tax strategies to protect your ow wealth Utilize advaced strategies for successio plaig to prepare for the evetual trasitio of your cliets ad your firm to the ext geeratio of advisors Those about to register as ivestmet advisors may wat to cosult with their professioal advisors to cosider whether a separate etity (apart from a existig etity) should be established. For example, if a existig busiess etity is also a broker-dealer or a isurace agecy, ivestmet advisor registratio may subject the etire firm to more rigorous recordkeepig requiremets. You should oly make your choice of etity after cosultig with your attorey ad tax advisor. Oly these professioal advisors ca assist you with the foregoig cosideratios ad advise you o the best choice of etity ad state of formatio, as well as ay additioal filig requiremets i other states where you pla o coductig busiess. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 17

20 2.5 Uderstadig the scope of registratio Various factors determie whether you are required to register your busiess as a ivestmet advisory firm ad, if so, whether you must make regulatory filigs with the U.S. Securities ad Exchage Commissio (SEC) ad/or oe or more state regulators. You must the determie whether you will be required to register your ivestmet advisor represetatives, icludig yourself, i the states where you have cliets ad/or maitai offices ad commuicate with cliets. Your firm will geerally be required to register as a ivestmet advisor with either the SEC or oe or more states if the firm: Provides advice or aalysis o securities, either by makig direct or idirect recommedatios to cliets or by providig research or opiios o securities or securities markets Receives direct or idirect compesatio i ay form for the advice provided Egages i a regular busiess of providig advice regardig securities Certai advisors, however, may be excluded from this defiitio (e.g., lawyers, accoutats, ad teachers) ad may qualify for a exemptio from registratio. It is advisable to discuss your particular situatio with a attorey ad/or a RIA compliace specialist. Oce the determiatio is made that registratio is required, you must determie whether you are required to register with the SEC or with state securities regulator(s). Geerally speakig, the determiatio as to whether you would be required to register with the SEC is based o regulatory assets uder maagemet, if ot otherwise exempt. As of 2012, the ew threshold for SEC registratios is $100 millio of regulatory assets uder maagemet. Geerally, if a firm maages less tha the threshold amout, it will be required to register with the appropriate state(s) securities divisio. Whe makig this determiatio, it is advisable that you cosult with your professioal legal ad compliace advisors to the extet there are ay questios. 18 FIDELITY INSTITUTIONAL WEALTH SERVICES

21 2.6 Preparig Form ADV ad draftig your disclosure statemet A applicatio to register as a ivestmet advisor is pricipally made o Form ADV. This uiform form is used by ivestmet advisors to register with both the SEC ad state securities authorities. Oce completed, Form ADV must iclude a complete descriptio of your ivestmet advisory services, icludig your fees, relatioships, brokerage arragemets, ad both actual ad potetial coflicts of iterest. Form ADV Part 2 may also serve as your primary disclosure statemet to cliets ad prospective cliets. For state-registered firms, registratio disclosure rules may vary by state. Your attorey ad/or compliace cosultat should be able to assist you with your federal or state regulatory filigs. 2.7 Creatig a cliet agreemet A cliet agreemet is a writte documet desiged to provide valuable, detailed iformatio about the advisor/cliet relatioship. A well-desiged cliet agreemet ca help defie roles ad maage expectatios. This agreemet betwee the advisor ad the cliet must be siged by both parties. It helps to accurately covey the advisor s services, fees, ad how those fees will be charged. 2.8 Regulatory filigs Amog the most importat duties that you, as a advisor, have to your cliets is to furish them with a clear ad accurate disclosure. This disclosure is primarily set forth o your Form ADV ad related schedules. For state-registered firms, disclosure rules may vary by state. Your attorey ad/or compliace cosultat should be able to assist you with your state regulatios. Your filig must describe, i sufficiet detail, your busiess activities, icludig: The kids of services available Who is providig those services The fees ad expeses the cliet will icur ad whether they are egotiable The compesatio to be paid to you by the cliet ad how the compesatio is calculated Sources of third-party compesatio received by you that are related to the services provided to the cliet, as well as how that compesatio is determied Your affiliatios with other advisors, broker-dealers, or other fiacial istitutios Coflicts ad potetial coflicts of iterest that might affect your idepedet judgmet REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 19

22 2.9 Electroic filigs The SEC ad most states have madated use of electroic filig via the Ivestmet Adviser Registratio Depository (IARD) ad the Cetral Registratio Depository (CRD) for certai forms. Both are admiistered by FINRA o behalf of the SEC. While the IARD ad CRD accommodate electroic filigs, there are likely a umber of paper forms that must also be filed maually with the states State otice filigs SEC-registered ivestmet advisors must also make a otice filig with oe or more states where they have cliets. Such otice filigs are usually required if the advisor meets oe or both of the followig: Has a place of busiess i the state Provided ivestmet advisory services to more tha five cliets i that state i the past 12-moth period, regardless of whether he or she has a place of busiess i that state A otice filig for a federally covered advisor is usually made by filig a complete copy of Form ADV as filed with the SEC, alog with the otice filig fees required by that state Represetative qualificatios Regardless of whether you have registered your firm with the SEC or state(s), the states retai jurisdictio to register the represetatives of a ivestmet advisor, meaig the employees of the firm. The qualificatios ad examiatios vary amog states. However, most states follow the rule kow by the North America Securities Admiistrators Associatio (NASAA). The model rule provides examiatio requiremets, which ca geerally be satisfied by passig either the Series 65 or the Series 66 i cojuctio with the Series 7 licese. I some states, certai professioal desigatios may qualify for a waiver from the examiatio requiremet, icludig: Certified Fiacial Plaer (CFP ) Chartered Fiacial Cosultat (ChFC) Professioal Fiacial Specialist (PFS) Chartered Fiacial Aalyst (CFA ) Chartered Ivestmet Couselor (CIC) Successfully passig oe of the miimum competecy exams or holdig a qualifyig desigatio does ot equate to a licese or permit a idividual to egage i ay advisory activities, util he or she has registered by filig a Form U4 i the required state(s) alog with the filig fee ad ay other documets requested by the state securities regulator. 20 FIDELITY INSTITUTIONAL WEALTH SERVICES

23 2.12 Writte supervisory procedures RIA firms have a obligatio to adopt ad implemet certai writte compliace policies ad procedures. Advisors are required to cosider their fiduciary ad regulatory obligatios uder the Ivestmet Advisers Act of 1940 ad to formalize policies ad procedures to address them. Your procedures should be desiged to prevet violatios from occurrig, detect violatios that have occurred, ad correct ay violatios promptly. I developig your policies, you should first idetify coflicts ad other compliace factors that may create risk exposure for your firm ad your cliets, ad the desig policies ad procedures that address those risks. The SEC expects that a firm s policies ad procedures, at a miimum, should address the followig issues: Portfolio maagemet processes, icludig allocatio of ivestmet opportuities amog cliets ad cosistecy of portfolios with cliets ivestmet objectives, disclosures by the advisor, ad regulatory restrictios Tradig practices, icludig best executio obligatios, the use of cliet brokerage to obtai research ad other services (soft-dollar arragemets), ad allocatig aggregated trades amog cliets The advisor s proprietary tradig The accuracy of disclosures made to ivestors, cliets, ad regulators, icludig accout statemets ad advertisemets Safeguardig of cliet assets from iappropriate use by ay advisory persoel The accurate creatio ad maiteace of required records Marketig advisory services The process for valuig cliet holdigs ad assessig fees based o those valuatios Safeguards for the privacy protectio of cliet records ad iformatio Busiess cotiuity plas I additio to writte supervisory procedures, advisors are required to ame a Chief Compliace Officer ad coduct a Aual Compliace Review testig the effectiveess of their compliace program. See for a copy of Rule 206(4)-7. For state-registered firms, compliace regulatios may vary by state. Your attorey ad/or compliace cosultat should be able to assist you with your state requiremets. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 21

24 2.13 Other elemets of the compliace foudatio It is importat to esure that your firm s Form ADV, cliet agreemets, ad policies ad procedures are drafted with a full uderstadig of all your curret ad proposed busiess practices. Template agreemets ad off-the-shelf compliace mauals that have ot bee customized to accurately reflect your specific busiess practices may create a ieffective foudatio for your compliace program ad may lead to regulatory actios or litigatio by cliets Maagig risk You have a obligatio to your cliets, yourself, ad your employees to protect the busiess. I additio to developig ad maitaiig a tightly itegrated compliace solutio ad busiess operatio, there are isurace products available to supplemet these protectios. Of course, there are maistream isurace offerigs to protect property ad casualty exposure. Beyod those, there are policies writte with the RIA i mid, such as: Errors ad omissios isurace. This isurace protects your firm ad its officers, directors, ad employees from claims that arise from acts, errors, or omissios i rederig or failig to reder professioal services. Fidelity bods. RIAs may obtai a fidelity* bod to protect agaist claims for dishoest acts by the compay s officers or employees. State surety bods. Some states require these bods as a coditio of registratio or as a alterative to meetig miimum fiacial requiremets. ERISA bods. I order to have the right or power to make ivestmet decisios for ERISA plas, govered by the Employee Retiremet Icome Security Act of 1974 (ERISA), you may have to be boded. Directors ad officers liability. This isurace covers claims that arise from a breach of fiduciary duty by a director or officer of your firm. The decisio to purchase a policy ad the coverage amouts you eed is a busiess risk decisio. Such isurace is geerally ot required by securities regulators; however, certai cliets, particularly istitutioal cliets, may isist o this coverage. It is advisable to discuss these cosideratios with your legal cousel Gettig the cousel you eed Federal ad state securities laws are very complex, makig ivestmet advisors a highly regulated busiess. Your iitial compliace efforts will form the foudatio of your ogoig compliace program ad will have a direct correlatio with the future risk i your busiess. There are serious log-term costs ad cosequeces of ot itegratig a effective compliace program ito your operatios. Therefore, careful cosideratio of the cosequeces of a ieffective compliace foudatio ad ogoig program should be made before cuttig ay corers i either your legal or compliace cousel. Careful cosideratio ad review by your cousel is highly recommeded. Whe selectig a compliace professioal ad securities attorey, ask questios up frot. The cousel you select should, amog other thigs, be able to: Serve you beyod the iitial registratio effort Uderstad the relevat iitial ad ogoig issues of maagig your busiess Maitai the staff ad resources ecessary to fulfill your ogoig compliace eeds *Not to be associated with Fidelity Ivestmets or ay of its compaies. 22 FIDELITY INSTITUTIONAL WEALTH SERVICES

25 Sample questios to review COUNSEL SELECTION CONSIDERATIONS FIRM 1 FIRM 2 FIRM 3 What portio of your busiess or practice is dedicated to servig the regulatory ad compliace eeds of ivestmet advisors? % % % What are the qualificatio stadards for compliace professioals or attoreys I will be workig with? What is the goal of the documets furished (e.g., registratio, busiess efficiecy, ogoig compliace)? Are all of the documets (e.g., cliet agreemets ad policies ad procedures) specifically drafted to coform with disclosures made i Form ADV, or will I have to customize them to fit my practice? What are some of the recet cotiuig educatio programs you have atteded? What is the basis for your fees (e.g., fixed, estimated, product, or hourly) for cosultig, registratio, ad buildig the iitial compliace program? What is icluded? What are the variables? Upo completio, is there a established program for persoalized ad proactive services for ogoig compliace cosultig, or must I cotact you whe I detect a required chage? Who maitais resposibility for esurig that filig deadlies are adhered to? These sample questios are geeral i ature ad are provided for iformatioal purposes oly. You are resposible for evaluatig your ow practice ad makig appropriate decisios for your firm. Those decisios may be based o these ad other factors you deem relevat. These sample questios are ot meat to be exhaustive of all possible questios you may cosider. Fidelity Ivestmets is ot resposible for your actio or iactio as a result of these sample questios. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 23

26 Stage 3: Preparig your orgaizatio 24 FIDELITY INSTITUTIONAL WEALTH SERVICES

27 Fidelity ca help you get your busiess up ad ruig by providig you with access to everythig from discouts o office furiture, statioery, ad busiess card pritig to marketig ad techology assistace. 3.1 Opeig your busiess Settig up your office Addressig huma resources eeds Developig your brad Coductig your clearig ad custody review Maagig accout setup Optimizig your techology ifrastructure Addressig cliets fiacial eeds Tradig REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 25

28 3.1 Opeig your busiess The idea of opeig your doors as a RIA is excitig. However, before you do, you ca help esure your success by havig the foudatio ad ifrastructure i place to support your RIA busiess. This guide ca assist you i determiig your readiess for your ew veture. 3.2 Settig up your office There are several cosideratios i selectig the appropriate office space, ot the least of which is the kid of office you like. Followig are several optios, with the pros ad cos of each: Home office. Readily available ad iexpesive to set up. However, it may ot have adequate space for office equipmet, furiture, ad staff, or provide you room to grow. It may also be difficult to meet with cliets or create cost-effective techology support for your firm, particularly as it grows. Office suite. Provides ready-made access to resources such as Iteret coectivity, phoes, ad shared coferece space. Leased space. Allows you to create your ow office from scratch ad provides a veue for meetig with cliets. Ad, if you egotiate effectively, it is possible to grow your firm without havig to move. 3.3 Addressig huma resources eeds As you start your ow firm, there are several importat steps you eed to take to get your orgaizatio up ad ruig efficietly. You ll eed to address payroll, beefits, regulatios, ad other huma resources issues. The busiess of a RIA firm is about the people: those you hire ad those with whom you collaborate. To provide a exceptioal cliet experiece, it s importat to attract ad retai the right people ad coect with firms that ca help you with your regulatory ad busiess eeds. 3.4 Developig your brad Fidig a way to stad out ad tell your story i a crowded market ca be difficult. You eed to create your firm s messagig platform, ad the fid ways to tell your story. There are three importat steps to take i the process: uderstadig your curret eviromet, creatig your commuicatios roadmap ad developig your messagig platform, ad learig to tell your story effectively. Uderstadig your curret eviromet The factors you may wat to cosider to help build your messagig platform iclude the followig: The competitive ladscape you are operatig i Your market ad ideal cliet type The eeds of the people who seek your services Your products ad services your offerig, or how you address the eeds Creatig your commuicatios roadmap ad developig your messagig platform You should cosider the mai platform poits, or marketig pillars, that serve as the foudatio, or the buildig blocks, from which the rest of your materials will be created. This foudatioal messagig ca help solidify your message to prospects ad cliets. A commuicatios roadmap ca give you a way to establish the platform poits that matter most to your firm, ad the help you to build from there. Tellig your story effectively You may wat to cosider the differet ways that you ca use your commuicatios roadmap to help brig your story to life through a simple arrative. Tell ad sell your story, icludig developig your cliet experiece Brig about cosistecy of message ad materials Map materials to your sales process The challege will sometimes be foud i takig a lot of data ad boilig it dow to three mai marketig pillars. It is importat to gather your data ad examie it to help you idetify three core ideas that resoate most for your firm ad differetiate you from your competitors. 26 FIDELITY INSTITUTIONAL WEALTH SERVICES

29 3.5 Coductig your clearig ad custody review To work as a RIA, you must have a clearig firm to custody the assets you have uder maagemet. A careful review of service providers is recommeded to esure that your custodia ca meet your eeds, both today ad i the future. The followig is a samplig of items you may wat to cosider whe reviewig clearig firms: TOPICS TO REVIEW WITH PROSPECTIVE SERVICE PROVIDERS FIDELITY FIRM 1 FIRM 2 Techology platform Comprehesive view of cliet relatioships Itegratio with a wide rage of portfolio maagemet, cliet relatioship maagemet ad fiacial plaig tools Comprehesive portfolio modelig ad rebalacig features Easy-to-use tools that ca help you provide quality service to your cliets O-demad traiig ad dedicated specialists to help you optimize the techology available to you ad your firm Mobile access via iphoe, ipad, ad Adroid devices Depth ad breadth of ivestmet products ad services Large selectio to meet varyig eeds of cliet base Special products for affluet cliets Implemetatio ad cliet service Oe-to-oe cliet service relatioship Traiig Busiess-buildig solutios Tools to help you grow your busiess Discouts o key busiess services Referral programs Additioal asset protectio Coverage above ad beyod SIPC requiremets Dedicated tradig desk Yes Yes Yes Yes Yes Yes 3.6 Maagig accout setup You will wat to work with a custodia who has a dedicated service team with i-depth expertise i the accout setup process, ad who will actively work with you to esure a smooth trasfer of assets to your cliets ew accouts. REGISTERED INVESTMENT ADVISOR STARTUP GUIDE 27

30 3.7 Optimizig your techology ifrastructure I today s eviromet, techology is t just about efficiecy. It s about ehacig the cliet experiece, improvig commuicatio, ad eablig growth. Techology ifrastructure is critical to your success. Fidelity has the techology tools, third-party alliaces, ad cosultig services that ca help you optimize your techology ifrastructure to grow ad scale your busiess, while providig outstadig service to your ow cliets. Cosider usig the followig framework as a guide. People, processes, ad techology. These are some of the keys to optimizig techology to achieve busiess goals of eablig growth, creatig scale ad efficiecy, ad ehacig cliet service. Maagig a successful techology implemetatio requires a itegrated ad balaced approach to effectively brig together people, processes, ad techology. First, cosider high-level system attributes: Cloud-based or locally istalled offerigs Cliet Relatioship Maagemet (CRM) Documet Maagemet Fiacial Plaig Modelig & Rebalacig Order Maagemet Cliet Web Portal ad Vault Custodial Platform (Fidelity WealthCetral ) After you select providers, you will eed to begi to scope out the implemetatio roadmap. Providers typically have their ow approach ad tools to assist with this stage, but you will wat to stay heavily ivolved as well. FIVE STEPS TO SELECTING A SYSTEM 1 outlie measur able busiess goals 2 determie product requiremets 3 prioritize eeds ad tr ade- offs 4 evaluate providers 5 select the system Applicatio suite or best-of-breed compoets Itegratio cosideratios Mobile techology requiremets Outsourced solutios Evaluatig vedor systems. To help you select the right systems to meet your busiess goals, ad that you fully uderstad ay gaps that may occur, cosider usig a disciplied process to help you evaluate your optios ad select the providers that are right for you. Cosider the software ad features of a techology system that aligs with your goals while helpig to improve cliet egagemet. Portfolio Maagemet & Reportig Haressig techology to drive busiess. As you eter the implemetatio stage, remember that techology s impact o your busiess is t just about efficiecy it s about deepeig cliet egagemet ad improvig commuicatio. Make sure to get the most out of your techology ifrastructure by rememberig to focus o adoptio, workflows, traiig, ad ehacig cliet service. Additioally, we provide may resources to help you with your techology ifrastructure, icludig these helpful guides: Haressig Techology to Drive Your Busiess, Eablig the Next Wave of Growth with Workflows, ad Fosterig Smarter ad Stroger Relatioships with Techology, amog may others. 28 FIDELITY INSTITUTIONAL WEALTH SERVICES