Tag Archives: RIA

Advisors: Things to Consider when Transitioning Firms

Did You Know That Advisor Recruitment is at a Four-Year High?

According to data compiled by On Wall Street, despite the recent decision by certain wirehouses to significantly reduce recruiting, recruitment is at a four-year high and remains strong.

Recruiters say that the continued strength in recruiting is due to regulatory uncertainty, an aging advisor population, and the expiration of many advisors’ current recruitment or retention deals. Going independent and establishing Registered Investment Advisor firms (RIAs) remains attractive for advisors as recruitment packages have disappeared at many firms. As a result, according to On Wall Street nearly $60 billion in assets changed hands in the first half of 2017. With all these significant moves, it begs the question of how an advisor should prepare to move firms.

If you are a registered representative considering a transition to a new firm, here are some legal and practical considerations:

1. Paperwork. Every firm is different when it comes to offboarding and onboarding procedures. Make sure you fully understand what is required to make the transition as smooth as possible. You should also carefully review all agreements from your current firm and your new firm. All promises by your new firm that you are relying upon should be in writing.

2. Obligations to the Departing Firm. Be fully aware of how your departure may impact compensation you believe may be owed to you by the departing firm. This includes any promissory notes and any deferred compensation. You should also be careful not to run afoul of the typical pitfalls that can lead to litigation. For example, unless specifically permitted by your agreement with the departing firm, all client records typically belong to the departing firm.

3. Compensation. Your pay may be structured differently so make sure that when you transition firms, you are fully aware of how compensation is structured.

4. Restrictive covenants. Are you bound by any restrictive covenants that may impact your ability to solicit clients and/or employees?

5. Protocol for Broker Recruiting. Members of the Protocol for Broker Recruiting are governed by specific procedures for handling broker transfers. If you are going independent you should consider whether your new firm should become a signatory to the Protocol. If you are transitioning to a firm that is a member of the Protocol you should follow the Protocol’s requirements when transitioning, including what information you can take from your old firm and the proper procedures for advising clients of your transition.

6. Planning ahead. Develop a transition strategy that encompasses factors such as timing, client communication, and compensation during the transition. Staying organized in the process will pay dividends down the road.

7. RIA Considerations. If you are considering establishing an RIA, among other things, you will need to establish a new legal entity, file a form ADV, and set up an appropriate compliance system.

8. Regulatory Filings. Pending customer complaints, arbitrations or internal investigations should be analyzed to determine how departing may impact current or future disclosures on your Forms U4/U5.

9. Retaining Counsel. There are many pitfalls and complexities with transitioning. Mistakes can subject you to litigation and regulatory risks. Having experienced counsel to assist with your transition will minimize these and other legal risks.

Advisors looking to transition to another brokerage firm or establish an RIA should have all their bases covered. DWH Legal has significant experience advising registered representatives nationwide on these and other relevant matters, allowing you to focus on your transition without concern about whether you are violating any contract or industry rules/regulations. To learn more about our firm’s arbitration practice, please contact us or call our office in Chicago at 312.380.6587.

SEC Staff Issues Guidance on Robo-Advisers

The Securities and Exchange Commission’s Division of Investment Management (“SEC”) recently published information and guidance for investors and the financial services industry on the use of automated advisers, or robo-advisers, which are registered investment advisers (“RIA”) that use computer algorithms to provide advisory services with limited human interaction.

Robo-Advisers are subject to the same fiduciary obligations under the Investment Advisers Act of 1940 (“Advisers Act”) as any other registered investment adviser. Since they rely on algorithms and limited interaction with clients, the model raises certain considerations when seeking compliance with the Advisers Act.

The guidance focuses on the following three issues: (1) the substance and presentation of disclosing to clients the services the RIA offers; (2) the obligation to obtain information from clients to provide suitable advice; and (3) the adoption and implementation of effective compliance programs specifically designed for robo-advisers.

DisclosuresIn order for clients to better understand how a robo-adviser provides its investment advice, the robo-adviser should; (1) explain its business model, including a description of the algorithm used to make recommendations; (2) clearly disclose the scope of its services; and (3) ensure clients understand and read the initial disclosure material and that the questionnaires used elicit a sufficient amount of information.

SuitabilitySimilar to all RIAs, a robo-adviser must act in the best interests of its clients and provide only suitable investment advice based on the client’s financial situation and investment objectives.  However, the questionnaires used by many robo-advisers may not request a sufficient amount of information.  The SEC recommends robo-advisers ensure questionnaires supplied to clients require enough information to make a suitable recommendation.

Compliance ProgramsRobo-advisers may have more risks than traditional RIAs.  These risks need to be addressed in their written policies and procedures in order to comply with Rule 206(4)-7 of the Advisers Act.  Robo-advisers should consider whether to adopt and implement written policies addressing the following areas: (1) the development and testing of the algorithm; (2) the initial investment objective questionnaire; (3) disclosing changes in the algorithmic code that may affect their portfolios; (4) oversight of any third party who develops, owns or manages the algorithmic code; (5) the use of social media in connection with marketing services; (6) the prevention and detection of cyber threats; and (7) the protection of client accounts and key advisory systems.

Robo-advisers represent a fast growing area of the investment advisory industry.  Click here to view the Guidance Update.

Read our other article here:

The Five Most Frequent Compliance Topics Identified in SEC Examinations of Investment Advisers