Transition: Leaving Your Position with an Existing Firm to Start Your Own Fee-Only Firm

Leaving a position as an Investment Adviser Representative “IAR” for an existing firm can be a scary, yet rewarding, process. Being an IAR at an established firm tends to bring about a level of comfort grounded in the idea that as long as the advisory revenue continues to be generated, then consistent income will follow. As a Registered Representative of a Broker Dealer, oftentimes a rep may be paid a salary that is derived from pooled commissions and sales of insurance products, combined with advisory revenue and sales incentives. Alternatively, in a more traditional compensation structure, a Broker Dealer Rep may be compensated directly from commissions paid on the purchase and sale of securities.

Being an appointed agent with an insurance company, while offering less stability from an income perspective, can still be reassuring from a compensation standpoint. Reason being, stiff competition among insurance companies for sales of annuity and insurance products makes the job market full of sales opportunities across various companies. Still, these compensation methods are generally consistent, and therefore income from these revenue sources is fairly predictable.

Income consistency and job-security are major concerns for advisers leaving their existing position within the financial services industry to start their own firm. Here are a couple of key points to consider when contemplating this transition.

1. Your Existing Firm most likely does not benefit from your departure – As an IAR of an established firm, the firm’s revenue is often dependent upon the sales revenue generated from your advisory clients. Therefore, it is in the best interest of the firm, should you decide to terminate your employment with them, that they retain your clients. Therefore, many firms will have non-solicitation, or non-compete clauses in place, to prevent you from taking your clients with you when you leave. As a result, it is important to review any such agreements that you have executed with your existing firm, to ensure that your intentions are not in violation of these agreements. If you review an agreement and you are unsure, it is advisable that you seek legal counsel.

2. Your Existing Firm has a Compliance Program – When beginning the process of registering a new firm, it’s easy to place your existing firm’s compliance program on the backburner. This is never a good idea. Whether you are associated with a Broker Dealer, RIA, or Insurance Company, there are compliance implications to starting your own firm.

If you are a currently employed by a Broker Dealer or RIA, then your current employer will have a compliance department that is responsible for your supervision. That firm will have access to your profile via FINRA Firm Gateway,  which is the same system that you will use to register your new firm. As you are in the process of registering your new firm, IN MOST CASES, your current firm will not be subject to notification until you file your Form U4. The Form U4 is the Uniform Application for Securities Industry Registration or Transfer. Representatives of broker-dealers, investment advisers, or issuers of securities must use this form to become registered in the appropriate jurisdictions.

When you file the U4 for your new firm, your existing firm will usually receive an alert, notifying them that you are starting your new firm. You may, at that point, be terminated.

However, some firms, as a part of their review of outside business activities, will search all of their representatives on the Secretary of State website to see if they are listed as officers, directors, managing members, or owners of any other business. This would usually occur during a branch audit, or an audit being conducted by regulators. If you have already listed your new firm with your State Secretary of State, then you are already exposed to the potential that your current employer may discover your intentions.

If you are appointed with an Insurance Company in order to sell annuity products for your Broker Dealer or RIA, then the above outlined potential for employer notification is the same. However, if you actually work for an Insurance Company in the capacity of an insurance salesman, and you are not an IAR or Registered Representative, then your exposure is significantly decreased by the fact that there may not be an existing U4 on file for you.

3. “It’s all About the Benjamins” – Figuring out how to maintain the ongoing stream of compensation and fee revenue is the most challenging part of the transition. As previously stated, your existing employer usually has no financial interest in helping you create a new revenue stream for your firm while decreasing the profitability of theirs. Therefore, it is imperative that the transitioning adviser create a feasible and coherent exit strategy before going out on their own. Here are some points:

Know your current Compensation Structure – Having a thorough understanding of how you are currently compensated is critical. If an adviser has a book of clients by which 65% of their compensation is revenue from commissions or insurance trails, then moving to a fee-only structure where this revenue source will be completely eliminated, requires some planning. Likewise, if an adviser is paid quarterly bonuses at their existing firm, and is in need of those funds to launch their own practice, then this factors into the timing involved in making the transition.

Do the Math – Run reports based on your current client revenue. Separate the revenue out into various categories for evaluation so that you have a clear picture of what the future could entail in your transition to fee-only.

Know your Clients – Particularly working within the BD structure, you will find that your current employer operates within many channels of the financial services industry. For instance, one of your clients at Wells Fargo Advisers may also have a Wells Fargo Mortgage, Credit Card, Checking Account, Savings Account and Car Loan. Anticipate the strong possibility that a client that is heavily invested in a large institution, utilizing them for multiple services, may not come with you when you start your firm. It’s almost certain that the Broker Dealer is going to make efforts to retain that client when you leave.

Also, don’t count on taking clients with you, if they were clients of the firm before you began working for the firm, unless you know them personally outside of your professional relationship. Those clients tend to exercise loyalty to the firm over the the individual adviser.

Evaluate your Personal Financial Situation – Before you make the transition, it’s important to do a household budget and make sure that you have enough in savings to sustain your lifestyle through this process.

4. Don’t try to Micromanage the Timeline of the Transition – The timeline for RIA Firm Registrations are unpredictable, particularly for state registered firms. Rarely, if ever, can anyone communicate with certainty, how long the process will take; so be financially and operationally prepared for at least a 4-week period between leaving your previous firm, and starting your new firm. Likewise, your existing firm has 30 days to file a Form U5 (termination) for you. In states that don’t allow dual registration, a compliance officer that is slow to terminate an IAR could create an additional unanticipated delay. So, in a nutshell, the adviser does not, and cannot, control the timeline of the transition.

In Conclusion, starting your own firm is extremely exciting. After working within the strict confines of existing rules and regulations, many which seem outdated and illogical, there is nothing more freeing than going into business for yourself. It can also be stressful, but by following the steps outlined here, you can begin the road to a smooth and successful transition.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

Communicating with your Clients About Compliance



Compliance vs. Convenience

Inevitably, there will come a time when maintaining your compliance policies will create some sort of inconvenience for your clients. Perhaps the adviser sent the client the wrong form to have them sign, and they will have to sign the correct form in a separate sitting. Or maybe the client received the correct paperwork, but they failed to initial in the appropriate location.

Another common occurrence, is for the client to be in a bind and in need of an expedited service that requires their signature, and they aren’t “near a fax machine”, or they are in a location that “doesn’t have access to email” for them to receive and return needed documentation. Although these occurrences can’t be completely avoided, there are a few things that can be done to more effectively prepare clients for compliance obligations, so that the compliance program doesn’t incur unnecessary risks.

Managing Producers

It can be suggested that the most intense conflict surrounding this subject lies with Managing Producers, or individuals within the firm that operate in both the capacity of Financial Adviser and Principal simultaneously. Anytime a client is inconvenienced as a result of a mistake of the Adviser, it is embarrassing for the adviser to have to go back to the client to admit that mistake in order to correct it.

Oftentimes, multiple mistakes tend to occur with the same client, resulting in diminishing goodwill and a decrease confidence in the adviser. In many cases, when this conflict exists, it is common for the adviser to “err on the side of revenue”, and cut corners on the compliance piece. That is because most Advisers get into the business to be service providers, not compliance officers. This can cause a problem for the compliance program.

3 Best Practices to Minimize Compliance Inconveniences for Clients

So what are some ways to minimize conflict when operating in this dual capacity to be effective on both sides of the fence? Here are some ideas.

1.) Clearly communicate compliance policies to clients upfront by spending time making sure clients understand documentation – When initiating client relationships, there is a point of commitment when the client is signing the advisory agreement. It’s easy to get excited, want the documents signed, ADV and Privacy Policy delivered, and suitability data gathered so that the adviser can start servicing the client.

But taking a bit of extra time during this period, to review these documents with the client will establish a precedent with the client that the adviser will pay attention to detail on compliance matters going forward. The client may not immediately seem engaged in the process of combing through the initial compliance documents with a fine-tooth comb, but in the long term, this practice will increase the probability that they will respond more positively to small compliance inconveniences going forward.

From a sales perspective, this practice can also make the adviser appear to be more detail-oriented and precise than previous advisers the client may have worked with, instilling confidence in the client that this will also be the approach taken to service their needs.

2.) Remind Clients of Compliance Items along the way – After the precedent has been initially established that the adviser will be thorough in compliance items, continue to reinforce this idea over the course of the relationship by reminding clients of such items whenever the opportunity presents itself. For instance, when requesting a copy of a client’s Driver’s’ License to open an account at the Custodian, remind them that it is against compliance policy for them to email such information without encryption, and provide a secure alternative for them to submit it.

Another example may be taking an extra step to review client suitability information while they are executing an item that doesn’t necessarily require this information to be updated and documented, based on your conversation with them. If the client mentions a college event for a child in common conversation, the adviser can take the time to see how that may impact the suitability profile, as opposed to simply breezing over that item in the conversation. Activities like this will serve as a constant reminder to the client that compliance is a priority for the firm.

3.) Give the client access to resources when they are displeased with inconveniences – Despite how diligent an adviser is, a client will inevitably become annoyed at some point with a compliance obligation. It’s a part of the business. When this occurs, one option is to treat it as an educational opportunity. The client will initially become annoyed with the adviser or the firm, because this appears to be the source of the inconvenience.

They rarely think of the regulatory agency that is creating and enforcing these policies, as being the immediate source of their frustration. Therefore, when the client becomes frustrated, is the appropriate time to remind them of this. By letting the client know that the adviser is on their side, and the “regulators” are the source of the frustration for both of them, the client may feel that they have a compliance advocate, as opposed to an offender. This process is most effectively executed by providing the client proof of the source of their inconvenience… The Regulations!

Give the client access to the regulatory guidelines that are creating their inconvenience. If the adviser can screen-share and review a quick item from the regulator’s website, this is best. If the client is the type that wants to dig through pages on their own, then the adviser can provide a link to the regulation and point out the sections that are relevant to their circumstances. This may prevent the client from feeling “victimized” by the firm.

The nature of Compliance is such that it only functions through documentation. This documentation, often time-consuming and burdensome, creates inconveniences for both advisers, and clients. However, by utilizing these best practices, advisers can begin to minimize the negative impact these inconveniences create for their clients.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

Calculating Your Assets Under Management



Every year, Registered Investment Advisory firms must calculate their Assets Under Management as a part of their annual ADV Update. For firms that focus on Financial Planning, this can pose an interesting dilemma. Where is the line between providing advice on investments, and actually managing the assets? While that line may not always seem clearly defined, the SEC has provided guidance to help firms understand the distinction clearly.

Why is it important to disclose Assets Under Management?

From a regulatory perspective, many RIAs charge fees that are based on a fixed percentage of Assets Under Management. Therefore, it is important for both regulators, and investors to be able to understand how those assets are calculated. Also, from a performance perspective, AUM disclosure allows investors to adequately evaluate the asset manager’s true performance over time.

What Constitutes Assets Under Management?

When completing the Form ADV Part 1, the SEC provides guidance through their instructions document on how to interpret certain key terms that are important to understand as it pertains to AUM.

Securities Portfolio – An account is a securities portfolio if at least 50% of the total value of the account consists of securities. For purposes of this 50% test, you may treat cash and cash equivalents as securities. You must include securities portfolios that are:

  • your family or proprietary accounts;
  • accounts for which you receive no compensation for your services;
  • accounts of clients who are not United States persons.

When thinking in terms of the traditional billing practices on Assets Under Management, this concept makes perfect sense. For instance, most commonly, the fee is assessed by applying the percentage fee, to the market value of the account based on the last day of the previous quarter. Included in that market value, is both securities and cash which is presumably set aside for future investments.

Value of Portfolio – Include the entire value of each securities portfolio for which you provide continuous and regular supervisory or management services. If you provide continuous and regular supervisory or management services for only a portion of a securities portfolio, include as regulatory assets under management only that portion of the securities portfolio for which you provide such services.

Again, this ties back to the previous item. The value of the portfolio is derived by taking the total value of cash and securities that the firm manages, provided those assets are held in a category as described in the definition of securities portfolios.

Continuous and Regular Supervisory or Management Services – You provide continuous and regular supervisory or management services with respect to an account if:

  • You have discretionary authority over and provide ongoing supervisory or management services with respect to the account; or
  • You do not have discretionary authority over the account, but you have ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sell and, if such recommendations are accepted by the client, you are responsible for arranging or effecting the purchase or sale.

There is a rather important distinction to point out on Continuous and Regulatory Supervisory Management Services. Many firms that provide financial planning services, will provide investment advice as one aspect of the financial planning engagement. Perhaps the adviser reviews the client’s 401k Statement, and makes asset allocation recommendations. Or, maybe the adviser reviews the client’s brokerage account statement, and provides commentary on performance of individual securities or the performance of third-party asset managers. But according the SEC’s regulatory guidelines, to constitute Continuous and Regulatory Supervisory Management Services, the adviser must have the ability to select or make recommendations, AND if the recommendations are accepted by the client, the adviser must be responsible for arranging the purchase or sale.

In other words, simply making a recommendation does not constitute assets under management, unless the adviser is also responsible for implementing that recommendation. A logical interpretation therefore, is that only advising a client of an asset allocation change in a 401k Account, or only advising on securities purchases or sales in an investment account, does not constitute AUM, because it is the client’s responsibility to arrange the purchase or sale.

How are you compensated?

Another item that to be considered when calculating AUM, is how the firm is compensated on the relationship. On the advisory contract, it should stipulate if the adviser provides ongoing portfolio management services. However, this can be tricky based on how the services are framed in the ADV Part 2 and the Advisory Agreement. Theses documents may list services as “Investment Advisory”, “Investment Management Services”, or “Portfolio Management Services”. Regardless of which label is applied, it’s important to go back to the definition of continuous and regulatory supervisory management services, when evaluating the activities performed as outlined in the advisory contract.

Under more traditional financial planning arrangements, if the firm is compensated based on a monthly retainer, quarterly or hourly fee, or an upfront fee with an ongoing monthly, this usually doesn’t constitute Assets Under Management. However, in some cases, continuous and regulatory supervisory management services may be included in a single fee that also encompasses financial planning services. In this instance, assets in securities portfolios should included in AUM.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

Handling Compliance Items that Inconvenience Your Clients



There is an undocumented struggle between compliance and convenience that every Chief Compliance Officer must come to terms with.

Many times, a client will need to sign an additional document or resign a document you already executed. Or maybe a client may be forced to receive a disclosure or a document that they are not interested in reviewing.

And in some cases, there may be types of investments that the client wishes to add to their portfolio, but these investments are either not suitable for the client or are unreasonable from investment management perspective.

So how should you handle compliance items that inconvenience your clients? Consider these factors to help you decide what to do.

Why Is Compliance Easy to Overlook in Client Meetings?

It helps to understand why advisors may try to skirt compliance rules when it comes to enforcing them on clients.

If the sales pitch isn’t sufficient enough to get the client to sign the advisory agreement, then rather or not the form is filled out correctly is a non-factor.

If the prospect is meeting with you to decline the engagement proposal, then the ADV and Privacy Policy delivery requirement is a moot point.

So it’s completely natural to prioritize production ahead of compliance and believe that the former is more important to your RIA than the latter. Simply recognizing that this conflict exists between compliance and convenience is the first major step to overcoming the hurdle.

Reputational Risk of the Advisor or Financial Planner

One big incentive for advisors to try to circumvent compliance policies and procedures is reputational risk. It’s embarrassing to go back to the client to ask them to sign a form again, especially if it’s because you omitted a minor detail.

And mistakes happen. They’re understandable. You have so many other items to cover in a client or prospect meeting. The pressure of signing a new client or maintaining an existing client can outweigh the perceived importance of having the client initial in every requested location on a form or document.

Compliance is often not the most important thing at the time of a client interaction.Therefore, the only way to combat this is to make a concerted effort to make compliance a priority in client meetings.

Here are a few tips to make it happen:

1. Thoroughly Review All Forms and Documents Prior to the Meeting

You already review aspects of the client’s investment profile, current investment performance, recent money movements, and to research anticipated investment recommendations. But you also need to set aside some time prior to the client meeting to review any outstanding compliance items and make sure those items are covered as well.

2. Prepare Documents Requiring Client Signatures

Use those handy “sign here” stickers to make sure you are having the client sign in all appropriate locations on the first try. If possible, use a highlighter on the documents to further reduce the chance that a signature or initials will be missed.

3. Check with Your Compliance Officer

It’s easy to make assumptions about what documentation is needed from a compliance standpoint. But there can be small nuances in relationships, account types, services provided, and so on that may merit additional signatures or client acknowledgments.

If you are the compliance officer, then double check your compliance manual and the regulatory background on what you are doing for the client to make sure all bases are covered.

4. Clearly Communicate Compliance Expectations

Most everything is easier for clients to deal with when they are notified up front of what to expect. If your clients know that they will be receiving your ADV and Privacy Policy Annually, then they are less likely to complain about “junk mail.”

If your clients understand they need to sign a separate form each time they want to execute a wire transfer, or open a new account at the custodian, then they will be prepared to fulfill this request.

Dealing with Dissatisfied Clients

It’s very easy to drop the compliance ball when a meeting concludes with you sitting across from a dissatisfied client.

Perhaps the investment portfolio is underperforming the benchmark. Maybe a failed money movement request caused the client a delay in a particular transaction. Or maybe husband and wife get together in the room and they simply can’t agree, causing an uncomfortable environment for everyone.

It is at this time, when it seems the slightest inconvenience to the client could cause significant damage to the relationship, that compliance issues tend to drop off advisors’ radars. To address this, practice removing yourself from the client’s temporary emotional state.

Empathy is a key component to an effective relationship. But the ability to separate yourself emotionally is sometimes equally as important. It is a good practice to stand firm on compliance needs in order to maintain stability in both volatile markets and volatile client relationships.

As unfortunate as it may be, compliance is by nature inconvenient. There are numerous things that a compliance officer can do to minimize this inconvenience for the firm. Setting up the right expectations can make the biggest impact.

Becoming effective in communicating compliance requests confidently and clearly should be a priority for both compliance officers and financial advisors.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

The RIA Business Model You Need to Serve Next Generation Clients


It’s time to address something all financial advisors know to be true, but most don’t usually admit. The financial planning industry is slow to change and slow to adopt new practices, new technology, and new marketing techniques.

It doesn’t matter if you look at investment management, insurance sales, or true financial planning. In any view, it’s easy to see that we’re stuck in old ways of doing things simply because that’s the way it’s always been done. One only has to look to other industries to see just how far behind we are.

There are many reasons why we’re stuck. We haven’t needed to change, since our businesses are profitable. We haven’t seen the technological innovations that many other industries have experienced, because advisors typically don’t purchase new tech. Neither businesses nor individuals invest much in technology designed for running financial planning practices.

Not to mention, ours is a highly regulated industry. That regulation and strict requirements to stick to existing standards tends to slow technology innovation from the get go. It certainly slows individual advisors and firm owners from taking risks by adopting that new technology, too — especially if there are any regulatory gray areas that the industry hasn’t yet resolved.

Additionally, we have an aging generation of advisors. While this older group of of advisors created what financial planning is today, they’re still operating the same way they ran businesses and served clients a decade or so ago. And little wonder: technically, it’s been working.These advisors and their firms have been making money, so why push change? Why push for progress when the same old thing seems to keep bringing money in the door?

These advisors and their firms have been making money, so why push change? Why push for progress when the same old thing seems to keep bringing money in the door?

But we’re starting to see many things happening at once in the financial planning industry. The landscape is changing, whether individual advisors and their practices are okay with it or not. The profession as a whole is evolving from where the industry began.

Next Generation Clients Want Advice, Not Products, from Advisors

When financial planning began as a profession as discussed earlier, advisors were product salespeople. We were insurance agents or stock brokers. And we did some financial planning because it was a good way to demonstrate the need for the products that we had to sell, but sales remained our focus.

Young people today increasingly are looking for financial advisors. They take the title literally and actually expect advice. They’re looking for help planning their financial lives.

Products are something that they can buy online themselves, but advice is something Gen X and Gen Y clients seek out from a human being they can have a conversation with; a website can give us information, but it can’t tell us how to apply it to our lives.

Next-generation clients are often savvier in general because of their comfort level with technology and their native knowledge on how to find the information they want. We’re starting to see clients come to us who know how advisors charge and how much money financial planners make.

They know the difference between commission and fee-only. They’re more educated and can ask more probing questions about fiduciary standards and whether or not you’ll work for them under that standard. Of course, not all clients are this well educated.

But the information is out there and available, and distinctions in the industry are no longer reserved as insider information as they once might have been.

Gen X and Gen Y clients are also looking for a specific kind of advisor. They know they’re looking for financial planning and comprehensive financial advice, not just insurance sales. Younger clients are looking for advisors who speak their language and understand their life stage. They want specialists to serve their specific interests, needs, and goals.

The Power of Niche Marketing Your Services

Let’s consider the craft beer industry as an analogy to better understand these ideas.

Consider how big, corporate players used to dominate. There was no room on the shelves for small-time operations between products from Budweiser, Coors, and Miller. But in recent years, there’s been a huge demand — especially among Gen X and Gen Y demographics — for what’s known as craft beer.

Younger generations tend to prefer locally made, locally sourced, specialty beers, and shun products from bigger, national companies that are generic, plain, and mass produced. Today’s consumers want unique and different offerings from the beer industry, and they’re interested in very specific kinds of tastes and flavors.

This move away from big, broad, and general products with a corporate feel and toward smaller, niched-down, and personal is happening in financial planning as well. It’s driven by the desires of the same consumer segment who want to feel like the companies they work with and give their money to actually care about their experiences and needs.

They don’t want faceless corporations or to feel distant from their service providers.

Consider, from a sales perspective, what happens if we create a specialty beer (or a specialty service) that has a really unique profile that only appeals to a really small subset of people — but the people that it does appeal to are raving fans because it’s perfect for them.

This is what’s possible right now. You can develop a niche and reach a specific group of people that don’t need to be sold on your offering, because they’re naturally attracted to it and they know it’s what they want.

The RIA Business Model That Allows You to (Profitably) Serve Gen X & Y

Creating a service model to serve Gen X and Gen Y clients requires rethinking and completely restructuring the way your firm generates revenue.

Instead of looking at existing business structures and trying to make it fit for the next generation, go back and ask this question: “If we were building this from the ground up, how would we design a fee structure to work with Gen X and Gen Y clients?”

Assets under management or AUM is simply not an option if you want to serve this demographic profitably. We can do the math to see that, ultimately, you can’t generate revenue on an AUM basis if you’re working with clients that don’t have assets. Most next-generation clients don’t have assets — and if they do, those assets are usually tied up in 401(k)s or equity in their homes.

Ready to learn more about the monthly retainer model and how to implement it in your firm? Click here to download a sample chapter of Alan Moore and Michael Kitces’ guide to using this RIA business model to profitably serve next generation clients!

Even if someone in their 20s, 30s, or 40s has a net worth that makes them look like a viable client, they may not have enough liquid assets in an investable account for you as the advisor to manage and deduct 1% of fees to run a profitable business.

And you should get paid to serve these clients. No one is asking advisors to work pro-bono. We don’t run charities. It’s not sustainable to try and build a business around serving “poor” clients today in the hopes they’ll be “rich” someday in the future.

It is perfectly fine to charge for the services that you’re rendering and get paid to do that work. But that means you must find a model that balances both sides of the equation: you can serve Gen X and Gen Y in a way that is affordable to them, and in a way that’s profitable for you.

Why the Monthly Retainer Model Works for Next Generation Clients

Charging assets under management worked for clients with assets to manage. It made sense and worked well for all parties. But this model fails with next generation clients who have the income to pay for advice, but not the assets on which the advisor can charge a commission on.

When advisors say, “I can’t work with younger clients because they don’t have any assets to manage and therefore they aren’t profitable to my firm,” what they’re actually expressing is that the existing service model and fee structure designed for different types of clients with assets does not work for clients without assets.

And we agree! We can all do the math to understand that as a business owner, you can’t profitably run your firm by serving clients that have an average of $50,000 in an IRA when you charge 1% AUM.

But this isn’t a client problem. It’s a business model problem. If we could be free from the expectations and the history — and the “way things have always been done” mindset — we could then openly ask questions like:

How can we build a fee structure to serve younger clients? How does that fee structure function so clients can afford the services and advisors can make a profit?

We asked these questions and landed on the monthly retainer model as the answer. No, this isn’t the way it’s always been done. No, business has not normally been done this way. But the monthly retainer model works both for next generation clients and for the advisors who want to serve them while still running a business that can generate revenue.

You can get the full guide to implementing a monthly retainer model into your RIA to profitably serve the next generation of clients. The Monthly Retainer Model in Financial Planning is now available on Amazon!

What an RIA Owner Should Know About Communicating with Regulators

RIA Owners


Every RIA owner must have a designated individual who serves as the primary compliance contact. This person is usually referred to as the firm’s compliance officer, or Chief Compliance Officer (CCO).

And if you’re the RIA owner and the sole person in the business, that means you.

The primary responsibilities of a compliance officer are to make sure the company complies with regulatory requirements and adheres to the firm’s set policies and procedures. In order for the compliance officer to do the job effectively, they must be familiar with regulatory requirements.

These requirements will be what internal policies and procedures are based on and amended as needed. Therefore, one of the most vital aspects of being a successful compliance officer is knowing when and how to communicate with your regulators.

Here’s what RIA owners need to know to ensure these communications are effective and productive:

Know Your Documents

The best way to put your compliance questions or concerns into context is to first review your regulatory documents. Before framing your question, double check your most recently filed ADV, Compliance Manual, and Advisory Agreement to make sure you are familiar with these items.

Not only will this help you ask the right questions the first time around, but it will prepare you for any follow up questions that you may receive from the regulators.

Know Your Regulations

After reviewing your internal compliance documents, access the applicable regulations to your questions to make sure that there are no existing conflicts in your firm’s compliance program. Most state regulators provide online access to their regulatory statutes.

You can also access plenty of resources via the SEC website if your firm is registered with the SEC.

Most RIA owner anxiety over contacting regulators is the fear of “raising red flags.” If you’re familiar with your internal documents and they tie out to the regulations, then you can eliminate this anxiety before contacting the regulators.

Prepare Your Interpretation of Your Documents and Regulations

Many compliance topics live in grey areas. Sure, there are regulatory statutes that are drafted in black and white — but the interpretation of those regulations is up to the individual who is reading them.

There will be times when you read and review a regulation, but it doesn’t specifically answer your question. At this point, you should contact the regulators to get their interpretation.

But note that by being confident in your own interpretation, you’ll likely experience more success in being able to frame the regulation in a manner that is conducive to the growth and success of your firm.

How an RIA Owner Can Interpret Regulations

This is much easier than it may seem, but it has to be done methodically. In my opinion, each regulation can be interpreted in many ways along a continuum.

At one end, the regulation can be interpreted to be so strict that it constricts the growth of the firm. On the other end, the regulation can be interpreted to the extent of appearing pointless, with virtually no impact on the firm.

The regulator’s interpretation will usually be somewhere in the middle, which is where your interpretation should be as well. Therefore, in order to form your interpretation of regulations, evaluate the most conservative and the most liberal view that you can conceptually imagine.

Then, locate that middle ground that allows flexibility for the firm but also remains compliant with the rule. Present that interpretation to the regulator when you contact them, and stand strongly upon it.

Interpreting regulations is a complete grey area for RIA owners. You may contact your regulators and get different interpretations of the same regulation from two examiners in the same office. Let this give you confidence that you are as capable of interpreting regulations as anyone else. In addition, it is important to note a best practice of documenting your conversations with regulators in case your receive a deficiency resulting from a different interpretation during an audit.

Try to keep track of the name, phone number, and if possible, email address of the regulator that you communicated with.

When an RIA Owner Should Communicate with Regulators

Compliance officers should reach out to their regulators when all other resources have been leveraged but a compliance question still exists. In most cases, a thorough review of your compliance documents along with a review and comparison with the regulations will yield the answer that you need.

If you follow these steps but are still a bit hesitant about how to proceed, you can document your review of the regulation just as you would document a conversation with a client. Then present that information as apart of your audit.

That is to say, that if you don’t want to contact the regulators but you are diligent in your research of regulations, then you can stand upon your own interpretation and wait until your audit or examination to have that discussion.

Communicating with regulators can be a nerve-racking for any RIA owner. The concern for the CCO is that they will inadvertently notify regulators of an existing deficiency that will cause a compliance burden for the firm. That may happen.

But if there is an existing deficiency, the earlier it is identified, the less damaging it will be in an audit. Regulators will probably catch it later anyway, so the CCO may as well reach out to the regulator proactively to get in front of the issue.

Once this method has been utilized once or twice, the benefits will be immediately recognized and hopefully any feelings of anxiety or worry will dissipate.

Remember, regulators aren’t out to get you. They are a resource and their goal is to help you keep your firm compliant.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

Understanding RIA Custody of Funds or Securities


RIA Custody

If you run your own financial planning firm, you need to understand the compliance rules and regulations around RIA custody. This is even more important for financial advisors running a monthly retainer model in their business, as the lines can easily blur and staying compliant with current rules can pose a challenge if you’re not educated on the topic.

Registered Investment Advisors who have the ability to withdraw funds or take possession of securities — specifically stock certificates — from clients accounts are required to safeguard those assets according to the SEC’s custody rule.

This rule was designed to protect investors and provide safeguards against theft or misappropriation from investment advisors.

Here are a few things you should know about the custody rule to ensure you remain compliant around RIA custody of funds or securities, and maintain the safety of your clients investments.

What Is RIA Custody?

According to the SEC, “custody by investment advisers means holding client funds or securities, directly or indirectly, or having the authority to obtain possession of them.”

This includes any situation where an adviser has access to funds, the ability to sign checks on a client’s behalf, withdraw funds, and even dispose of assets for any purpose outside of authorized trading.

How the SEC’s Custody Rule Affects RIAs

As previously mentioned, the custody rule was put in place to protect clients against theft and/or fraud. As a protective measure, the SEC imposed a number of requirements that registered advisers were expected to follow to avoid any conflicts.

For example, an investment adviser is required to maintain client funds and securities with a “qualified custodian.” The custodians must maintain client funds and securities in a separate account for each client either under that client’s name, or under the name of the adviser acting as agent or trustee for the client.

The investment adviser must also provide the contact information of the qualified custodian, and detail the manner in which funds or securities are maintained. In addition, the firm must keep records for each client account showing deposits and withdrawals.

The custody rule also requires that firms send quarterly or more frequent itemized statements to each client that shows all disbursements for the custodian account, including the amount of advisory fees. Your RIA must notify clients in writing of how the funds are maintained and when accounts are changed.

Finally (and in my opinion, the most burdensome of all of these requirements), is that the advisory firm must arrange an annual unannounced visit from an independent public accountant who must then file a report verifying the amount of client funds and securities in custody.

Since there is a significant increase in your compliance responsibility for those firms that have custody of client funds or securities, it’s critical that you consider these additional items when determining whether or not your firm will have custody.

You can find more information on the Custody of Funds/Securities of Clients by Investment Advisers by visiting the SEC website.

Deducting Fees from Client Accounts

Due to the fact that a part of the definition of custody involves having the authority to obtain client funds, issues of custody arise whenever an RIA is authorized to automatically debit the client’s account for payment of fees.

If the instance of custody is limited only to this process, then most regulators will refer to this as “limited custody.” Firms that have limited custody are often relieved of some of the above mentioned compliance responsibilities.

In order to be protected under the safeguards of limited custody, the RIA firm must:

  • Send a copy of its invoice to the custodian at the same time that it sends the client a copy.
  • Attest that the custodian will send at least quarterly statements to the client showing all disbursements for the account, including the amount of the advisory fee.
  • Make sure that the client will prove written authorization to the firm, permitting them to be paid directly for their accounts held by the custodian.

Let’s evaluate each of these items a bit more closely:

Send copies of invoices to custodians and clients: Many firms have commented on how it is redundant, and operationally inefficient to generate and send invoices when the custodian is already doing so.

But regulators insist that this practice is a requirement. In a regulatory exam, an RIA is often not permitted to transfer responsibility of invoicing to their custodian, nor is the firm permitted to utilize the custodian’s invoices as evidence of having generated their own.

Regulators want to see that the firm is checking behind the custodian. In financial planning engagements that don’t involve a traditional custodian, the bank can be considered the custodian, and the notification to the bank can be made via electronic payment processor (this is still open to regulator interpretation).

Attest that the custodian will send at least quarterly statements to the client: Most custodians understand their responsibility to send statements at least quarterly, so this is rarely an issue for RIA firms.

Make sure that the client will prove written authorization to the firm: This can be completed in numerous ways. Firms can incorporate a check box, initial box, or signature line on their advisory agreement that is specifically designed to capture this authorization.

If the firm intends on relying on documentation provided by a custodian or an electronic payment processor, then the firm should make sure they know exactly what documentation the client will sign, and how that fulfills this part of the regulation.

Finally, as a general best practice, firms should make sure they are familiar with the functionality of any payment systems that are being utilized. Regulators reserve the right to question how payment amounts, and/or terms and conditions may be changed within the system, and whether or not those changes require client authorization.

An electronic payment processing system that allows for changes to these items without client authorization is an immediate red flag, and could cause the firm to unknowingly violate custody regulations.

When you run an RIA, you need to understand and act on these rules around custody of client funds and investments. It can be a tricky issue to resolve, but that doesn’t mean there are no solutions.

The best action to take when you serve as your own CCO? Continue educating yourself, seeking resources, and asking questions. Remember that XY Planning Network provides compliance services, support, and communication for members. If you want additional help and information, consider becoming a member and allow XYPN to help you start, run, and grown your own RIA.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

RIA Compliance: Updating Language in Your ADV Part 2

RIA Compliance

Inevitably, every firm will be faced with ADV Updates. Inherent in the growth of your business is change, and with those changes come the regulatory obligation to make updates to your ADV Part 2.

Here are a few quick tips to help you confidently navigate what you need to know about RIA compliance and serving as your own CCO.

What Is Form ADV Part 2?

According to the SEC website, “Form ADV Part 2 requires investment advisers to prepare narrative brochures written in plain English that contain information such as the types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the adviser. The brochure is the primary disclosure document that investment advisers provide to their clients.”

First, let’s break down three critical sections of this definition.

1. Narrative: When we think of a “narrative,” we think of a story or some written account of connected events. This is exactly the approach to take when updating your ADV Part 2.

Regardless of which item you update within the document, make sure that the changes you make connect to the rest of the document to make a coherent picture of how your firm operates.

Write your ADV Part 2 as if you are writing a story about your firm.

2. Plain English: It seems counterintuitive, but many advisers tend to explain things verbally differently than they explain things in writing. Using “Plain English” can help bridge the gap between verbal and written explanations.

The ADV Part 2 should center around the use of proper grammar, without slang or colloquialisms. Focus on turning your conversational tone into plain English for the purposes of drafting or updating this document.

3. Disclosure Document: A major part of the regulatory scrutiny surrounding ADV Part 2 documents is the level of disclosure. With this document, the more detailed the firm is regarding the information input in each Item, the more effective the document from a regulatory perspective.

When disclosing information about items such as fees or services offered, ask yourself, “If I were a prospective client of my firm, what questions would I have for the adviser before I sign the advisory agreement?”

Then, simply answer those questions along the way as you update the document.

Incorporating Language into Existing Documents

Incorporating new language into an existing ADV is a common requirement with RIA compliance. For instance, if you change or add a custodian or recommended broker dealer, you may be required to update your ADV Part 2 to reflect that change.

In this case, the most important thing to remember is to maintain the integrity of the document. Adding something to your ADV Part 2 doesn’t mean you have to delete something else that is already in the document.

If you are still using the previous custodian, and you are adding an additional custodian, then there is no reason to remove language from the previous custodian. The same is true if you are adding a third party asset manager.

Just add the new language and review the entire document to make sure that it reads coherently (remember the “narrative” part from the section above).

Updating Language Pertaining to Fees

In some cases, you may need to update language in relation to a change in fees. It’s easy to update the numerical amount, but it’s a bit more challenging to update other fee-related items, such as termination and refund clauses, or methods of payment.

When doing so, simply be as descriptive as possible.Try to cover all possible scenarios in your verbiage.

Please note that you will need to update your Advisory or Financial Planning Contracts along with any changes to Fees and Compensation on your ADV.

Stay Calm and Keep Compliant

The last thing to address when you update the language in your ADV Part 2 — and perhaps the most important thing — is the psychological aspect of this process.

For many of us, just looking at long and detailed regulatory documents is stressful. As a result, we immediately begin to doubt our abilities to draft or make updates to the document.

Don’t allow yourself to be defeated by an unsubstantiated lack of confidence. Before beginning the process, take a deep breath and say, “I CAN DO THIS.”

It may sound silly, but half of the battle in updating this type of document, is diving in head first and working through it confidently. Good Luck!


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

How Financial Advisors Can Secure Client Information via Email

Client Information

As new technologies emerge and our industry continues to evolve, keeping information safe and secure becomes more and more important. It’s critical to understand cyber security from a basic protection standpoint. But financial advisors should also know what they need to do to stay compliant, too.

Recently, state regulators increased focus on privacy laws. Specifically, they looked at the use, storage, transmission, and handling of client information.

The Compliance Updates Financial Advisors Need to Know

The SEC issued Regulation S-P, and the CTFB (Consumer Financial Protection Bureau) adopted Regulation P. Both of these regulations address the responsibility to provide initial privacy notices to your clients. These notices should outline the handling of their nonpublic, personal information.

And if you’re state-registered, you probably need to create these notices for your clients, too. Most states have some version of a privacy requirement that mirrors the regulations above.

In an increasingly technology-based world, you shouldn’t anticipate any regulatory pull-back on this topic anytime soon. It’s advisable that all firms have an effective cybersecurity program that includes the necessary evaluations and testing of all technology used in the firm’s course of operations.

Much of the rationale behind this need is the compliance surrounding the protection of client information. Not only is there regulatory risk, but reputational risk is substantial. The feeling of personal violation associated with having one’s’ privacy compromised can be damaging to client relationships.

Some of the most common pieces of client information that fall under the category of nonpublic and personal include your clients’:

  • Social Security Number
  • Driver’s license or passport number
  • State identification number
  • Debit or credit card number
  • Account number

And some of the most common ways we fail to secure that information? Accidentally sending client information via email.

How to Protect Client Information via Email

We have all been there. You draft an email, press send, and then immediately notice a mistake. Some email service providers have “recall” feature that allow for an attempt to recall the message, but once you click “send” it’s usually too late to turn back.

If the error you made includes sharing any of the above listed pieces of client information, then you probably violated Regulatory Privacy Requirements… unless you took the necessary steps to encrypt the email before sending it.

Use Email Encryption

There are numerous vendors available that offer services that assist you in encrypting your emails. But if you prefer not to pay for an additional service, there are other alternatives.

One option is to add passwords to your PDF documents when you save them. You can either call the recipient of the document to give them the password over the phone, or let them know in the email that the password is something recognizable to them (i.e. “The password is the last 4 digits of your Social Security Number”).

Obviously, it defeats the purpose to send the password in the same email.

Another viable option is to manually strike out certain items on the personal information. For example, if you send an email in reference to account number 1234-5678, then most regulators would accept a message sent as xxxx-5678 as compliant.

Download our free guide on 25 tools under $25/month to help you better run your business.

Don’t Fall into the Email Thread Trap

It is easier to remember to encrypt personal data on an email that you draft from scratch. But when you respond to client emails in such a manner that it creates a long email chain, you risk falling into a compliance trap.

That’s because the longer the email chain, the harder it is to make sure that you aren’t disseminating personal information. Remember, even if the client sends the personal information to you via email, if you respond without encrypting it, it can be seen as a violation for your firm.

Track Your Communications

One way to satisfy regulators in the area of securing client information is to maintain a log of each and every violation of client privacy that occurs within your firm. Make sure that your firm has proper supervision and archiving of email communications, and pull a sample of emails every once in awhile to make sure you don’t spot any violations.

Document the review by date and time and if you have the resources, create a separate mailbox only for forwarding the emails that you have reviewed. Your log can be an Excel spreadsheet that documents the date, the time, any violations, who created the violation, and what corrective action was taken.

Accidentally failing to protect client information via emails is a common occurrence. It happens! But with preparation, awareness, and proactiveness, firms can decrease the number of client privacy violations that are committed via email.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.

What Advisors Need to Know about Solicitor Referral Arrangements

Solicitor Referral

As a financial advisor, you know you need to engage in smart networking in order to succeed. The ability to make connections within the industry and work closely with centers of influence is vital to growth and sustainability for your financial planning firm.

Of course, the biggest value someone in your network can provide is to give you a client referral. And because referring clients to other practice and accepting referrals from other advisors is a big part of operating your business, regulators have weighed in on the importance of identifying solicitation and referral arrangements.

XYPN offers a variety of compliance support and services. Learn more by joining us for our next Intro Webinar!

It’s of utmost importance for you as the RIA owner to ensure these activities are transparent and remain in the best interest of the client. So how do you go about fulfilling your responsibilities with referrals on the compliance side?

Here’s what you need to know about solicitor referral arrangements, and items to consider from that compliance perspective.

Guidance in Regulatory Interpretations

In many cases, SEC regulations may closely mirror your state’s regulations as it pertains to solicitation arrangements. Still, it’s important to check with your state regulators prior to entering into these types of relationships to make sure there aren’t any quirky differences in the regulations.

Also, be aware that there may be a state-level requirement that the third-party solicitor must be registered as an investment advisor in order to receive payment from advisory fee revenue.

Updating Your ADV

Yes, as with nearly every other compliance change your firm undergoes, there will need to be a review of the ADV with solicitation arrangements. The intention is to ensure there’s consistency between the ADV and the way the solicitation arrangement is structured.

Solicitor Registration

If the state requires that the solicitor be registered (Series 65 or other substitute designation), then the Solicitor usually does not have to be registered as an “employee” of the advisory firm.

The solicitor may remain separate from the firm, as long as their registration remains effective. In general, the same items that would disqualify an individual from investment advisor registration will disqualify an individual from being a solicitor.

If your state does not require registration, be sure to check for these items on your proposed solicitor.

Developing the Actual Agreement in Writing

Not only is having a written agreement on file a regulatory requirement, but it’s also a general good practice for your business. At minimum, the written agreement should contain:

  • Solicitor’s name
  • Investment advisor’s name
  • Relationship between the solicitor and investment advisor (for transparency)
  • Statement that the solicitor will be compensated for referrals
  • Terms and conditions of that compensation: this is a description of the fees that will be paid to the solicitor, how often payment will occur, clauses for termination of the agreement, and so on
  • Signatures or some form of acknowledgement by solicitor and investment advisor

The Need for a Client Notification

It’s also imperative that the client be notified when a solicitation arrangement exists between the adviser and solicitor. If a referral goes from prospect to client, then the client needs to be made aware of all the terms in your written agreement.

Usually, you can generate a form and have the client sign and date the document. This is sufficient to indicate that they have been made aware of the solicitation arrangement.

Networking and establishing relationships will always play a big role in the success of individual financial planning firms. While there are compliance issues to be aware of, you can cover these bases and stay compliant as you work with others to bring more clients to your practice.


Scott GillAbout the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.