Many insurance agents and financial planners get to a point in their careers where they need a new challenge. Because of their numerous years of experience in the financial services industry, they believe they want to and can actively manage their clients' money. When they call me to assist with the creation of their registered investment adviser, I always make sure they can answer these seven critical questions because the answers will make or break their new business.
1. Do I want to be a business owner and am I driven to build a business?
Perhaps this is the most fundamental question that needs to be answered because it takes a lot of work to run a successful business let alone a RIA. However, most individuals that are faced with this decision have already run a successful business such as an insurance agency or branch office of a broker-dealer.
2. How much money under management do I anticipate having within the first year?
This question should be asked early in the decision process because if there isn't a large enough book of business to manage; there is no point in setting up a RIA. More importantly, it will help answer the next question.
3. Will my book of business generate enough fees to pay for the added expenses?
The prospective owner must sit down with pen and paper and make a list of expected expenses. At a minimum, the list should include RIA specific expenses such as errors and omissions insurance coverage, billing software, compliance system creation, performance reporting software (if desired), disaster recovery system, and record keeping systems. The list should also include traditional business expenses, such as, rent, telephone, and computers to name a few. At the end of the first year, the generated fees and expenses should break even or come close to that point.
4. Do I want to and do I know how to manage money?
Most people in the financial services industry have some money management skills. However, actively managing money can be a very time consuming and stressful task. Money Managers need to constantly monitor and adjust their portfolios to the daily fluctuations of the markets. While some individuals may thrive on these duties others may not want the burden. Those who do not want to actively manage money but still want their own RIA have the option of outsourcing the money management. The prospective RIA owner should take time to reflect on what level of involvement they wish to have in this aspect of the business before opening the firm.
5. What company is the best custodian for my clients and the services I want to provide?
A good custodian can make or break a start up RIA. Many custodians are designed to help RIAs with powerful software and back office support. But, a poor custodial relationship can strain client relationships to the point of losing long term clients. Proper due diligence should be conducted on various custodians to make sure they help the firm and the clients.
6. Do I want to be in charge of my own compliance responsibilities?
This is a critical question that must be affirmatively answered by anyone wanting to open a RIA. A RIA owner must be willing to put time, money and resources in to their compliance department as the business grows. Opening a RIA guarantees that a regulator will examine the firm within the first one to three years. Thus, proper set up and administration of a compliance department is critical.
7. How comfortable am I disclosing all of my conflicts of interest?
A registered investment adviser has a fiduciary duty to its clients. All boiled down, this means the RIA must put the clients' interests ahead of its own and disclose all conflicts of interest. For some this is not easy, but for all it is not only necessary, it is required.
If a prospective owner can answer these seven critical questions and feel good about the answers, it might be time to look into opening a registered investment adviser.
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