A: Brian Hamburger, MarketCounsel

• a. In today’s business and regulatory climate, the implementation of potential new rules are discussed on a daily basis. Trying to prepare for these potential rules would be an impossible task, especially considering that the vast majority never go beyond discussion. Even rules that are proposed have recently had trouble becoming or staying approved.
• b. There are some rules that are currently under consideration at the SEC level. A new version of Part II of Form ADV has been sitting as a proposal for nearly ten years. To this date, however, the rule has not been approved, despite being re-proposed somewhat recently. A new version of the privacy rule, Regulation S-P, has also been proposed. At the state level, Massachusetts has approved a significant change to the privacy rules that impact any investment advisor that has clients in Massachusetts. That rule is scheduled to become effective in January 2010, but it has been postponed on two different occasions already.

A: Brian Hamburger, MarketCounsel

• a. SEC registration of a firm:
  • i. There are numerous ways that a firm can qualify for registration with the SEC. The most common is to have (or expect to have within 129 days of approval) at least $25 million in assets under management. An investment advisor can also register with the SEC in a few other circumstances, including where it manages a registered investment company, regardless of the amount of assets under management, and if it advises on $50 million in pension assets.
  • ii. In order to register with the SEC, a firm must file a Form ADV, Part I, through the IARD system. The firm must also complete Part II of Form ADV, but it does not have to be filed with the SEC.
• b. State registration of a firm:
  • i. Investment advisors that do not qualify for SEC registration must register in certain states. A state may require a firm to register if it has a place of business in that state or has greater than five clients during a 12-month period in that state. Each state has its own requirements and proper consideration must be given to all states where the investment advisor has a place of business or has clients in order to ensure that all necessary registrations are perfected (and no unnecessary registrations are made).
  • ii. All states require Form ADV, Part I and Part II, to be filed. Part I must be filed through the IARD system in all states. In addition, Part II must also be filed through the IARD system in most states. Many states also have additional filing requirements. Such requirements include financial statements, marketing documents and client agreements.
• c. Registration of investment advisor representatives:
  • i. SEC advisors: States may only require qualification and registration of individuals that meet the definition of “investment advisor representative” as described in the Investment Advisers Act of 1940, as amended. In addition, only those states where such individuals have a place of business can require registration.
  • ii. State advisors: States do not have the same limitation on whom they can require to register in the state the firm is registered. Each state has its own definition of “investment advisor representative,” and typically, it is a broader definition. For example, a state may require the registration of all owners of an investment advisor, regardless of an owner’s activities or place of business location.
  • iii. Qualification: Once it has been determined that an individual must be registered as an investment advisor representative, the qualification requirements are the same. Each state determines its own qualifications. Typically, investment advisor representatives must pass either the Series 65 examination or both the Series 7 and Series 66 examinations. In addition, most states recognize certain designations (such as Chartered Financial Analyst® [CFA®] and Certified Financial Planner [CFP®]) in lieu of the examinations.

A: Brian Hamburger, MarketCounsel

• a. Timing varies based upon a number of factors. The biggest factor is the jurisdiction of registration. The more complete a filing is during the initial filing, the faster the process will go. The SEC has up to 45 days to approve a firm. The full 45 days should be allowed when planning, but approval is more typically achieved within 30 days of filing and can be significantly faster.
• b. State filings are very inconsistent among the various jurisdictions. Certain states may take up to 90 days to approve a filing, even when all proper information has been submitted. Other states, such as Massachusetts, have time limits similar to the SEC and must approve (or deny) a firm within a certain time period when a complete filing has been made.

A: Brian Hamburger, MarketCounsel

State and U.S. Securities and Exchange Commission (SEC) advisor filings are done through the Investment Adviser Registration Depository (IARD) system, which is administered by the Financial Industry Regulatory Authority (FINRA). Certain individuals must be listed on Schedule A of Part I of Form ADV. Those individuals include owners of 5% or more of the firm and officers of the firm. The individuals’ Central Registration Depository (CRD®) numbers are listed upon filing, and the filing is a public document. In addition, most investment advisor representatives must file a Form U4. The information on that U4 will be accessible by a representative’s current employer. Therefore, an employer can see that a representative has filed an ADV and U4 for another firm.

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A: Brian Hamburger, MarketCounsel

• a. This is most importantly determined by the characteristics of the firm. The policies and procedures must be drafted for the specific firm. Off-the-shelf manuals that are not tailored to the needs of a particular firm will not be acceptable.
• b. Next, the jurisdiction of registration must be considered. Rule 206(4)-7 of the Investment Advisers Act of 1940, as amended, requires all SEC-registered investment advisors to adopt and implement written policies and procedures reasonably designed to prevent the violation of the Investment Advisers Act of 1940. Certain states have regulations in place regarding certain policy requirements, while other states have none. At a minimum, an investment advisor should have policies and procedures in place to help ensure that the fiduciary duty to clients is met. Basic policies and procedures include best execution, insider trading and personal securities transaction, privacy and a business continuity plan.

A: Brian Hamburger, MarketCounsel

There are two primary considerations when determining what information an individual can take to a new firm. First, there are confidentiality duties. The information held at the previous employer typically belongs to that employer, not the investment advisor representative. Therefore, the investment advisor representative can only take limited information, if any. In addition, there are regulatory concerns regarding the privacy of the information. Regulation S-P requires investment advisors, broker-dealers and other financial institutions to protect client information. While a client can give an investment advisor representative certain information that it possesses, the investment advisor representative cannot take client information from the previous employer without consent or there may be a privacy violation. A comprehensive review of the type of information and contractual and regulatory allowances must be done before taking any information to a new firm.

A: Brian Hamburger, MarketCounsel

• a. All documents required to be kept pursuant to Rule 204-2 of the Investment Advisers Act of 1940 can be kept electronically. In order to do so, the advisor must:
  • i. Arrange and index the records in a way that permits easy location, access and retrieval of any particular record;
  • ii. Provide promptly any of the following that the SEC may request:
    • 1. A legible, true and complete copy of the record in the medium and format in which it is stored;
    • 2. A legible, true and complete printout of the record; and
    • 3. Means to access, view and print the records.
  • iii. Separately store, for the time required for preservation of the original record, a duplicate copy of the record.
• b. It should also be noted that an investment advisor should retain emails and other electronic communications as if they were printed documents. If the email would otherwise have to be retained if it was a printed document, the email should be retained in a consistent manner.

A: Brian Hamburger, MarketCounsel

• a. The frequency and scope of examinations vary depending upon a number of factors. The first factor is where the investment advisor is registered. State examiners vary significantly in the scope of frequency of their on-site examinations.
• b. The frequency and scope of an SEC examination will depend partially on the type of exam. SEC exams typically fall into the following categories:
  • i. Risk-focused examinations. These examinations are typically referred to as “sweeps examinations.” These examinations are conducted to get a better understanding of areas that have been deemed as emerging risks in the industry, such as best execution and soft dollars. When the staff of the SEC decides to do a sweep, a sampling of firms is chosen for a risk-focused examination of a specific activity, control or compliance area. These examinations may be done on- or off-site.
  • ii. Cause examinations. These are obviously the scariest examinations because they are conducted when the staff of the SEC has reason to believe that there have been violations of federal securities laws. Cause can be determined in many ways including tips from clients (or even competitors), other regulators, lawsuits and arbitrations and press releases. Such an examination will not always lead to enforcement, but a cause examination is certainly something to be concerned about.
  • iii. Limited-scope examinations. This is a relatively new type of examination. Typically, newly registered investment advisors are subject to these examinations. The goal of the examination is to obtain information about the investment advisor and its compliance program in order to determine the “compliance culture” of the firm and help determine the relative riskiness of the firm’s operations. These examinations generally last anywhere between four hours and one full day. A limited-scope examination will focus on the firm’s policies and procedures, business practices and interviews with personnel. Invesgtment advisors may be subject to this type of examination within their first few years of existence.
  • iv. Cycle examinations. This is the most routine type of examination and probably what most investment advisors think of when they hear about an impending examination. Therefore, we will discuss this type of examination in more detail. A cycle examination will include reviews of the firm’s books and records, interviews with personnel, and analysis of the firm’s operations. The firm will typically, but not always receive prior notice (often one week) of the scheduled examination and be asked to provide certain documentation prior to the on-site visit. The examination will last anywhere from three days to a month or more. The frequency of cycle examinations will depend upon the perceived risks associated with the firm.

A: Brian Hamburger, MarketCounsel

• a. SEC-registered investment advisors can compensate third parties for referring business. State regulations vary from not mentioning referral fees to significantly limiting them. For an SEC-registered investment advisor to compensate a third party, the investment advisor must meet the following general criteria found in Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended:
  • i. There must be an agreement in place between the third party and the investment advisor. The agreement must have certain provisions included.
  • ii. The third party must not be barred from accepting the fee.
  • iii. Clients must be provided with disclosure and acknowledge that they are aware that the third party is receiving a fee from the investment advisor for the referral.
• b. While not generally the responsibility of the investment advisor, the referring third party should be aware that there may be registration requirements for the referring of business. This depends on the state where the third party has a place of business and where clients reside that are referred.

A: Sam Edgerton and Chad Weaver, Edgerton & Weaver, LLP

If you are considering leaving a wirehouse and going independent, there are several legal and compliance issues that you should consider before making your decision. A little extra time and attention paid at the onset of the transition can ultimately pay off in spades.

From a legal point of view, regardless of whether you ultimately choose to join a broker-dealer or a registered investment advisory firm, you should pay particular attention to your current employment agreements. For one, if you have an outstanding promissory note, you should review its terms before making the move. The terms of such a note may direct you to hold off for a particular period of time before terminating your employment. Second, most wirehouse employment agreements have non-compete clauses. Depending upon which state you live in, these non-compete clauses may or may not be enforceable. Notwithstanding, your agreement may also include a provision protecting certain "trade secrets" of the company, which are often interpreted to include basic client information. For this reason, you should consult with an attorney about taking the appropriate steps to move assets. For example, in 2004, most wirehouses and major brokerage firms signed a recruitment protocol, in which all signatories agreed to allowing departing brokers to take limited customer contact information. If you are looking to ("the Protocol") move to a firm that is a signatory to the Protocol, you should get a copy of the Protocol and follow the terms set forth therein. If you are considering moving to a firm that is not a party to this agreement, you may think about asking the firm to join the Protocol before your departure. In those cases in which the new firm is not a party to the Protocol and does not wish to join, there are still steps you may take to limit the threat of any action taken against you by your current firm. The following case study is illustrative.

Faced with the uncertainties of his current wirehouse firm, GoingUnder, Indy decides to leave the firm and join A Broker's Choice (ABC), a broker-dealer in the State of California. Indy pays no attention to his outstanding promissory note and employment agreement with GoingUnder before submitting a termination letter to ABC. A week before his termination, Indy begins informing his clients of his pending move. In doing so, Indy sends a letter to all of his clients informing them why he is leaving GoingUnder and detailing the reasons why they should transfer their assets to ABC. Indy attaches a pre-completed transfer form, which only requires the signature of his clients to effectuate the transfer. Before leaving, Indy also downloads all of his clients' files onto a disc.

Three weeks later, Indy receives a notice that GoingUnder is filing a temporary restraining order and complaint for breach of his employment agreement, which includes a non-competition, non-solicitation provision. ABC is not a signatory to the Protocol. Indy seeks aid from ABC, only to learn that he must pay for his legal defense. Indy now faces the possibility that a Court will prohibit him from soliciting any former customers, and pay damages for lost profits to GoingUnder. He also learns that his promissory note contract contained a termination clause, which would have completely absolved him from making any further payments on the note. Had Indy simply taken the time to review his contracts and undertaken a different course of action, he could have completely avoided the impending litigation.

From a compliance point of view, the decision to join a broker-dealer versus joining a registered investment advisory firm carries significant differences. From a hiring perspective, the broker-dealer is going to be particularly sensitive to your U4. If you have any prior customer complaints or regulatory actions, you should be prepared to discuss these items upfront with the broker-dealer. At the same time, the broker-dealer should be particularly helpful in assisting you with the administrative task of transferring your client accounts. As most broker-dealers already have compliance and supervisory systems in place, your transition should be fairly routine and noneventful. On the other hand, if you choose to join an existing registered investment advisory firm, you should undertake particular due diligence of the company. For example, you should ensure that the RIA has properly registered with the Securities Exchange Commission and applicable states. You should also review the RIA's current Form ADV to make sure its business model is in line with your expectations and business model. Also, you should inquire as to the supervisory and compliance chain of command. If the essential compliance requirements are not met, your prospective RIA could be shut down during a routine audit. Alternatively, if you choose to start your own independent advisory firm, you must undertake significant steps before transferring any assets. For instance, depending upon the amount of assets under management, you must first register with either the SEC or state. The time frame for completing the registration process ranges from six months to one year. In the interim, you must also create and implement your own compliance and supervisory procedures, as well as client agreements. During this time period, you should also align with a custodian (i.e., Pershing) to ensure the smooth transition of assets.

Choosing to go independent can be exciting and profitable. If done right, the transition process can be streamlined and relatively painless. If done wrong, the decision can be extremely costly and potentially fatal to your business.

A: Thomas Giachetti, Stark & Stark

No. The vast majority of restrictive covenant agreements do not have non-competition provisions. Rather, they contain non-solicitation provisions preventing employees from soliciting former clients and colleagues to join them at their new RIA or broker-dealer firm.

A: Mindy Diamond, Diamond Consultants

There is no "cookie cutter" formula for the deals being offered. All packages are crafted on an individual basis and are based on many factors. A good recruiter always knows what the current range of deals look like. If you have specific questions about transition packages.

A: Mindy Diamond, Diamond Consultants

As a broker thinking about changing firms, your confidentiality is of utmost importance. A recruiter allows you to explore options while maintaining a posture of strength. In addition, the due diligence that must be done prior to making a change can become a full-time job. By letting a quality recruiter perform the search for you, you can continue to focus on the growth and success of your business. A first-rate recruiter will bring you access to major firms and those opportunities of which you may not currently be aware. You are the expert when it comes to meeting your clients' needs. Shouldn't you obtain the same type of professional assistance when you are seeking to make a career move?

A: Beverly Flaxington, The Collaborative

So, you want to go on your own and start your own registered investment advisory firm? Sounds great–freedom from the constraints of a large organization, keeping all of the income for yourself, and no boss to tell you what to do! It all sounds perfect–and it can be, if you make sure you've considered all the important items–let's take a quick run through the list:

A: Jennifer Connelly, JC Public Relations

Brokers who transition to independence report that they are both excited and relieved to own their own business and all of their client accounts. They feel empowered that they can report to clients that they are completely independent and free of the taint of the wirehouse world that has sustained. From a public relations perspective, they also have a story to tell the press, clients, and prospects regarding their ability, as independents, to always do the right thing for their clients.

A: Beverley Flaxington, The Collaborative

First, you must define who your target market is (e.g., individuals with investable assets of $1million or more). If you have clients that will be transitioning with you to your new firm who match your target profile get to know more about them personally. Questions you may ask include:

• To what social and professional groups do you belong?
• What newspapers, newsletters and journals do you read?
• What types of professional services do you use and why?

Based on this information you will be able to more effectively prospect similar individuals who may find your services valuable. If you don’t currently have clients in your target market who can help you gather this information, you can research using both online tools and also by interviewing centers of influence (e.g., lawyers, CPAs, insurance professionals, etc.)

Specifically, recommendations on reaching out to your target audience include:

• Developing relationships with centers of influence who may be able to refer new business
• Writing newspaper, newsletter or magazine articles
• Advertising
• Speaking engagements at professional or interest group meetings
• Hosting seminars on topics relevant to your target market
• Sponsoring charitable events

A: Beverley Flaxington, The Collaborative

A written strategy gives everyone in the firm (even if, at first it is just you) a clear depiction of the whats, whys, hows and whens of your selling efforts. Business development personnel or financial advisors tasked with this need to know what’s expected of them, and a written sales strategy is an excellent source for crafting job descriptions and compensation plans. In larger firms, full communication of sales strategy enables all areas – client service, operations and technology, administrative, etc. to understand their direct contribution to achieving the firm’s goals.

Generally, a written plan should answer these questions or contain the following components:

• Is my target market growing, stable or declining?
• Is my firm’s value proposition aligned with the needs of my target market?
• What are the overall buying criteria of people within this market, based on the mindset and personal needs that we know about them?
• What, if anything, do we need to change their buying criteria from or to?
• Who are my competitors? How are we positioned in relation to the strongest competitors?
• What changes must be made to my marketing message, client service, operations and technology to fully serve this market?
• How do I source prospects in my target market?
• What are the steps in my sales cycle that help convert a prospect into a client?
• What kind of contact management or CRM (customer relationship management) system will I need?
• What kind of marketing is needed? What sales tools?
• What is the budget for all of this?

A: Beverley Flaxington, The Collaborative

Many financial advisors know that referrals are the primary way to source new business and thus ask clients and their trusted network of professionals to refer prospects to them. In addition to referrals, financial advisors who are actively growing their business utilize technology solutions as a key component of their overall prospecting strategy.

With your target prospect defined, today’s technology allows you to quickly develop “warm” leads that open doors to them directly or through your trusted network of professionals. Social networking sites such as LinkedIn® gives new power to individuals focused on business development who are looking for an entrée and a warm first contact. Newer services like Zoominfo®, TrueAdvantage® and Generate® allow you to customize information sets such as relationships and “trigger events” based on target demographics, target market, etc. Many customer relationship management or CRM systems integrate with these networking sites and map relationships within your current database of contacts.

In summary, in today’s competitive financial services industry many of the old rules of prospecting are still effective, however, we encourage financial advisors to test these new social media concepts to reach out to clients, prospects and centers of influence both before and after you are out on your own. Before you are out on your own, these contacts can be helpful to interview and help with positioning. After you have established your firm these contacts can be essential to your growth strategy.

A: Beverley Flaxington, The Collaborative

Difficult markets, such as the one we're experiencing, presents the opportunity for greater, more targeted communication to clients. Many advisors make the mistake of "hunkering down" and focusing on managing the portfolio, thinking that the investment results will speak for themselves. This approach misses the opportunity to communicate, educate, and put the clients' minds at ease about your investment approach. Advisors want to be sure to communicate to clients that they are in control (even if they don't feel it!) and are staying consistent by sticking to their stated objectives and investment process. It can be compelling to spend the day making trades, doing research, and focusing on account management, but taking the time to prepare and provide clients with communication is necessary and important. While all communication must be done with confidence, sincerity and a true willingness to avail clients of the information–specific recommendations include (1) a targeted email, or letter to clients talking about the current market and how your investment approach fits with these market conditions; (2) workshops or other educational events to teach clients about past market cycles and how this one is the same, or different, and the ups and downs of markets over the last many years; (3) targeted phone calls to clients who have expressed concern, are generally "nervous, " or where the portfolio is underperforming to show how they are still on track to their goals and talk about what steps you are taking to manage the account; (4) newsletters or other standard communication with information about how to talk to your kids, or parents about what's happening in the market and the necessity of taking the long-term view.

Many advisors make the mistake of thinking that if they don't address it, the client won't notice and won't worry about what's happening. The problem in our information age is that they are being exposed every day to negative information. The advisor needs to act as a counter-balance by communicating and being the voice of wisdom and experience!

A: Paula David, Fort Point Growth Partners

There's no substitute for frequent and effective communication with your clients and prospects. It starts with the announcement of your new firm, which should clearly articulate the reasons behind your decision and the benefits the new firm will provide your clients, and continues with personal communication through each step of the conversion process, followed by ongoing monthly newsletters and periodic client satisfaction surveys. For all intents and purposes, there's practically no such thing as "too much communication" as far as most clients are concerned.

Always remember that you are not just managing your wealth–you have been entrusted with their future and their children's futures. Be proactive. Don't wait for clients to ask you about some product solution or service…anticipate the need instead. A quick email note such, the example below can be a major step in the process of turning new clients into lifelong clients and friends:
"Bob, I saw the attached article on using limited partnership interests to fund charitable-giving vehicles and immediately thought of your unique situation. Let's discuss next time you come in."

When it comes to client feedback, don't make the mistake of assuming that no news is good news. Too many advisors avoid gauging the satisfaction of their clients for fear that asking the questions might somehow remind them of some long-forgotten unhappiness with the firm. It's the advisory practice fallacy of "don't ask, don't tell." There's nothing more toxic than an unhappy client with no means of venting.

Annual or semi-annual client satisfaction surveys afford you an opportunity to identify the strengths and weaknesses of your staff, your client service model, and your overall firm, and provide you with a clear roadmap of precisely what issues and areas need to be addressed to continually improve the practice. More importantly, your clients will feel as if they matter…that their thoughts, feelings, and concerns are as important to you as they are to them.

A: Julie Littlechild, Advisor Impact

There is, of course, no way to eliminate risk entirely when it comes to this issue, but there are ways to mitigate that risk. Your goal is to create "sticky" client relationships, or in the parlance of new research we just published called the Economics of Loyalty, to have actively "engaged" clients. That means that you need to focus on demonstrating your commitment to your clients and consistently reinforcing the value that you provide.

One simple way to build deeper relationships and to actively engage your clients is by gathering client feedback. At a time when you are considering a change and, particularly, at a time when the markets are less than cooperative, you'll set yourself apart by putting a process in place that not only allows you to gather more and better information on what your clients need, want, and value, but reinforces the notion that you are there for them in the good times and in the challenging times. But perhaps even more importantly, a well-structured survey will allow you to reinforce everything that you do for your clients and underscore that you are proactive in managing the relationship. For example, if today you asked clients to rate satisfaction with investment performance, they might tell you exactly how they feel. However, imagine asking clients to rate investment performance as well as the extent to which you are proactive, care about the relationship, focus them on their goals, or provide access to a comprehensive range of services. They may provide a low rating on their investment performance, but they are forced to recognize the good work you do in supporting them in meeting their overall goals. That creates goodwill because you are reminding them of the critical role you play in their lives while demonstrating commitment by asking for their input.

But there is another important reason to gather feedback when you are considering a transition. Quite simply, it will uncover any risk that exists for you, with respect to losing clients, and that means you'll have an early warning system that allows you to deal with any potential concerns before you take the leap.

A: Jennifer Connelly, JC Public Relations

Newer advisors generally tell us that the most challenging aspect of launching an independent RIA is moving client accounts over to their new custodian. But a growing number of firms, such as Pershing, have hands-on, in-office consulting and turnkey programs (including form letters that can be customized) for advisors to make this transition fairly seamless. Some firms, like Pershing, even have a team dedicated solely to transition, to ensure that nothing is left to chance and that nothing falls between the cracks. As a public relations firm, we also help new advisors tackle another challenge: Getting word out about their firm to the media, which can pave the way for an advisor in their marketplace.

A: Jennifer Connelly, JC Public Relations

This question depends on the firm. It's usually wise to budget three to six months, depending on how much hands-on assistance you get from your new broker-dealer or custodian. Some firms, including Pershing Advisor Solutions, have an in-house transition team that will do everything possible to pave the way for a seamless and relatively speedy transition.