Brooke’s note: I think I know a lot about RIAs but if somebody were to ask me how to turn a wirehouse practice into one, I would freeze. The problem is that the metamorphosis involves a breakaway from an existing [often litigious] firm, a business start-up and entangling one’s self and start-up in a policing bureaucracy. With that gauntlet to run, it’s not always easy to say: come on in, the water is fine. But that is precisely what Thomas D. Giachetti, chairman of the securities practice group for Princeton, N.J.-based Stark & Stark, a law firm with a strong practice in legal services for financial advisors, said in his Schwab Advisor Services-sponsored webinar for brokers [and one reporter] on Tuesday. I took notes, and they yielded this article. See also: What exactly is an RIA?

Step One

The first step in breaking away from a brokerage job is to create a plan. The four key parts of the plan are:

a. when to leave;

b. what employees to bring along;

c. what space is needed for the new business;

d. and who needs to know about the break away.

Giachetti makes it clear that very few people need to know – maybe just a significant other and immediate partners.

“People coming aboard you should be circumspect with,” he says. He doesn’t recommend telling clients. The closest an advisor should get to telling a client about leaving is to ask them hypothetically if they are okay with them turning independent at some indefinite time in the future..

Step 2

The next step is to find an expert to help with and registration issues.

I would start there,” he says. This person, probably a regulatory lawyer, needs to be given some lead time. “I like 90 days but we’ve done these as quickly as 30 days,” he says.

Step 3

After you’ve decided to go independent, the next big decision is how to conduct business – by fees or commissions. Giachetti recommends making the new business discretionary, even if the practice has always been non-discretionary. Having discretion means that the advisor can take actions on behalf of the clients without getting permission every single time.

The two arguments that he offers for assuring clients that this works on their behalf are: a.) in market turbulence, you can react even if you can’t get in touch with them b.) “You tell them: Look, we’re going to have an investment policy statement that’s going to dictate how you manage the account.”

Step 4

The next decision is whether to run the business under an RIA custodian like Fidelity Institutional Wealth Services or Schwab Advisor Services, which sponsored Giachetti’s presentation, or under an independent broker-dealer. The attorney seems to lobby against going the IBD route.

“You have to take a hard look at why you want associate with a broker-dealer,” he says. “The big issues for most advisors is: Do I want to sell a variable insurance product?” Other insurance-related products can be sold under an RIA but variable products can not, he says. Giachetti believes that brokers should keep revenues from commissions on these kinds of products in perspective. “How much are we talking about in terms of revenue?”

Step 5

The next step is for the broker to understand the employment agreement that currently holds sway. “Have that agreement reviewed to see whether it’s enforceable,” he says. “You don’t want leave without reviewing your contract.”

Giachetti adds that veterans like himself can generally tell a broker what constraints their company places them under, based on which b-d is involved and when they were hired.

Step 6

Repay your loans to your broker-dealer!

“Brokers say: Tom, Do I need to repay that loan and the answer is ‘yes’,” Giachetti says. “You want to start afresh and you don’t want an adversarial encounter with your former broker-dealer.”

Step 7

Choose your legal entity. Bottom line: Giachetti favors the formation of an LLC.

“A sole proprietorship is something I generally do not recommend,” he says. He particularly warns against having a sole proprietorship and also living without errors and omissions insurance. Still, the formation of a legal entity is mostly a financial decision.

“I generally tell clients that the most important person to speak to [about your legal entity] is your accountant,” Giachetti says.

On this note, he highly recommends E&O insurance, even if you choose to work under an IBD, and the IBD insures its brokers.

“How much coverage do they really have?” he asks. “A couple of claims could wipe out the insurance when you need it most.” Giachetti recommends seeking out higher coverage even if it means accepting a higher deductible.

Step 8

He also spells out the ABCs of figuring out whether to register with state or federal regulators. You need $25 million of qualifying assets, which are either discretionary assets or qualifying non-discretionary assets, to be eligible to register with the SEC. Qualifying assets are ones that, at a minimum, are subject to recommendations and monitoring at least on a quarterly basis.

“Once you go to $30 million, you have to go to the SEC,” Giachetti says. The registration generally costs about $1,000. The $30-million level is likely to be raised, he adds.

He preaches that plunging into the regulatory morass of becoming an advisor registered directly with the Securities and Exchange Commission is not to be feared. “You may have heard horror stories,” he says. “I promise you it’s not difficult. It never has to be difficult.”

Step 9

The next question to resolve is whether you need to get individually registered and what it takes to qualify. Different states have different requirements but generally a Series 65 or series 66 license is the ticket. Some states allow you to get by with a CFP or CFA, he adds. Often you need to register both the firm and yourself individually.

Step 10

Giachetti counsels leaving client records and the like behind. “One thing I really want to counsel you on: there’s very little you need to take with you,” he says. “We can always get it from existing clients.”

Step 11

Don’t worry. “Sometimes transitions don’t go as planned but unless you do something to violate your fiduciary duty to your employer or tell your clients” you shouldn’t have problems, he says. “That’s what’s happened in the last six to nine months” to people who stick to the straight and narrow.