MarketCounsel’s Brian Hamburger discusses legal considerations to help with an advisor's transition

[Employment Considerations]
[with Brian Hamburger]
[Advisor Services]

[Charles Schwab]
[Brian S. Hamburger, JD, CRCP, AIFA®
[Founder and Managing Director | MarketCounsel]

Advisors, when they're looking to break away or leave their current employer, have to have a clear plan in place. They have to really understand where they are and where they're headed to. And looking at where they are, they really want to take a look at what agreements they may have already subjected themselves to, they may have already signed, or other policies and procedures of the firm. Primarily, we're looking at traditional employment agreements that exist within the brokerage industry, we’re looking at promissory notes, training agreements, and anything else that they may have signed that's pertinent to their employment. The agreements are going to set the stage for what is and isn’t possible, what timeframe is allowable, and also, what information can be taken from one firm to the other. 

The broker protocol sets the stage for advisors and brokers moving between firms. It allows a broker and advisor great predictability, a well-worn path, if you will, in moving between firms, so long as they follow a specific set of rules and procedures, primarily leaving breadcrumbs behind and advising the firm that they're departing what information they're taking regarding what customers, and where they’re headed to.  Now, there's a couple of essential elements of the broker protocol, the most important, however, is ensuring that the firm you’re leaving and the firm that you’re going to are both members of the protocol.

I can't emphasize how important that level of discretion really is for a successful transition. So most often the people that you're going to tell include your closest and immediate family members and service providers that are assisting you, core to assisting you with the transition.  So I don't want to undermine the fact that that is a very unnatural thing for advisors to do, however, I can't overemphasize the importance of maintaining that level of discretion. We have war story after war story of advisors who… whose pre-termination… who on a pre-termination basis had some disclosure that was leaked.  And the reason for that is because folks that are in other walks of life and other industries don’t understand the sensitive nature of the employment within the brokerage industry.

[Charles Schwab]
[Disclosures]

You are urged to consult your own professional advisors, including legal, tax, accounting and compliance advisors, to address specific circumstances and considerations, including any contractual restrictions, postemployment obligations, and licensing requirements.  Schwab does not provide tax, legal, regulatory, or compliance advice and this information is not intended to be a substitute for specific individualized advice.

Schwab makes no representations about the accuracy of the information or its appropriateness for any given situation.

The information provided and views expressed by MarketCounsel and their representative are their own, without endorsement or verification by Schwab, and some statements have been edited.

MarketCounsel and their employees are not affiliated with or employees of Schwab unless otherwise noted. Mention should not be construed as a recommendation, endorsement of, or sponsorship by Schwab. The views expressed are those of the third party and are provided for informational purposes only. 

Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Schwab.  Independent investment advisors are not owned by, affiliated with or supervised by Schwab.

©2021 Charles Schwab & Co., Inc. (“Schwab”).  All rights reserved. Member SIPC.  (0921-1JTK)

[Key Steps to Forming a Business]
[with Brian Hamburger]
[Advisor Services]

[Charles Schwab]
[Brian S. Hamburger, JD, CRCP, AIFA®
[Founder and Managing Director | MarketCounsel]

Determining the best type of entity for your new business means really having a vision for what this business is going to become: How many owners is going to have?  Where are you going to be conducting business, what states are you going to be conducting business in? What type of business will you be conducting aside from just investment advice?

It really requires not only legal counsel, but often tax counsel or your accountant to come in and weigh in on available options to you.  The fact is… the fact remains that most new businesses that are formed today are limited liability companies, however not all. And just like there's an investment strategy for end clients, there are various strategies that apply… that are pertinent to advisors. So advisors are best to really have these discussions to determine are they one of the minority that may need to go out and form a C-corporation?  Are any of the elements present that require an entity other than a limited liability company?

Most advisors form their RIA in their home state, where they're going to principally conduct their business. That being said, there are reasons to form an RIA in other states. There are some… some states that have really reached great popularity because of their friendliness to business, so there may be reasons to head to those states and there are some other states that are very difficult or lengthy to get businesses started up in, and so there's often strategies that employ the use of these alternative or neutral states to get the business started for timing purposes. 

My theory is that if you can agree upon the disposition of an asset that's worth exactly zero, there's no way once the business is rolling that those agreements become any easier. So it's a great time to sit around a kitchen table with potential partners, or partner or partners, and really go through these core and crucial issues to ensure that this is really going to be a viable partnership, that you're going to be able to discuss some of these thornier issues, some of these more difficult issues as the stakes are raised.

There are a number of ways that advisors can protect their business once they have this business formed and it's fully launched. Insurance is key among them. There are various types of insurance that protect the business. Errors and omissions insurance is the most specific to this particular industry. There's also directors and officers insurance that may be necessary depending upon the structure. Property and casualty insurance is important once the business actually has some type of physical space and assets that they need to protect. Insurance plays a significant role in mitigating risk.

The switch from an employee to an entrepreneur is not necessarily an easy one, and one of the things that an entrepreneur has to do is assume risk that they didn't otherwise have to assume or maybe wasn't apparent to them, or even probably closer to the truth, they didn't have a choice on what risk to assume, or control over it. That shift in mindset is crucial to the success of an investment advisor.

[Charles Schwab]
[Disclosures]

You are urged to consult your own professional advisors, including legal, tax, accounting and compliance advisors, to address specific circumstances and considerations, including any contractual restrictions, postemployment obligations, and licensing requirements.  Schwab does not provide tax, legal, regulatory, or compliance advice and this information is not intended to be a substitute for specific individualized advice.

Schwab makes no representations about the accuracy of the information or its appropriateness for any given situation.

The information provided and views expressed by MarketCounsel and their representative are their own, without endorsement or verification by Schwab, and some statements have been edited.
MarketCounsel and their employees are not affiliated with or employees of Schwab unless otherwise noted. Mention should not be construed as a recommendation, endorsement of, or sponsorship by Schwab. The views expressed are those of the third party and are provided for informational purposes only. 

Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Schwab.  Independent investment advisors are not owned by, affiliated with or supervised by Schwab.

©2021 Charles Schwab & Co., Inc. (“Schwab”).  All rights reserved. Member SIPC.  (0921-1JTK)

[Initial Registration & Regulatory Compliance]
[with Brian Hamburger]
[Advisor Services]

[Charles Schwab]
[Brian S. Hamburger, JD, CRCP, AIFA®
[Founder and Managing Director | MarketCounsel]

This is somewhat of a complex area, but I want to make sure that people understand that there is a well-worn path to independence. This is a process that's been done thousands of times before, something that people that do this each and every day are very, very familiar with. And so while they may seem overwhelming and it may seem like a complex laundry list of items, they really can be broken-down into manageable, bite-sized pieces along the way.

When we talk about registration, it's all about disclosure. So for investment advisors, it's really about envisioning the type of firm that they're looking to launch, the various services they're looking to offer, how they're being compensated both directly and indirectly, the various roles that they play within the client relationship, other conflicts of interests that may play a part in their firm, and really taking inventory of all of these things and ensuring that there's clear and concise disclosure.

Our job is often to have a meaningful conversation, a dialogue with the advisor about what they anticipate, what they want to do, and making sure that we can create disclosures that really explain it in plain English.  Our goal, effectively, is to pull this out of them, to translate it to plain English, and furnish disclosures that consumers and regulators can both feel comfortable with.

So once the registration process is underway, now it's time to backfill and get all the other essential documents in place. We're talking about policies and procedures, or a compliance manual, if you will, based upon the type of business that the advisor is going to be conducting. These policies and procedures will lay out for the firm exactly what is permissible and what has to happen under various circumstances.

The other main element that we want to put in place are a set of client agreements based upon the various services that the advisor is going to be offering. 

Now, one byproduct of all of this work—the registration, the disclosure, the policies and procedures, the client agreements—is that you bring all of this together, and you have wonderful tools to help mitigate risk that go well beyond any type of insurance that the advisor can put in place, because they're doing everything they can to adequately inform and disclose all of their business practices to potential and current clients.

Once an advisor is done peering over the fence of independence and they decide that this is something that they're ready to proceed with, it's at that time that they want to engage an advisor or counsel. There are various advisors that play a very significant role in this transition, most important of which I believe is legal counsel. Legal counsel will help structure a strategic plan for exiting, ensuring that all the essential elements are considered.

Like many important moves in life, there's never the perfect time to leave. The most common feedback we get after a transition when we go out and canvas our advisors that have made the move to independence, the most common response we get is ‘I wish I would have done this sooner.'

[Charles Schwab]
[Disclosures]

You are urged to consult your own professional advisors, including legal, tax, accounting and compliance advisors, to address specific circumstances and considerations, including any contractual restrictions, postemployment obligations, and licensing requirements.  Schwab does not provide tax, legal, regulatory, or compliance advice and this information is not intended to be a substitute for specific individualized advice.

Schwab makes no representations about the accuracy of the information or its appropriateness for any given situation.

The information provided and views expressed by MarketCounsel and their representative are their own, without endorsement or verification by Schwab, and some statements have been edited.

MarketCounsel and their employees are not affiliated with or employees of Schwab unless otherwise noted. Mention should not be construed as a recommendation, endorsement of, or sponsorship by Schwab. The views expressed are those of the third party and are provided for informational purposes only. 

Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Schwab.  Independent investment advisors are not owned by, affiliated with or supervised by Schwab.

©2021 Charles Schwab & Co., Inc. (“Schwab”).  All rights reserved. Member SIPC.  (0921-1JTK)