A reader recently inquired: “I just read your Florida Bar Journal article, titled: “The Attorney as Complete Advisor: Fiduciary Ancillary Business Models.” It is an incredible resource. My law partner and I are in discussions to start our own financial advisory firm. Any chance you could answer some questions or, better yet, we could hire you as a consultant to help us get everything set up to make sure that we are in compliance?”
Following is my reply.
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Thank you for your inquiry. Please note that I don’t provide comprehensive compliance advice and support to start-up entities, as I restrict my activities in the compliance area to consultations on more complex issues relating to the applications of the fiduciary standard and, when applicable, the prudent investor rule.
However, I can direct you to many potential resources.
Choosing to Be a Fiduciary RIA. I applaud your decision to operate as a fiduciary financial advisor, rather than as an investment or insurance product salesperson. The best fiduciaries eschew all product-related compensation and operate as “fee-only” advisors. [The term “fee-only” should not to be confused with “fee-based” – which in reality usually means a mixture of compensation paid directly by the client (fee-based) and compensation received from the sale of products (i.e., commissions, 12b-1 fees, etc.]
Attorneys are well-trained in fiduciary law, and as fiduciaries in their legal practice possess a fiduciary mindset already. Instilling a strong fiduciary culture within a financial services practice starts at the top, and requires constant reminders to all team members of the deep commitment to bring strong benefits to all of the relationships the firm and its team members possess – clients, vendors, and team members themselves.
Certified Financial Planner Board of Standards. The CFP® certification is by far the most recognized (by consumers) certification or designation in financial services. Being an attorney, you qualify for the “accelerated path” to becoming a Certified Financial Planner™. In essence, you can study for the CFP Exam, take only the “Capstone” course (many of which are available online), and then sit for the exam. An “experience” requirement must also be met, in order to utilize the CFP® certification.
Undertake a Personal Commitment to Being an Exceptional Financial Adviser.
When I was considering starting up my own registered investment adviser firm, in 2001, I attended an AICPA conference on personal financial planning. A pre-conference was dedicated to start-up issues. I was fortunate enough to hear a presentation from Harold Evensky, one of the wise early leaders of the financial planning movement and its progression toward a profession of fiduciary advisors. Harold advised to “go all in” – i.e., commit yourself to becoming an excellent financial advisor.
Permit me to pause and reflect upon my years as an investment adviser. Some twenty or so years ago, as an estate planning attorney (with my practice emphasizing transfer taxation planning), and from various readings in the field of investments, I thought that adding personal financial advice to my repertoire was going to take a year or two of (part-time) training and experience. However, I found that, in forming a registered investment adviser (RIA) firm in which comprehensive financial planning and investment advice was offered:
(1) Personal financial advice is very much intertwined with personal tax advice, and tax laws are ever-changing.
(2) Financial planning – which encompasses areas as diverse as estate planning, budgeting, goal-setting, planning for a future retirement, decumulation planning, and many different strategies and types of investment and insurance products – is a very broad area to attempt to master, and at times very deep as well. I have always desired to be intellectually challenged, and the ever-changing world of personal financial planning provides me with an ongoing and robust challenge.
(3) A little bit of investment knowledge can be a dangerous thing. A full understanding of Modern Portfolio Theory, the various forms of the Efficient Markets Hypothesis, strategic vs. capital asset allocation, capital asset pricing models (including factor-based investment strategies), the fees and costs associated with various types of pooled investment vehicles, effective asset placement in various types of accounts to reduce over the long term the tax drag on investment returns, securities trading methodologies (to ensure best execution), and much more is required to be an excellent investment adviser.
(4) The ability to add value, as a fiduciary financial advisor – equipped with the knowledge and experience to provide exceptional and holistic financial advice, and accepting the obligation to minimize conflicts of interest – makes the journey to the office each day a very pleasant one.
While you can outsource financial planning, as well as investment portfolio design and management – to other firms (see discussion of TAMPs, below), I urge that you commit fully to becoming a Certified Financial Planner™ and becoming a full-time financial and investment advisory professional, over time. If you are in a law firm with many others, one or more of the partners or associates may be identified to pursue financial planning and investment advice as a career.
Lastly, over 20 years ago in my practice as an estate planning attorney, I felt I had close relationships with many of my clients. I met with most of my clients every few years, at a minimum, to review and (at times) revise their estate plans. My clients often looked to me for guidance in other areas, outside traditional estate planning.
Yet, as a financial planning and investment professional, I found that the depth of relationships with my clients is far, far deeper. I have learned many details about their lives, and I have then have assisted them to define and then pursue their lifetime goals. The rewards flowing from my clients’ accomplishments bring back to me the greatest reward.
National Association of Personal Financial Advisors (“NAPFA”). This is by far the largest association of “fee-only” investment advisers and Certified Financial Planners™. “Fee-only” means all material compensation is paid to the firm directly by the client. NAPFA has two major conferences a year, as well as regional symposia; you will learn a great deal from very successful colleagues at these events.
NAPFA also has various “study groups” to which many of its members belong, and a very active online discussion board in which members assist each other. Members also receive discounts on various vendor services – including various compliance consulting services, software, etc.
To join NAPFA you need to be a CFP®. However, you can attend their conferences and symposia as a non-member, or as a “Student Affiliate” or “Pathway Member.”
XY Planning Network. One for-profit association that has grown rapidly over the past several years provides a broad range of services to its members. XY Planning Network provides ongoing guidance and resources to new and existing registered investment advisory firms. To become a full member of the network, you need to become a CFP®. Again, however, non-members may attend their annual conference.
Compliance Consulting. There are many good compliance consulting firms out there. For attorneys and many others who seek to start an RIA firm, I recommend Market Counsel, which provides comprehensive start-up assistance and exceptional training through its “RIA Incubator” program. Another compliance alternative is RIA-In-A-Box, a low-cost option for new RIAs.
TAMP Programs. There exist various “turnkey asset management providers,” or “TAMPs,” that provide different levels of services. Some handle portfolio management, billing, and the formulation of quarterly reports to clients (often branded with your firm name). Others provide substantial training in investments and/or practice management topics. A few provide more robust advisor services to facilitate the needs of diverse clientele – even providing financial planning services on your behalf, to your clients.
Unless you are a highly experienced investment adviser, I suggest you employ a TAMP of some kind to assist with custodial relationships, training in the use of certain forms, portfolio design and management, portfolio rebalancing, and portfolio reporting software
Some TAMPs will also provide “back-office” support for new account openings and account transfers (not always as easy as they should be). Several TAMPs go further, offering you the ability to tackle different markets, such as high-net-worth clients, executives, defined contribution plan sponsors, and foundations. other TAMPS provide you with the ability to outsource comprehensive financial planning services (at least until such time as you possess the requisite knowledge and experience to provide these services on your own).
Again, unless someone in your firm possesses significant experience in the delivery of financial planning and investment advice, as a fiduciary, your first investigation should likely involve reviewing different TAMPs and their offerings. This will minimize your initial investment of time and other resources, and enable you to provide high-quality financial services.
Life Insurance and Annuities. Generally, to give advice on insurance, you need a form of insurance license. However, under some states’ laws, attorneys are given the authority to provide advice on insurance needs and policies without a license.
While most insurance products are sold on a commission basis, DPL Financial Partners has accelerated the trend toward being able to provide insurance solutions without commissions, and as a fee-only, fiduciary advisor. Other sources of low-cost life insurance and annuities should also be explored.
While term life insurance is often recommended, there may be situations where a cash value life insurance policy is best. For example, for asset protection purposes (for those in certain professions). Or for funding an ILIT in order to provide liquidity to pay estate taxes. Hence, possessing a resource for life insurance needs of the clients is an important part of establishing a financial services firms.
Readings. There are many publications in the investment and personal financial advisory space. I commend four to you:
Bob Veres’ Inside Information (monthly newsletter) – and Bob (a top “thought leader”) in the profession also hosts an exceptional annual conference;
Michael Kitces’ Nerds Eye View blog, podcasts, and more (Michael is also at the top of the thought leaders in our profession);
Advisor Perspectives – a host of online articles each day, and an excellent discussion board through its affiliated APViewpoint; and
https://www.thinkadvisor.com/ – a traditional and online magazine resources, that often has good articles on financial planning topics and recent regulatory developments.
https://riabiz.com/ – an online magazine highlighting different business moves (and new business structures) in the RIA space.
There are many other publications in the financial planning and investment advisory space. You will find, if you truly devote yourself to this profession, that you will spend several hours each week keeping up-to-date with the latest trends and techniques.
Attorneys’ Ethical Obligations. Referrals by law firms to an affiliated RIA firm, or from the RIA firm to the law firm, create conflicts of interest. Confidentiality of client information is also a concern, requiring separation of business entities (or formation as a subsidiary). These concerns can be addressed, via commitment as a fiduciary to providing advice, and through various notifications and/or disclosures to clients. An excellent compliance consultant can guide you through your state bar’s ethical requirements, as well as the compliance requirements imposed by state securities administrators and/or the U.S. Securities and Exchange Commission.
In conclusion, thank you again for the question posed. Please don’t take my answers as a deterrence to entering this wonderful emerging profession of financial and investment advice. Rather, be certain that – if you go this route – you are doing so for your love of providing comprehensive, holistic advice to clients. And make the commitment to become one of the very best in this profession.
Thank you … Ron
Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is an Associate Professor of Finance within its Gordon Ford College of Business.
Called “Dr. Bear” by his students, Dr. Rhoades is also a financial and investment adviser with Scholar Financial, LLC. To request further information about Scholar Financial, LLC’s fees and services, please email AdvisorINFO@ScholarFinancial.com. Thank you.