With more and more people looking to become a financial advisor – given both the rewarding nature of helping people and the income potential it brings – questions about when you actually have to register as a financial advisor are becoming more common. Does any financial advice trigger a requirement to register? What kind of license do you need to become a financial advisor? And can you wait until you get clients, before you go through the process?
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the exact rules that determine when you have to get a license to become a financial advisor – or technically, to register as an investment adviser by creating an RIA and becoming an IAR (investment adviser representative) of that business.
The core requirement under the Investment Advisers Act of 1940 is that it’s “being in the business of giving investment advice for compensation” that triggers the need to register. While there are forms of financial advice that may not require registration, such as “financial coaching”, the reality is, almost anyone who’s holding themselves out as a financial advisor – particularly as a CFP certificant – is likely giving some form of investment advice, and consequently will need to register.
Registration as an investment adviser can happen one of two ways: either registering with the primary state in which you do business, or registering with the Securities and Exchange Commission (SEC). However, registering with the SEC requires a minimum of $100M of regulatory AUM, or doing business in 15+ states; as a result, most advisors just starting out will initially register the RIA at the state level, and then become an IAR (investment adviser representative) of that RIA.
Notably, though, to become an IAR, you must also pass the Series 65 exam (or have the Series 7 and 66 if you are coming from a broker-dealer). Most states will waive this requirement for those with an advanced certification such as the CFP, CFA, CHFC, or the AICPA’s PFS. But ultimately that means to get started, you must both pass the Series 65 exam (or possess one of the requisite designations), and go through the registration process.
And the registration process in the advisor’s home state itself should be done before actually going into business. As the financial advisor adds clients in other states, and crosses more than five clients (for most states), it’s also necessary to extend the registration in those states. But soliciting the first client requires the advisor to at least create the initial RIA in their home state, first.
Fortunately, it’s still fairly inexpensive to get up and running as a financial advisor (at least relative to the income potential it brings, and the cost of starting a business in other industries). However, that doesn’t mean it’s easy to make the transition – because the real challenge is not just the startup cost to become a financial advisor, but filling the “income gap” of launching a business with no clients or revenue, and needing to build up to the point where you can actually pay yourself a fair wage! On the other hand, in the long run, successful financial advisors still have the potential to make many times the average household income in the US!