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For all of the myriad ways financial advisors can structure and run their practices, firm owners generally encounter similar stages in the development of their firms. At some point, solo advisors will need to decide whether to increase their headcount, and an ensemble practice may later evolve into a centralized brand with significant enterprise value. The journey will be unique for each advisory firm owner, but one thing they all have in common is that they will eventually have to divest themselves of their ownership stake, either through a voluntary (or involuntary) dissolution of the business or through the full or partial RIA sale, with the latter naturally being the most economically ideal outcome.

In this guest post, Chris Stanley, investment management attorney and Founding Principal of Beach Street Legal, discusses in depth the various stages of buying, selling, and merging an investment advisory and financial planning business.

The initial step towards the eventual sale of an advisory firm requires the seller to identify a well-suited counterparty, which can be challenging given the population of well-funded serial acquirers who have a material advantage over firm owners, many of whom have likely never bought or sold a business. Once the seller and potential buyer are ready to get serious about a deal, the next step will be to sign a mutual Confidentiality and Non-Disclosure Agreement (CNDA), which contractually obligates the parties to keep any information that is shared (as the name implies) confidential.

From there, both parties can begin their respective preliminary due diligence. Once they are comfortable with the information and documents that have been shared, they can sign a Letter Of Intent that, while still high-level, provides enough detail about the proposed transaction for the seller to make an informed decision about whether to proceed. At that point, the definitive transaction documents are drafted, providing details around items such as equity and/or asset purchase agreements, a possible promissory note, and a bill of sale. Notably, these documents will serve as evidence in any subsequent disputes, making it imperative for both seller and buyer to fully understand the terms.

Once all that work is completed and both parties are satisfied with the terms of the transaction, it’s time to seal the deal and legally bind themselves by signing the contract. This moves the deal into the closing period, where the transaction can be publicly announced and any closing conditions must be met (such as obtaining consent from the seller’s clients to transition to the new owner). Only then can the new owner begin the work of integrating processes and systems and serving their new clients.

Ultimately, the key point is that the process of transferring ownership of an advisory firm is an immense undertaking and is almost always far more intensive and involved than most parties can imagine. However, given that all advisory firm owners will inevitably face the transfer (or dissolution) of their ownership stake, it’s important to consider what a future sale or merger might look like, as it’s far better for potential sellers to understand the steps involved well in advance rather than trying to figure it out on the fly!

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In the United States, Registered Investment Advisers (RIAs) are required to register in one of 2 ways: with the Federal government (namely the SEC) or with one (or more) state securities regulatory agencies. While SEC-registered RIAs are governed by the Investment Advisers Act of 1940 (and its associated regulations), state-registered RIAs are subject to the individual rules of the states (which have their own securities laws and regulations) where they are registered. So RIAs not only face a different set of regulations depending on whether they are Federally or state-registered, but state-registered RIAs, in particular, can also face a widely varying set of rules depending on which state they are registered in.

In this guest post, Chris Stanley, investment management attorney and Founding Principal of Beach Street Legal, breaks down some of the key differences between the Federal and state registration application requirements, approval processes, and post-registration requirements for RIAs.

While there is some overlap between the specific documents to be submitted for those registering with the SEC as opposed to the states, the universe of documents is far from identical. To start, Form ADV is the foundational registration document that must be submitted by any advisor seeking to become registered with the SEC or the states, but submission requirements for its various sub-parts vary depending on the registration type. For instance, while firms applying for either SEC or state registration are required to submit Form ADV Part 2A (the brochure and wrap fee program brochure), Form ADV Part 2B (the brochure supplement) is required to be submitted only by state-registration applicants (though SEC applicants are still required to create, maintain and deliver a brochure supplement to clients). Notably, along with certain standardized forms (e.g., Form ADV and Form U4), state-registration applicants are almost always required to submit additional ancillary documents to the state(s) in which they are seeking registration as part of their application.

In addition to differing registration form requirements, firms applying for SEC or state registration typically will have different experiences in the approval process. For example, while the SEC is required to respond to an adviser’s application within 45 days of the initial filing date, state applicants can expect more variable and longer lead times during the registration process. Further, while the SEC’s review process usually tends to be straightforward and permissive, some states will respond with additional questions, follow-up requests, and required revisions to the contents of the documents submitted.

Once an adviser’s registration application has been approved, they can begin advice-rendering activities, but their regulatory obligations do not end there. Along with renewing their registration annually (for both SEC- and state-registered firms), firms face a variety of requirements related to their internal finances, fees, marketing activities, and advisor agreements depending on whether they are SEC- or state-registered.

Ultimately, the key point is that while both the SEC and individual states share the goal of protecting the public from financial predators, advisers typically face differing registration, approval, and ongoing supervision experiences, depending on how they are registered. But by being aware of the varying requirements and filing documents in an accurate and timely manner, new firms can navigate their way through the registration process and (finally) begin offering planning services to clients!

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