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Episode 7

CPA to RIA Compensation and Regulation

CPA to RIA Compensation and Regulation

Rob and Rory speak with Scott Tarra of Connexian who works with broker-dealers and with both SEC and State Registered Investment Advisors on registration and compliance needs. Scott talks about the new marketing Rule 206(4)-1 which will go into effect May 4th 2021 which sets new guidelines for solicitors and modernizes the marketing rules to reflect today’s landscape of technology and social media use. Accounting firms will be interested to learn about how the new rule will mainly do away with the current solicitor’s agreement. He touches on considerations needed to from registration to compliance to filing requirements. Lastly, he talks about the focal points of regulators today being transparency, disclosures, and cybersecurity. If you are working with a registered investment advisor or are looking to become one, you won’t want to miss this episode.

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Speaker1: [00:00:00] You’re a CPA firm. You can act in a solicitor capacity, which would be, you know, you’re simply referring business to another investment advisor that may be complementary to your business, but you’re not necessarily, you know, managing the assets of those clients. And, you know, if there’s a good fit there, you’re referring to an investment advisory firm or other investment advisor firms, which you can receive a some kind of commission type model.

Speaker2: [00:00:30] Welcome to AFO Wealth Management Forward, a podcast about finance, accounting, technology and entrepreneurship. We apply our decade’s worth of experience and insight into what makes businesses work so we can help others grow both personally and professionally in this ever evolving marketplace. We help accounting firms and financial advisors grow their practice through the adoption of holistic wealth management services, learn from industry leaders in subject matter experts to unlock the secrets of their success. A podcast that shows people in companies the transformative power of technology so they don’t fear it, but instead harness it. Don’t fight the robots team up with them. And here are your hosts, Rory Henry, director of business development and CEO Rob Santos of Arrowroot Family Office.

Speaker3: [00:01:14] Oh, welcome to Alpha Wealth Management for today. We are being joined by Scott Tarab Connection. Scott has over 18 years of experience in the financial services industry. He works with FINRA broker dealers and with the SEC and state investment advisors, focusing on registration, governance, risk management and compliance matters. He was an examiner at NASD Regulation Inc. Now FINRA, where he conducted comprehensive examinations and investigations of FINRA broker dealers for compliance with federal, state and S.R.O. rules and regulations. Scott, welcome to the podcast.

Speaker1: [00:01:53] Thanks for having me.

Speaker3: [00:01:54] All right, Dan, we’re joined by Rob Santos. Rob, how are you doing?

Speaker4: [00:01:57] Hi, Jentz. Doing great. Great to have Scott on.

Speaker3: [00:02:01] All right. So, Scott, let’s start out here and why don’t you give us some background and tell our audience about connection and yourself and what you do. Sure.

Speaker1: [00:02:11] So connection really is a three tiered platform. We kind of focused solely on the financial services industry. We are first kind of marketplace for platform is to is as an expert marketplace. We have the section of marketplace to really connect financial service firms such as investment advisers, broker dealers with our network of of service providers, consultants, experts and compliance professionals. If we’re a financial service firm, you need help with a compliance project. You can go on our platform and we’ll connect you with the right compliance consultant, can get your your project needs addressed. We have a second platform, which is a digital library. This is really a comprehensive resource library out there for not only access to federal and state securities forms and documents and checklists, but we also offer free to fee based documents that are really resources for firms to tap into from a compliance standpoint, forms checklists to documents, white label products they customized in a line to their particular size, scope and function. And then lastly, we have a self publishing platform that allows our service providers on the compliance side to post white papers, position statements to really kind of elevate their footprint in the industry, which is posted on their profile for financial firms to see. So we’re really focused primarily in this space. And it’s it’s working well so far. It’s been in business since January of 90 or twenty seventeen. So going strong.

Speaker3: [00:03:44] Right. All right. I want to make sure our audience is clear on some definitions as we have started. Can you explain what an investment advisor is and also what an investment advisor representative is?

Speaker1: [00:03:57] Sure, so in the basic sense, there’s really a three pronged test of this and that and the regulators see this as any person or entity that holds themselves out to the public where they’re providing or offering investment advice for compensation. Right. So there’s really a three, three prong test here. The regulators and the firms should really look at it from a standpoint of do they hold themselves out to the public as an investment adviser or offering investment advice to the public. Are they getting paid specific to the advice they’re offering to their clients? In other words, if I’m giving advice with respect to securities or investment products that are specific to a a prospective or investment investors set of circumstances, that would be the second process. And then third, if I’m getting if I’m getting paid for those services or that advice. And that really is the general definition of what makes up that an investment adviser, you know, the investment adviser has to be registered first and foremost as a as a firm, whether it’s with the secular state. And then the investment adviser representatives would be those licensed individuals that are acting on behalf of that entity to offer advice specific to those clients.

Speaker4: [00:05:12] Got it. Scott, I’ll hop in here. First, I’ll say thank you so much. We we actually worked with Scott when we started our registered investment advisory practice, as well as our our broker dealer. And so it was just absolutely fantastic working with Scott, continuing to work with Scott and his team. You know, Scott, could you maybe just spend a second and talk about your experience and, you know, the growth in the registered investment advisor kind of space that we’ve seen in the last kind of five to 10 years?

Speaker1: [00:05:51] Yeah. So we’ve seen really a tremendous migration from the broker dealer side of things where, you know, there there was approximately. 425000 broker dealers in about 19000 investment advisers, state and SEC collectively nationwide. And so we’ve seen a kind of a migration over time from firms deviating from the commission model. The broker dealer is really going towards a fiduciary type model where they’re managing client assets, really kind of operating in much more of a high touch position, where managing a portfolio and the client assets is something which is a closer relationship to the to the end client and tends to be. I think there seems to be a transition towards that, not only from a regulatory standpoint, but also from just a customer relationship management standpoint as well.

Speaker4: [00:06:48] Yeah, you know, we we obviously were part of that wave. A lot of folks at around the office and various affiliates that we had worked at, much larger firms that were associated with broker dealers. And, you know, we’ve really seen a lot of clients demand that fiduciary standard and look for it as well. And, you know, a lot of folks on the podcast are accountants that are thinking about becoming registered investment advisors or at least affiliate with another investment advisor. Could you maybe talk about before we talk about starting their own area, maybe some considerations that some accounting firms should take when they’re thinking about it from a regulatory standpoint, about associating with with a registered investment advisor or a broker dealer?

Speaker1: [00:07:44] Sure, so I think a lot of firms, it seems to be a natural kind of track for KPR firms to consider this. It is, you know, they are in this space of giving advice seems to be a natural progression to kind of move into the investment advice or advisory arena. And it seems to be complementary to their practice, whether it’s taxes or investments and things like that, or audit work. And so I think some of the considerations are what space do they want to be in? Right. So there’s several different tracks about if you’re a CPA firm, you can act in a solicitor capacity, which would be you know, you’re simply referring business to another investment advisor that may be complementary to your business, but you’re not necessarily, you know, managing the assets of those clients. And, you know, if there’s a good fit there, you’re referring to an investment advisor firm or other investment advisor firms, which you can receive a some kind of commission type model. Other firms can associate with other CPA firms can also associate with broker dealers in a capacity, or they can take the route where they want to be registered, where they’re either starting their own practice or affiliating in a registered capacity with an existing investment advisor.

Speaker1: [00:08:56] So all of these come with it, pros and cons. Right. We have a situation where if you’re acting as a solicitor, you can you can maintain your this is really for firms or CPA firms where you want to maintain their current practice. That’s their core competency. And they have a situation where they want to add complementary services, but not necessarily be registered and involved in that capacity. And so they can still offer advisory firms that can offer advice that they may need so they can fill that niche, but also receive compensation. They can also go the route of of affiliating with an existing firm where they may need to get registered to vote on the circumstances and they can offer their own investment advice. But there are some conflicts of interest that come with that. So it’s a matter of how you handle that, of how you disclose things of that nature. Yeah. So there’s there’s different tracks that a CPA firm can can consider and you can get into this particular space.

Speaker4: [00:09:55] Yeah. And, you know, we we obviously have our wealth management forward program where we’re trying to, you know, assist accounting firms and going through that. But even for folks that aren’t signed up for that course, we really suggest before going into this realm of either being a solicitor or becoming an aria, talking to somebody like yourself, Scott, you know, before you start marketing it, before you start talking to people about it, or certainly before you start to have clients make any kind of activity, is, you know, talked to a compliance expert like yourself.

Speaker1: [00:10:36] Yeah. I also think it’s good to reach out to the CPA as well that has its own kind of governing body and code of ethics and things like that. So you can make sure you’re you’re kind of operating within the framework of of their body, but also looking at other regulatory considerations before moving in up in that direction.

Speaker3: [00:10:57] Absolutely. And speaking of regulatory conditions here, Scott, you touched on rule two, six four, dash one. The modernized marketing role becomes effective on May 4th. It’s my understanding is creates a single rule which replaces the current advertising and cash solicitation rules. You cannot break down that new ruling and what it means.

Speaker1: [00:11:20] Sure. There’s a lot of moving parts of that. But I’ll try to paraphrase here. Yeah. So this rule came out. Yeah, it’s effective May 4th of this year. It is a pretty sweeping change with some of the advertising regulations we’ve seen in the past. He’s basically looked at this and said, look, you know, we’ve had existing marketing or advertising rules in place for many years. They haven’t changed. They’ve been rather stagnant. And yet the landscape has changed in terms of how advisors are reaching out, communicating with clients, prospective clients, existing clients. Heavy use of technology and the social media landscape. So I think in reaction to this and kind of be more up to date with with the rules and aligning this with current landscape, as you came out with this with this this rule, really, you just modernizes the rules. Right. It breaks down the definition of what is considered advertising, which is any really communications that are more than two more than one person. So this is kind of a much more of a broad definition of of advertising. It does include the use of technology, social media platforms, things of this nature, which weren’t addressed prior to that. But I think most notably for people or CPA firms would be that that it really kind of removes with this new rule, it really kind of removes the cash solicitation rule and. Wraps those some of those requirements and updates it under the use of compensated testimonials and endorsements. Right. So. So, in effect, what a lot of firms will will use by way of a solicitor or arrangement with an existing firm really goes away. And it’s replaced by the general advertising rules that kind of encompass all of these requirements, which they say that if you’re going to be if an advisor firm’s going to be compensated or compensating a person or entity for use of testimonials or endorsements, there are certain disclosure requirements that need to be in play that at the time that the death testimonial or endorsement is made, and there needs to be certain disclosures as to whether or not the testimonial or the endorsement is by a customer of record existing customer or a person other than a customer.

Speaker1: [00:13:35] How the cash or non-cash cash compensation is if there’s any cash or non-cash compensation provided as a result, that testimonial or or endorsement, and also talking about any material conflicts of interest as a result of that relationship. So if there is a relationship between that that promoter that this is, he used the term promoter of the advisory services and that advisory firm, and they’re getting paid for making that testimonial recommendation, then that should be disclosed as well. So so there are some difference differences in what we’re used to seeing at the old Cassells Tatian rule or soliciting agreements and what’s in inplay currently. So and depending on and there’s a lot of moving parts of this, but not to get too much in the details. But, you know, you’ve got situations where the SEC says if there’s compensation less than a thousand dollars for the within a 12 month period, then that’s considered de minimis. And there’s no need for an agreement. Anything above that threshold. You would need to provide a written agreement that kind of spells out the terms, conditions of that of that endorsement. And these are all things that really kind of replace and are updating the old solicitation requirements, right, from a cash solicitation rules.

Speaker4: [00:14:49] Got it. And you know, Scott. So we also talk about in our our program, we kind of lay out the three different paths that people can do, you know, in order to for accounting firms to start incorporating some holistic wealth management services in their firm. One of them as kind of fully outsource. You know, you’re just referring out to someone. Secondarily is maybe doing some in-house and some outsource. And third is kind of, you know, looking to bring the full Oria in-house. You know, could you maybe just spend a second talking about the need of of maybe just using a solicitors agreement and you know, what’s not round about what states that kind of works works for?

Speaker1: [00:15:39] Sure, so so there’s there’s a couple of different things at work here, right? We kind of bifurcated by federal requirements and state requirements. So when we talk about federal requirements, there’s there’s there’s advisers at the federal level which are managing a hundred million in assets under management or more. Anything less than that really defaults in the state. And we’re all really dealing with a patchwork of regulatory requirements. Each state has their own specific requirements. There are a handful of states, I think in, for example, California’s one of them, where you can operate in a solicitor capacity, for example, without triggering registration requirements. But there are certain requirements that the advisers are firm for which they’re working with. That solicitor has to make certain disclosure requirements. In other words, there’s you know, you don’t have to meet the registration requirements, but that adviser firm would have to file a particular filing similar to you for filing to notify the regulators that these solicitors are acting on the advice that we have. Right. And depending on the state, some states say if you are a solicitor, that is deemed to be an investment advisor by definition. And so we require, you know, which triggers state requirements for registration. So it all comes down to state specific requirements. But I think the the the one that requires the child to requires the least amount of of complications would be the solicitor arrangement. Right. Which is, you know, you you are acting as a solicitor on behalf of another adviser, where you’re referring business or soliciting on behalf of that adviser for which you’re receiving some form of compensation. Right. That may be a case where there’s a CPW firm that is has clients that need particular help in the area of investments. They don’t currently offer those. So they build a relationship with one or more investment advisor firms, which they refer those clients to meet those needs on the investment side of things. Got it. The first channel.

Speaker4: [00:17:41] Yeah. And so, you know, we we always try to underline the fact, because, you know, this there’s a lot of folks from across the country that are on on the call, and they may be in one state and have clients in another state and, you know, will have a conversation with them. And they say, no, no problem. I have a solicitors agreement with X, Y, Z firm, and it’s all fine. And then they realize that the amount of clients that they might have in another state actually does require a registration within that state. And so, again, we really just want to highlight to people that before they start to offer these services, you know, talking to someone like yourself is really, really important to make sure that you are running correctly with the state and potential federal guidelines as well.

Speaker1: [00:18:33] Right. I think that’s a good point to note, too, because if you’re dealing with clients in multiple states, if you’re sitting at the state level, meaning, you know, your your you may be soliciting or offering business to investment advisers, maybe that’s a state advisory. Right. There’s what’s called a de minimis exemption. Right. And there is a federal a federal de minimis exemption at the city level. And then there’s a state, every state has its own de minimis exemption, but basically that is that the states don’t dmae to be big enough, if you will, to to trigger registration requirements in that state if you have fewer than six or fewer clients within a 12 month period. And you have no place of business in that state. So, for example, if I’m an investment adviser in the state of California and I want to do business in another state, then it really kind of you have to look specifically at the amount of clients you have and whether or not you have a physical presence in that state, whether there is a registration requirement to be licensed as an investment advisor.

Speaker4: [00:19:38] Yeah. And, you know, we you know, in addition to talking to someone like yourself before you go through this, you know, we also try to tell everybody that the investment advisory firm that they’re working with to make sure to ask these questions, you know, after their or before they’re entering into these agreements with that investment advisory firm to make sure that they’re taking care of those requirements if needed, if there’s any kind of registration need or not, and how you fit into that before you get into those kind of relationships.

Speaker1: [00:20:11] Absolutely. Yeah, there is, I think, a amount of due diligence process that would go into this. Right. Not only looking at it from a standpoint of from the CPA to the adviser, but but also Viser to CPA to make sure this is a good fit. The adviser, if they’re offering services, that the adviser will be acting in a sort of a capacity, if that’s truly a good fit for their clients and meeting the needs of their investments. But also what? In terms of whether the investment adviser has any reportable disclosures and making sure that I think both parties go through the due diligence process to make sure this is this is the right decision.

Speaker3: [00:20:54] And maybe you can step back as well, Scott, and and talk about the exam requirements for I-r and what were needed as far as the passing exams for us.

Speaker1: [00:21:09] So there are some basic requirements that if you are acting in the capacity of a registered advisor, then you are looking at it from a standpoint of licensing requirements, which generally most states and again, it’s somewhat of a passport of requirements, but the common theme seems to be with most states is that you should have either a seven, a series seven and a sixty six combined will allow you to operate in a registered investment capacity or a series. Sixty five, which is a standalone exam, or you can operate as an investment advisor by way of an exemption, whether you have any designations like a CIIC chartered financial consultant designation such as that, or you can be grandfathered in, which is generally reserved for those who are maybe affiliated with the broker dealer, acting in such capacity with a broker dealer, investment advisor for I think it’s I believe it’s two years with continuous employment. And I think in some cases you can be grandfathered in without triggering any licensing requirements. But those are really the general the three typical standards that you would apply to somebody who’s looking for licensing or qualification.

Speaker4: [00:22:28] Got it. Great, Scott. And, you know, and just a one quick thing to talk about. So for accounting firms that are looking to start their own right, you know, other than obviously reaching out to someone like yourself to help them understand all of those requirements, can you maybe just from a 30000 foot view, you know, some of the regulatory and compliance considerations that they should start thinking about? You know, both from a responsibility standpoint, but also operationally before they start to to go down that road.

Speaker1: [00:23:09] Sure. So there are some if if they’re acting in unsolicited capacity, which to Roy’s point earlier, you know, a lot of these solicitor arrangements will be kind of morphing into somewhat something somewhat different. Effective May 4th that she has really given this transition period from from May to November 2022 to kind of move into full compliance with the the updated or modern advertising rules. So you have a little bit of time. But I think if you’re acting, the next solicitor capacity is something where you want to look at it from a standpoint of having appropriate books and records in place. Right. Do you have the necessary documents, disclosure documents, print advertising rule? Do you have the are you operating under there under the solicitor solicitor rules? Are you giving the disclosure documents as required, the form EDV, or are you maintaining books and records in accordance with some of the requirements? So really looking at it from a federal assassi requirement standpoint in terms of books and records or a state specific books and records requirement standpoint in the solicitor requirements, if you’re looking at moving into affiliating with another investment adviser firm. There are certain requirements that you have to go through again, books and records requirements, certain operational requirements that you have to comply with if you’re affiliated with another investment adviser in a registered capacity or if you’re starting your own firm. There’s certainly compliance requirements, registration requirements, filing requirements, both at the firm level and the individual level, not to mention ancillary requirements like fingerprint cards and things like that, which all require fees and timing of filings and and reporting to the to the regulatory to the specific regulatory agencies for which are requesting approval. So there there are a lot of considerations, a lot of it. Or do you have the the operations to accommodate the added practice or at an operations? Do you have the books and records necessary for meeting the compliance requirements? And all those are are spelled out, I think, in in not only the state regulatory framework, but federal requirements as well.

Speaker4: [00:25:25] Yeah, absolutely. And you know, as somebody that that we started our own oraia, you know, we’ve we’ve spoken to a lot of accounting firms that have come right out of the gate and they just want to start their own RIAA. And usually our advice to them is slow down a little bit, maybe start in a solicitor’s agreement to get familiar with not only the business practice, but also the regulatory frameworks, and take a lot of time to think about it because of those needs on the compliance side and the operations side. And, you know, a lot of the accounting firms are already pretty busy doing their already their compliance work for their clients. And so being really cognizant of that tradeoff between the responsibilities you’re taking on in-house versus, you know, partnering with someone is a major consideration that we try to tell people to think about before going straight into to starting to do an aria.

Speaker1: [00:26:26] Right. For a lot of I think for a lot of smaller firms and in terms of staffing that make that maybe makes more sense to operate in that in that capacity rather than starting their own firm or affiliating with it in a registered capacity. Because a lot of firms, there’s added costs associated with the regulatory compliance side of things that they’re going to need to maybe hire staffing to to deal with that or outsource it, all of which is a cost. And some firms can can bear the brunt. Other firms, I think it’s it’s a bit of a stretch. So I think to to your point, to ease into that particular position and see if the right fit, I think it’s always best to to slow down a little bit and test the waters and see if it’s if it’s the right move.

Speaker4: [00:27:12] Ok, I’ve got another question here. I lost Rory. You got one? I can not. Go ahead, Rob. Ok, so, you know, while we’re kind of wrapping up here, Scott, could you maybe just touch briefly on some hot items that SCC and FINRA are really going out there and looking at? You know, we’ve been reading in the news about elderly abuse was was one one area. You know, obviously everybody remembers Madoff, who just passed away this week. But, you know, what are some of those kind of big ticket compliance items that they’re they’re really focusing on out there?

Speaker1: [00:27:55] Yeah, I think some of the the the focal points we’re seeing lately are coming in the areas of transparency and disclosures. Right. So whether you’re operating in a kind of a solicitor capacity or an investment advisor. Regulators are looking very closely at firms and their disclosures and how transparent they are with their fees, their relationship with their clients, conflicts of interest in particular. Those things are, I think, at the forefront, you know, with with a lot of what’s happened not only in the pandemic recently, but, you know, in the past you’ve seen a focus on cybersecurity. Advisers are looking really to protect and provide sufficient safeguards for sensitive information that you have on behalf of your clients. Right. So that’s whether you’re an accounting firm or your investment adviser firm. A lot of us have that information that’s that’s sensitive in nature. So to provide sufficient safeguards measures to make sure that that information is protected. There’s also outside business activities. So invariably what we see is in regulators, what they see has to do with advisors who are maybe running a practice and have one or more outside business activities that may be complementary, whether they’re on the brokerage side, whether they’re on the insurance side or the mortgage side, real estate, what what have you. It’s making sure that those are properly disclosed so that you’re fully transparent with conflicts of interest, things of that nature. And yeah, I think that’s that’s it. I mean, you had mentioned the elderly abuse. I think there’s there’s an added focus on that concerning clients that may be getting older and age. There’s issues with related to just handling clients that are that are in that are moving into that particular period of their lives. Right. So making sure and continuing to offer quality services without taking advantage of, obviously, anyone in that capacity.

Speaker4: [00:30:03] Got it. No, that’s that’s been been exceptionally helpful, you know. And as we’re starting to wrap up here, I’ll remind everybody that’s listening that if they want to learn more about what we’ve been talking about and they’re interested in and incorporating holistic wealth management services into their current practice, it to reach out in regards to our course. But you know, what’s the best way for them to get a hold of you, Scott, or find you?

Speaker1: [00:30:32] The best way is just to go on our website and you can see Incom and contact us page. You can reach out and ask any questions. Happy to help out.

Speaker3: [00:30:41] And we’ll put all the information in the show notes. Well, for you, Scott.

Speaker1: [00:30:44] Perfect. Thank you very much.

Speaker3: [00:30:46] Thank you for coming on. Scott is very informative.

Speaker1: [00:30:48] All right. Thank you, gentlemen. Thank you, Scott, again.

Speaker2: [00:30:51] All right. All opinions expressed by Rob Santos and Rory Henry on this website, podcast, interview are solely their opinions and do not reflect the opinions of every group, Family Office LLC or their parent company or affiliates, and may have been previously disseminated on television, radio, Internet or another medium. You should not read any opinion expressed by anyone as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their opinions as performance is not indicative of future results.



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