The RIA Name Game

One of my favorite jobs was serving as director of RIA compliance at FSC Securities. I love working with RIAs, as they are clearly the future of the financial services industry. While I loved working with RIAs and helping them build their business, I was also frustrated because I felt there was so much more my department could have done. At the same time, I understood the BD’s position re liability exposure.

What many RIAs do not understand is that if they choose to form their own RIA, instead of affiliating with their BD’s RIA, they are responsible for their own RIA’s legal responsibilities, especially compliance. I see far too many RIAs with unnecessary legal issues and liability. In most cases, they feel their BD will let them know what needs to be done and will keep them updated on legal and compliance issues. No, your RIA, your responsibility.

One of the most common issues I see are RIAs improperly using assumed or fictitious names, aka dba’s (doing business as) names. While it is perfectly acceptable to use assumed names in business, the use of same presents special issues for RIAs.

The primary issue is using assumed names in such a way that an RIA violates the anti-fraud provisions of Section 206 of the Investment Advisers Act of 1940, or a state’s version of same. Since assumed names are not legal entities, they cannot contract with clients. Furthermore, use of a fictitious name without disclosing the actual individual or entity registered as the RIA is considered misleading and fraudulent.

Most people that choose to use an assumed name/dba do so to project a certain image to the public. Again, the law generally allows the use of assumed names/dba’s as long as the use of same is registered with a local regulator. However, when an RIA is involved, it must be sensitive to federal and/or state laws requiring disclosure of the actual name under which the RIA is registered, e.g., John Smith dba Premier Wealth Management.

I recently was contacted by an attorney regarding a case that demonstrates the damage that can result from improper use of a fictitious/dba name. The RIA had hired a RIA consulting firm to help it form an independent RIA. The RIA had been in business for some time, with over 100 clients. The RIA’s contact was between the client and the dba name.

Since the dba name represented a company that did not legally exist, all of the contracts were invalid. As a result, I suggested that the RIA was legally required to contact all its clients, explain the situation, and to return all monies that it had received under the invalid contracts, plus interest, should a client request such a remedy. I’m not sure what eventually happened, but the RIA was obviously facing dire consequences.

Bottom line, if you decide to form an independent RIA, pay the extra couple of hundred dollars and form an LLC or a corporation. Yes, it’s a little more trouble, but it allows the RIA to project a professional image and, if done correctly the first time, allows the RIA to properly focus on providing clients with first-class service.


About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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