So you dream of getting paid to advise other people on how to invest their money—how do you make that dream a reality? First, it is important to understand, broadly speaking, the legal landscape in which those who do get paid for their investment advice operate. Second, it is important to understand the barriers to entry in this industry so you can assess what you need to do to become an investment adviser.
Overview of Legal Requirements
Any person who represents themselves to be a “financial planner,” “financial counselor,” “financial adviser,” “investment counselor,” “financial consultant,” “investment adviser” or other similar designation, title, or combination is considered to be “engaged in the business of financial planning” under Minnesota law. All those engaged in the business of financial planning owe a fiduciary duty to their clients. This means that financial planners must put their clients’ interests before their own, and may be liable to clients when breaching that duty.
Most financial planners are also “investment advisers,” as defined in the federal Investment Advisers Act of 1940 and the Minnesota Securities Act. Investment advisers are persons or entities paid to advise clients on the value of certain securities products, and/or on when to buy or sell securities. Investment advisers typically must become registered with a securities regulator before they can conduct business in a particular jurisdiction. The Securities and Exchange Commission (SEC) has primary jurisdiction over investment advisers with assets under management of $100 million or more (“federal-covered investment advisers”). State agencies, including the Minnesota Department of Commerce (“Commerce Department”), have primary jurisdiction over investment advisers with assets under management of less than $100 million doing business in their state.
The registration process (whether at the federal or state level) requires investment advisers to share with regulators important information about their business and the individuals associated with that business. This gives regulators the opportunity to screen out individuals who are unqualified to provide investment advice, or who have a record of misconduct suggesting they are unlikely to meet their fiduciary obligations to clients. Most registration information is accessible to the public, meaning consumers of financial services can also review registration information when deciding whether to work with a specific investment adviser.
Barriers to Entry
As most new investment advisers are likely to have less than $100 million in assets under management when starting out, this article will focus primarily on Minnesota’s registration requirements, and not those enforced by the SEC. Prospective investment advisers must meet a few pre-requisites in order to become registered in Minnesota. Namely, advisers must: 1) meet Minnesota’s examination requirements; 2) meet Minnesota’s experience requirements; and 3) complete forms and other paperwork reviewed by the Commerce Department as part of the registration process.
Generally, each supervisory or control person (as well as all investment adviser representatives) associated with an investment adviser must pass the Uniform Investment Adviser State Law Examination (Series 65) or the Uniform Combined State Law Examination (Series 66) within two years prior to applying for registration in Minnesota. The Series 65 and Series 66 examinations are created by the North American Securities Administrators Association (NASAA) and administered by the Financial Industry Regulatory Authority (FINRA). More information on NASAA exams, including information on where to take the exams, is included here: http://www.nasaa.org/industry-resources/exams/exam-faqs/
The Commerce Department has the authority to waive these exam requirements; however, the Department is unlikely to exercise this authority unless the applicant can demonstrate he/she has previously passed the exam, has substantial experience in the industry and/or holds one or more of the following professional designations at the time the waiver is requested: Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC); Chartered Financial Analyst (CFA); Personal Financial Specialist (PFS); or Chartered Investment Counselor (CIC).
Minnesota rules also prohibit investment advisers from registering “if no person employed full time in a supervisory capacity” by the firm “was actively engaged in the securities business in a similar supervisory capacity for a minimum of three of the preceding five years.” For many new investment advisers, this experience requirement is a tough barrier to overcome. Though the Commerce Department does not have express authority to waive this experience requirement entirely, Department staff have shown some flexibility in how they interpret the rule. That said, if you are applying for Minnesota registration, you will need to make a case for how you—or another employee of your firm—meets the experience requirement by pointing to applicable experience in your work history.
Finally, the Commerce Department will request a copy of the adviser’s Form ADV, client contract, and other information when considering a registration application. As specific instructions and regulations apply to these documents, subsequent articles in this series will focus on these topics. Keep an eye on the website for more to come!