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Also available as podcast (Episode #151)
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What licenses do I need for the RIA model?
TL;DR – In most cases, an advisor needs to have passed the Series 65 exam to qualify to become an Investment Advisor Representative. However, there are circumstances where a 66, professional designation like the CFP, and/or even a 7 might still be applicable. It is important to understand what licenses are needed, depending on the specific profile of your practice.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
What licenses do I need for the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #151.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
Today’s episode is a seemingly simple topic, but there are definitions involved that are worth clarifying, making sure everyone understands this correctly. Whether you’re perhaps brand new to the industry coming across this episode or you’re my typical advisor client, a more tenured advisor that is looking to transition into the RIA model and just wants to confirm you have the correct licenses needed to operate under the RIA model.
That’s what we’re going to talk about here today. For starters, a few definitions to make sure we’re speaking the same language.
The title of the episode is… “What licenses are needed for the RIA model?” Well, keep in mind from a definition standpoint, there is a difference between RIA, Registered Investment Advisor, and IAR, Investment Advisor Representative.
The RIA is the entity. You might create an RIA, you might own the RIA, you initially register the RIA, but the RIA is an entity. It is the financial advisors that work underneath the RIA that are called IARs, Investment Advisor Representatives.
So to be clear, the RIA, because it’s an entity, not a person, the RIA does not require licenses to be able to be created. There is an entire registration process, which I talk a lot about in these episodes, how you hire a compliance consulting firm to help you with that. There is an entire process to establish the RIA.
But the RIA is not contingent on licenses or exams passed, because again, the RIA is an entity, not a person.
The IAR, the human, there are license requirements and that’s what we’re going to get into today of what that individual must have passed from an exam perspective, the licenses they must have obtained in the process.
I would also clarify, keep in mind the difference between broker-dealer and RIA.
Many of you that are watching this are at that traditional wirehouse, or independent broker-dealer. Which an advisor might say… “I’m at a broker-dealer” or “I’m thinking about changing to another broker-dealer.” That’s factually correct. But the reality is in most all cases nowadays your typical advisor at the most well-known wealth management firms of this type that are working with retail clients are technically wearing two hats while they’re at those firms.
First, they are under that firm’s broker-dealer. That’s what enables them to provide brokerage commission-based accounts and services to clients where they are compensated on a transactional basis, on a commission basis for the services they provide.
While simultaneously also being registered under the firm’s often referred to as “corporate RIA.” That’s where the advisor is wearing their IAR hat, their Investment Advisor Representative hat. That’s where they can work with the client on a fee basis, an advisory capacity.
Again, most advisors are wearing both of those hats at these traditional firms. But because historically for so long we’ve just referred to these as “broker-dealers,” that’s the language typically used. But most of those firms are actually both a broker-dealer and an RIA.
The reason I bring that up is I’ll sometimes hear an advisor say… “I’m with a BD, I’m with a broker dealer.” And it’s…. “Yeah, you’re with a BD, but you’re likely in almost all scenarios also with the firm’s RIA.”
And so what we want to make sure we’re understanding here is the difference between the licenses needed to be at a broker-dealer / RIA and what it would be in the more traditional RIA model that you might think of.
So, keep in mind, there is difference between a broker-dealer and an RIA, they have different licensing requirements, different exam requirements.
What we’re looking at, based on what I just said is, what does it take to become an IAR under an RIA?
Again, for many of you, you already are, but this is to clarify which part of whatever you’ve done in the past from an exam perspective is still necessary on that future path.
Under an RIA, what enables you to become an IAR, the Investment Advisor Representative, in most all states, it’s typically passing the Series 65 exam. And many of you have done the Series 65 exam.
Now, another way to potentially meet the exam requirement, which some of you have done, is pass the Series 66 exam. For those of you that have done that, you would know that the 66 is a combination of the 65 and 63. And so because of that, you’ve by default also obtained essentially the 65 in the process. So the 66 will meet the same requirement in the standalone RIA model as well.
But for someone that perhaps doesn’t have any of those licenses and is just going to be in the RIA space, you would obtain the 65. The 63, which is part of the 66, is a broker-dealer license. It might have made sense to have at the time you took the 66, because you were at both a broker-dealer and an RIA, but for solely the RIA perspective, it’s the 65 that is needed. But if you already have a 66, again, that will work as well.
And then some states, not all, also allow you to exempt out of the 65, or potentially 66 as I noted, if you have certain professional designations. A typical example is the CFP. Some states might also allow (for example) the CPA, but let’s use the CFP as an example.
These states say… “If you have the CFP, that’s a far more extensive exam than the 65 is. So if you’ve obtained the CFP, we’ll rely on that as demonstrating your knowledge base. You don’t also have to take the 65. You can exempt out of that exam requirement.”
However, it’s a rare circumstance where that is typically used because most anyone that has a CFP, probably prior to that had got the 65 and then subsequently got the CFP. You don’t see too many folks that have acquired the CFP, that hadn’t already got the 65 in the process.
But just know there are a couple carve outs. It’s unique to each state. You might be able to exempt yourself out of the 65 if you have certain designations. But again, that scenario is pretty rare.
So, from an exam perspective, that’s what’s required to be an IAR.
Now keep in mind, that is solely as far as you wearing the IAR hat under an RIA. It might be your RIA, might be an RIA you join.
Some of you will choose your new path to be 100% fee-only. And if that’s the case you only need to consider what’s needed to become an IAR of an RIA.
Many of you though, and this is a topic I discuss in many episodes here, will have a need or a desire to still be able to accommodate, often referred to as “legacy commission” business that you have. Where you might say… “I don’t desire to do any new commission business going forward, but because I’ve been in the game so long, I have (for example) VA trail positions, or mutual funds that are paying a trail.”
Arguably some of that can and should be converted to fee-based accounts. But point being, many advisors have a need to establish what’s referred to as a “hybrid” relationship.
Which careful with that term. A lot of different firms, solution providers, throw the term hybrid around in different capacities. But essentially the rough general definition of that is that you’re operating with both hats. You’re an Investment Advisor Representative under an RIA, while also a Registered Representative under a BD.
And so in the RIA space, some of you might utilize what’s often referred to as an RIA-friendly broker-dealer. I did a separate episode on what those are if you want to learn more about them.
But the reason I’m pointing all this out is if there is a need, in most cases it would be your 7 that you will hold with the broker-dealer. So I just want to clarify that while I’m saying if you go the RIA model you only need the 65, well, that’s if you’re going to be 100% fee only.
If you are going to need some sort of hybrid arrangement, not only will you need the 65, you will likely need to maintain your 7 as well if you’re utilizing an RIA friendly broker-dealer.
So just know there could be more licenses involved depending on your circumstances.
And then a few takeaways or final thoughts that I want to point out on this.
First, with all these exams, always keep in mind that passing, in this case, the 65, all that means is you have passed an exam. The minute you walk out of the testing center, hopefully with a passing score, you can pat yourself on the back, but all you have done is passed an exam. That doesn’t make you a licensed financial advisor. In the case of the 65, an Investment Advisor Representative. All that does is say you passed the exam.
What that exam though is, is essentially a prerequisite to become licensed as an IAR, in the case of the 65. Or if you pass the 7, the 7 then allows you to become registered with your broker-dealer as a Registered Representative.
I know it’s semantics, but just know that passing an exam, all that is is you passing the exam. You then must follow that up and register as an individual with either an RIA or again, depending on the circumstances, might be with a broker-dealer.
For most of my audience, as most of my audience are already tenured advisors that are looking to transition their practice into the RIA space, in most all cases, you are not going to need to obtain any new licenses from this because you likely already have your 65, or maybe your 66.
If anything, you might be dropping licenses. You might be going from wearing both those hats now, and you might desire to go 100% fee-only on the new path. And so you might be dropping your 7. Perhaps for some of you it’s a 6, which is just a more limited capacity 7.
Point being, for most of you, don’t think that if you go down the RIA path that you’ll have to go pass additional exams. You’ve likely already passed the exam you’ll need.
But if you’re brand new to the industry, brand new to being a “financial advisor,” you are likely going to need to do that.
If you’re that tenured advisor making a transition, it’s just a matter of knowing which ones are you keeping? Which ones are you maintaining? And which ones might you drop in the process?
And with respect to “dropping” a license, that can be, I don’t know if “scare” is the right word, “frustrating” perhaps.
Many of you passed the 7, which is typically the first exam you pass in the journey of being a financial advisor. At least was historically because historically you defaulted to go into work for a broker-dealer. It’s the 7 that is the exam that allows you to become a Registered Representative of the broker-dealer.
People that are new to the industry that are going to bypass the broker-dealer world altogether, bypass the FINRA world, they don’t do that at all. They go straight and take the 65 and go into the RIA space, if that’s the path they want to go on.
But for many of you, you do have your 7. And you remember the amount of work that went into passing that exam. You remember perhaps the pressure that was put upon you. Maybe you were in a training program where the expectation was you either pass this and you stay in the training program, or you fail it and you’re out.
There was a lot of pressure, and you passed it and it was something to be very proud of and you’ve had it now many years, some of you maybe many decades. So the idea of… if I go down the RIA space, am I going to have to drop my 7? And again, some of you will have a need to keep your 7 like I talked about. You have a need or a desire to have that kind of hybrid relationship going forward, even in the RIA space.
But for those of you that are moving to that advisory, that 100% fee-only world, you will not need your 7. In fact, if you’re only under an RIA, there’s not even a way to essentially maintain your 7 because the 7 must be linked to a broker-dealer. And if you’re 100% fee-only under an RIA, you are leaving the broker-dealer world.
But what I would offer up for you, to help you maybe calm those nerves of the idea of walking away from something, is a couple of things.
First, and by the way, I’ve passed the 7. I held earlier in my career five licenses total. So I speak from experience. I’ve been in your shoes. I’ve gone down that path. I’ve had to sit in test center. I’ve had to hit “enter” at the end of the exam and wait for your score to come up and you hope you passed. I get all that.
What I would say though is everyone in this industry that has licenses will eventually step away and lose their licenses, right? That day will eventually come. In many cases, that’s when you retire, but that day will come and your 7 or your 65 if that’s the case, will eventually lapse and you will have to accept that you’ve turned the page and it’s a different chapter in your life at that point. So that day’s going to come anyway.
The idea is… if it happened earlier in your career because you’re pivoting to be 100% fee-only, well again, it’s going to happen anyways. Is it really that big of a deal if it just happens sooner?
If you don’t have a need for it anymore, if you’re not going to be with a broker-dealer anymore, you don’t have a need for it, you just accept the fact, just like when you retire, you don’t have a need for it anymore.
You just have to mentally accept… I’m essentially moving on from that exam I passed all those years ago. But again, it’s going to happen one way or the other regardless.
But even if that is still a bit of anxiety inducing, just know, and this has increased, it used to be two years, that you have a window. If you’re not aware, if you leave a broker-dealer and you don’t reaffiliate with another broker-dealer, it used to be you had two years to reaffiliate with another broker-dealer, and as long as you did so, you would not “lose” your 7.
Now, FINRA has expanded that to five years. Now, there are some caveats with that. You must pay, it’s a fairly nominal fee every year to keep this on-the-shelf-status, if you will.
You must do the industry continuing ed every year.
So, there’s a couple hurdles that go with it, but FINRA basically a couple years ago they came out and said… “we’re going to extend that to a five-year window.”
And so for any of you that have any anxiety over the thought of dropping your 7, I’m only going to have this 65, I would say well you have five years to get used to that new world.
If you go down the RIA path, and let’s say you decide to be 100% fee-only, so you drop your 7, if after five years you have not had a need for that 7, you have not had a desire to reaffiliate with a broker-dealer ever, at that point you can rest assured it’s safe to ride out the balance of your career without that 7.
If it was only six months and you’re like, wow, I don’t know if that’s enough time to get used to my new world and make sure that’s the path I want to be on. You have five years to essentially get comfortable with the idea that it’s time to turn the page and move on and you can drop your 7.
Speaking from experience when I left the corporate world and had all these licenses. When I started my business, I signed up for that five-year arrangement. I said…. I worked so hard for all these licenses, let me make sure I maximize that five-year timeline.
To be honest though, I only made it about two and a half years into that. I was paying the fee, doing the CE, and I just got sick of doing the CE. I said… look I’m not going to need these anymore. Why am I sitting there laboring through all this continuing ed for something I’m not going to need long term. I’m not just going to artificially keep hanging on.
But even then, I’ll admit it took me two, two and a half years to get over that hump myself as well.
Again, just know you have that buffer to mentally accept the fact you might be moving on from your 7, possibly only having your 65 going forward, again if you’re 100% fee-only.
With that, I hope that gives you some things to think about. Again, it’s a relatively simple answer about what licenses do I need in the RIA space? But you do want to make sure you’re understanding the right definitions, speaking the right language.
For many of you, this is not going to be an exercise of having to go get new exams. It’s just knowing which ones to carry over. Don’t let that intimidate you. There’s a whole process, whether you’re registering your own RIA, or joining an RIA, of how to get those licenses moved over, how to get re-registered. It’s a very typical process, all kinds of resources that help you accomplish that.
Your main takeaway is just understanding, particularly again if you’re that tenured advisor, not a whole lot’s going to change for you from an exam perspective. But just be aware of how this process works.
If you have any questions, I’m happy to answer those for you.
With that said, like I said at the top, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors understand is… What is your current state? Are you under that broker-dealer / RIA? Are you going to maybe go on a 100% fee-only RIA path? How do all those pieces fall into place?
The licenses required to do that are just one of those pieces. This type of topic does come up in conversation along with everything else that I help advisors understand and navigate what that process is. I’m happy to connect with you as well on that.
First things first though, head to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series.
And at the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related, I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
And with that, I hope you found value in today’s episode and I’ll see you on the next one.
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