Short answer
Five legal documents and decisions carry most of the weight at the start: the entity, the advisory agreement, the disclosure documents (Form ADV Parts 2A and 2B, and Form CRS), the privacy notice, and the insurance. This guide says what the rules require of each. It is not legal advice. Have securities counsel review your documents, and see the end of this page for when to call one.
Choosing an entity
The SBA's summary of common structures: [5]
| Structure | Liability | Tax treatment |
|---|---|---|
| Sole proprietorship | Owner can be held personally liable for business debts | Personal tax and self-employment tax |
| Partnership | Unlimited personal liability unless structured as a limited partnership; in an LLP every owner has limited liability | Profits pass through to partners |
| LLC | Generally protects personal assets | Profits pass through, members pay self-employment tax |
| S corporation | Owners not personally liable | Profits and some losses pass through; states vary |
| C corporation | Strongest protection to owners | The corporation pays income tax and dividends can be taxed again |
Your principal office decides your home state for registration. [6] If you later change your entity or state of incorporation, the Form ADV instructions treat the result as a new organization with registration obligations, and give ways to fulfill them, including succession by amendment. [4] Plan the entity with a lawyer and an accountant before you file, so you do not have to redo the registration. See how to start an RIA.
The advisory agreement: what it should cover
The rules set some terms and your disclosures set others. A checklist:
- Scope of services. The SEC says the specific obligations of the fiduciary duty depend on what the adviser has agreed to do for the client, and that the duty applies in a manner that reflects the agreed scope. [2]
- Fees and billing. Match Form ADV Item 5: your fee schedule, whether fees are negotiable, deduction or billing, frequency, and the refund of prepaid fees. [7] See fee schedules and pricing models.
- No fee on capital gains. A contract of an SEC-registered adviser generally may not base compensation on a share of capital gains or capital appreciation, with listed exceptions. [1]
- Assignment. The contract must say it will not be assigned without the client's consent. If you are a partnership, it must also say you will notify the client of any change in the partnership's membership within a reasonable time. [1]
- Discretion and custody. If you accept discretionary authority, Form ADV requires you to disclose it. [7] If you can withdraw client assets, including to deduct fees, you have custody. [8]
- No waiver of the fiduciary duty. The SEC gives two examples of provisions that purport to waive the duty generally: a statement that the adviser will not act as a fiduciary, and a blanket waiver of all conflicts of interest. A clause that limits your liability (a "hedge clause") in an agreement with a retail client will rarely, if ever, be consistent with the antifraud provisions where it purports to relieve you of liability for conduct as to which the client has a non-waivable right of action. [2] Have counsel draft any limitation of liability.
- Delivery acknowledgments. Record when the client received the brochure, supplement and Form CRS (see below).
Form ADV Part 2A, Part 2B and Form CRS: when to deliver
| When | What | Rule |
|---|---|---|
| Before or at the time of the advisory contract | Brochure (Part 2A) | [3] |
| Before or at the time a supervised person begins advising the client | Brochure supplement (Part 2B) | [3] |
| Before or at the time of the advisory contract (retail investors) | Form CRS | [9] |
| Within 120 days after fiscal year end | Current brochure, or a summary of material changes that offers the brochure, when the annual update has material changes | [3] |
| Promptly after a new or materially revised disciplinary event | The amended brochure or supplement, or a statement of the material facts | [3] |
| Within 60 days after amendments are required | Changes to Form CRS, to existing retail clients | [9] |
Clients who receive only impersonal advice and pay less than $500 a year are outside the brochure requirement. [3] Post Form CRS prominently on your website if you have one. [9]
The privacy notice
Regulation S-P, which covers SEC-registered advisers, contains the privacy notice and opt-out provisions. The 2024 amendments conformed the annual privacy notice rule to a statutory exception under which an annual notice is not required if certain conditions are met. [10] State-registered advisers should ask counsel which privacy rules apply to them. See RIA cybersecurity and client data protection.
Assignment and change of control
The Act defines assignment to include a direct or indirect transfer of an advisory contract, and a transfer of a controlling block of the adviser's voting securities. [11] An SEC rule says a transaction that does not result in a change of actual control or management of the adviser is not an assignment. [12] So client consent comes up whenever ownership or control changes: a sale, a merger, or a partner buying out another. Put your plan in the agreement and your operating documents before a deal is on the table. See asset sale or equity sale.
Insurance
We did not find an SEC rule that requires an adviser to carry errors and omissions or cyber insurance, so we state no requirement. Check three places: your state's rules, your custodian agreement, and your counsel's advice. NASAA's cybersecurity checklist lists considering cyber insurance as a step in recovering from an incident. [13]
When to call securities counsel
These are the moments when the sources above say the answer turns on facts and judgment:
- Before you file Form ADV. SEC examiners of new advisers compare disclosures and filings with actual practice. [14]
- When you draft the advisory agreement or any limit on liability. Whether a hedge clause is misleading depends on all the surrounding facts and circumstances. [2]
- When you pay anyone for a testimonial, endorsement or referral. The Marketing Rule requires a written agreement above a $1,000 de minimis threshold. [15] See the SEC Marketing Rule guide.
- When ownership or control may change. [11]
- After a data incident. Notice to affected customers is due as soon as practicable and no later than 30 days after you become aware. [16]
- When a regulator writes to you. Examiners request documents and interview personnel. [14]
Also see building a compliance program.
This guide is educational. It is not legal, tax or insurance advice; talk to securities counsel.