RIA Formations, Mergers & Acquisitions – Liability Considerations for RIAs

By Brian Francetich

11 Jul RIA Formations, Mergers & Acquisitions – Liability Considerations for RIAs

Posted at 10:57h in Risk Tips by

Clearly, the independent RIA channel is at the center of a monumental change in how financial advice is being delivered.  According to Discovery Data¹, in 2018 alone the independent RIA channel had a net gain of 3,184 advisors while wirehouses experienced a net loss of 1,247 representatives.  According to Echelon Partners, there were a record 181 RIA M&A deals completed and 82 advisor teams left wirehouses for the Independent RIA channel in 2018.  There are three main ways these transitions are occurring (1) formation of new Independent RIAs, (2) mergers with or acquisitions of an Independent RIA and (3) joining an existing Independent RIA.  With all this movement it seems timely to stop and consider the potential professional liability implications.  Our aim is to help you make better-informed decisions while navigating what can be a challenging transaction.  Below are some key questions to ask from seven unique perspectives:

  1. Breakaway individual or team forming a new RIA Firm – Who is legally liable for the services/advice provided prior to the move?  What, if any, insurance exists to fund this liability? How does my exposure change now that there is no longer BD/wirehouse oversight? What exposures do I have as a newly established RIA and what are the potential implications?
  2. Breakaway individual or team joining an existing RIA – Who is legally liable for the services/advice provided prior to the transition?  What, if any, insurance exists to fund this liability?  What responsibilities or financial obligations do I have now as an Investment Advisor Representative (IAR) and what potential legal liability do I face as an individual?  How does the RIA firm obtain and maintain appropriate insurance for me as an IAR?
  3. Existing RIA firm bringing on breakaway individual or team – How do the BrokerCheck reports look for the individuals coming over? Who is legally liable for the services/advice provided prior to the transition?  What, if any, insurance exists to fund this liability?  Does our current professional insurance coverage properly extend to the new IAR(s)?  What notification(s) do I need to provide to the insurance carrier(s)?
  4. Existing RIA firm leaving Independent Broker Dealer – Who is legally liable for the services/advice provided prior to the transition?  What, if any, insurance exists to fund this liability?  How does my exposure change now that there is no longer Broker Dealer oversight?  How does independent RIA E&O differ from what the Broker Dealer has been providing me?
  5. Two Existing RIAs merging together – Who is legally liable for the services/advice provided prior to the merger?  What, if any, insurance exists to fund this liability?  Is one firm merging into the other and filing an ADV-W or are both firms filing ADV-Ws and creating a new RIA?  Is tail coverage needed for past acts or will the existing/new insurer pick up this activity?
  6. Existing RIA acquiring Existing RIA – How do the BrokerCheck reports look for the individuals within the firm being acquired? What notification(s) do I need to provide to the insurance carrier(s)? Who is legally liable for the services/advice provided prior to the acquisition?  Is the acquisition a stock purchase or asset purchase?  Is tail coverage needed for past acts or will the existing insurer pick up this activity?  If tail coverage is needed, for how long and who will fund the purchase?
  7. Existing RIA being acquired – Who is legally liable for the services/advice provided prior to the acquisition?  Is the acquisition a stock purchase or asset purchase?  Is tail coverage needed for past acts or will the existing insurer pick up this activity?  If tail coverage is needed, for how long and who will fund the purchase?

The above is not exhaustive but should set you on the right path to properly protecting the business that has been diligently built.  Undoubtedly, most advisors will experience one if not several of the above scenarios.  As additional questions arise, Golsan Scruggs remains available to the RIA community to assist in protecting each firm properly.

1 Discovery Data, Rep Movement 2018

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

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