I repost this to indicate that Maryland is a de minimus state.  Thank you, State of Maryland, for your prompt response, unlike Louisiana.

I find it interesting that only two states, Texas and Arkansas, are file on the first client states, for out-of-state advisers.  Perhaps one day, state regulation will be uniform in the US regarding investment advisers.


This post is different, therefore it has to start with a disclaimer.

I am not a lawyer. Yes, I am good at reading legal documents, such as securitization agreements, structured securities, insurance contracts, insurance laws and regulations, etc., but that is not the same as having legal training.  I make mistakes, and how much more so when I am operating near the edge of my field of competence?

So don’t rely on this.  This is not legal advice. This is just my faltering attempt to figure out a legal question that faces my business.  For all the small investment advisers out there who face similar problems, use this as a springboard in your discussions with your lawyers, or for your own research if you don’t employ a lawyer.  I am providing links to laws that I think, but don’t know, are current as of today.  Use them at your own risk.

I make no representation or warranty that this is accurate. I did my best.  Since my website is free, please realize that you get what you pay for.  You’re paying nothing, so don’t expect miracles, and don’t sue me, please?

There. I feel better now.  Here’s the question: if you are a State-registered investment adviser, how many clients can you have in a state where you have no physical presence before you have to register with the state?

This is an important question for me, because I am best known for what I have written at Aleph Blog and RealMoney.com.  I get most of my clients “out of the blue,” e-mailing me and asking what I am doing.

When I was at a meeting with the head of the Maryland Division of Securities last February, she asked if any of us were “internet only” advisors.  I was the only one that raised my hand.  I have far more clients outside of Maryland than inside Maryland.

That ‘s the reverse of most small RIAs that I interact with in Maryland.  They tend to be Maryland-centric.  Good for them.

Back to the question: if you are a State-registered investment adviser, how many clients can you have in a state where you have no physical presence before you have to register with the state?

For most states, the answer is you can have five clients.  Before you take on client number six, on a one year rolling threshold, you must register, which means a lot of paperwork and the payment of fees on an annual basis thereafter.

Note: when you register in 15 states, you have the option of moving to Federal regulation, even if you are still below the $100 million Asset Under Management limit.

Now, unlike other sites that have tried to answer this question, I am giving you links to the state laws that answer this question.  But state laws change.  Links get broken.  Sometimes links don’t get broken, and you get an old version of the law.  Use this as a springboard for your own research, not as a substitute for it.

Here are the states that have the five client “de minimus” limit:

Wyoming does not have registration of investment advisers, as far as I can tell.

Here are the states that require registration on the first client:

One more note: occasionally states cite section 222 from the Investment Advisers Act of 1940, which gives a national “de minimis” standard.  But that’s not a national standard, and thus Louisiana, Maryland and Texas require filing on the first client, and in Wyoming, you never file.

On the journey to gather this data, I found that some states have very good websites and some are quite poor.  Some go out of their way to help investment advisers, and some seem to have little interest in that.  Some follow the model law in one of its historical variations, and some are eclectic, or even weird.  Still, there seems to be more standardization in securities law for investment advisers than for life insurers.  That’s not saying much.

For those reading this, let me know about errors, broken links, law changes, etc.  I might repost this again someday.

And remember, this could all be wrong, outdated, etc., so do your own due diligence or hire a lawyer.

This post is for average 401(k) investors.  I’m going to let you in on a secret that is not so secret, but does not get talked about much.  It’s a simple idea as well, and would be common sense, if sense were common.

401(k) investors tend not to change their allocations often, except to panic when things are going bad, or arrive late in bull market, and buy near the top.  In general, if you don’t have a lot of investment knowledge, it is good to come to a place where you “set it, and forget it.”  Remember, those with no experience are far more prone to the errors of fear and greed than most experts are.  Those arrive late to a rise or a fall in the market, and say, “Look what I have missed out on,” or ‘Look at how much I have lost,” are going to make the wrong move again and again.

There are temptations as an investor to not diversify.

  • “I’ll just hold all my assets in a money market fund.  I don’t want to lose anything.”  Money market funds preserve value at best.  They won’t help you build value.
  • “I’ll just hold all my assets in gold.  I don’t want to lose anything.”  Gold preserves value at best.  It won’t help you build value.
  • “This manager is the greatest.  I’m putting it all on him.”   Sadly, managers have hot and cold streaks.  Many people join in near the end of hot streaks.  The quote I heard this from was a professional in 1999, deciding to invest all his money with Bill Miller.  Bad timing.
  • “Stocks win in the long run.  I am investing only in stocks.”  If you have a really long time horizon, and you are certain that your nation will not go through a revolution, or something close to it, that will work.  Otherwise, you are taking a risk.

There are more, but I think you get the point.  In most of life, those who do the best are the ones that take prudent risks.  Prudent risks are where the likely rewards outweighs the likely risks.

Think of it: in business, the guy who never takes risk does not do well.  The guy who takes huge risks blows up frequently, and does not do well on average.  The guy who takes moderate, prudent risks tends to do well.

The same is true of bond investing.  Those who invest in bonds of medium risk (BBB/Baa) tend to do best, those that play it safe or risk it all do less well.

The same is true of stock investing.  Stock investing is risky by nature, and in general, those who take less risk tend to earn better returns over time.  Ignore the canard: more risk, more return.  It ain’t so.

So what would I do if I were a 401(k) investor facing a limited menu of choices?

  • Put 60-70% in conservative, value-oriented stock funds. (US and Foreign)
  • And 25-35% in moderately risky bond funds. (US and Foreign)
  • And 5% in cash.
  • And rebalance yearly.  Do it after you complete your taxes, or something like that.

Avoid complexity.  Even if the plan offers a wide number of choices, winnow it down to a few funds, say five at most.  Over the long run, your investments should prosper, because you are doing things that few investors will do, and enjoy  returns from bearing risk successfully.