Who is a Registered Investment Advisor?

Registered Investment Advisors (RIA) provide investment advice regarding the purchase and sale of securities. The distinguishing characteristic of RIAs from brokers and other advisors is that they are bound by fiduciary duty. This duty enjoins them to act in a client’s best interests and suggest investments that are appropriate to his or her situation and circumstances in life. RIAs are required to make extensive disclosures relating to their qualifications and business dealings before they can operate as a business.

 

Basics of Registered Investment Advisors

Registered investment advisors are different from financial advisors, which is a broad term encompassing any advisor who deals with various aspects of financial management.

RIAs are bound by fiduciary duty as opposed to the suitability obligation that governs business dealings for brokerages. In the latter, businesses are only required to suggest investments that might be “suitable” to a client’s portfolio and they do not have to disclose conflicts of interests.

There are two parts to fiduciary duty for RIAs:

  • Duty of Care: This duty requires RIAs to conduct proper research and suggest investments that are in the client’s best interests after taking their current situation into consideration.
  • Duty of Loyalty: This duty requires RIAs to be loyal to their client by disclosing conflicts of interests, such as commissions received from products, during the advising process.

Who Is a Registered Investment Advisor?

An investment advisor is any person who advises individuals regarding their finances. To qualify as an RIA, advisors should have more than $25 million under management. Registration requirements for advisors differ based on the amount of assets under management (AUM).

  • Investment advisors with more than $110 million under management must register with the Securities and Exchange Commission (SEC).
  • Investment advisors with less than $100 million under management must register with their appropriate state agencies.

For registration purposes, an advisor is supposed to submit appropriate paperwork, such as client advisory contracts and regulatory documentation, and a completed form ADV. The form is an especially important piece of documentation because it lays out an advisor’s qualifications and business dealings. It can also be used by clients to check the credentials of their advisor and discover conflicts of interests that have not been disclosed.

There are no qualifying exams required to register as an investment advisor. But states have mandated that certain qualifications and qualifying examinations are necessary or, at least, desirable. They are:

  • Series 65, Series 66 and Series 7.
  • Certified Financial Planners (CFP) and Certified Financial Analyst (CFA).

What Does an RIA Do?

The job of a registered investment advisor is to advise clients on security investments for their financial wellbeing. They suggest investment products and assets based on a client’s financial goals. As the client’s goals and priorities change, the RIA works with them to rebalance the asset portfolio. During times of turbulence in the markets, it is the job of an RIA to ensure that client portfolios are protected.

RIAs work with the following people:

  • asset managers to facilitate the securities transaction
  • custodians to custody purchased assets.

Some RIA firms try to achieve vertical integration in their operations and have subsidiaries or sister companies that can facilitate trading of client assets and custody.

How does an RIA Get Paid?

The most common method for RIAs to get paid is the fee-only model. In this model, they charge fees from clients based on either of the methods described below.

They can charge fees based on a percentage of the assets under management they have in their portfolio. Generally, this figure is around 1%. According to a survey conducted by the website RIA in a Box, the average total fee for an investment advisor was 1.17% of their AUM in 2019. The median fee was 0.98%, indicating that a majority of firms charged less than 1% for their services. RIA’s can also opt for a business model that consists of consultation charges on an hourly basis.

Another business model for RIAs involves charging commissions from investment firms to promote their products to consumers. Advisors are required to disclose conflicts of interest in such cases.

Evaluating RIAs

Unlike the brokerage industry, which has several big-name brokers, there are no brand names in the RIA industry. Therefore, prospective clients have to conduct more research to evaluate RIAs. Here are a couple of questions that will help you started on the journey to evaluate RIAs for your wealth needs.

  • Have you checked the advisor’s ADV form?

The ADV form provides public information about the advisor’s firm, qualifications of senior executives and employees, business dealings, and conflicts of interests. You can see details here.

  • Is the RIA fee-only?

As part of their fiduciary duty, RIAs must disclose conflicts of interest arising from commissions paid out by investment companies to promote their products. An RIA who follows a fee-only business model generally avoids this trap by basing their revenues on fees from clients and no other source.

Registered Investment Advisors (RIA) provide investment advice regarding the purchase and sale of securities. The distinguishing characteristic of RIAs from brokers and other advisors is that they are bound by fiduciary duty.
You can evaluate RIAs by reading through disclosures in their ADV form and checking whether they are fee-only or commission-only.
Investment advisors with more than $110 million under management must register with the Securities and Exchange Commission (SEC) while those with less than $100 million under management must register with their appropriate state agencies.