Key points
- An RIA provides investment advice to clients.
- RIAs are required to register with either their state or the SEC.
- Some RIAs are full-service firms that offer comprehensive financial planning.
Financial professionals can earn many certifications and designations. While these titles serve an important purpose, demonstrating proven expertise in a particular area, they create confusion. This confusion may even discourage some people from seeking professional guidance.
Registered investment advisor is one common designation in the financial industry. If you hired a financial professional in the past, you may have worked with an RIA without even realizing it.
If you are considering hiring a financial professional, understanding what registered investment advisors are and the services they offer can be helpful.
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What is a registered investment advisor?
A registered investment advisor is a financial firm that provides investment advice to clients in exchange for compensation. Though investment advisor — used interchangeably with investment adviser, as it’s spelled in the Investment Advisers Act of 1940 — can refer to a firm or an individual, only firms must register with the government.
“These firms can be registered with either the state in which they are domiciled or the Securities and Exchange Commission,” said Jason Steeno, the president of CoreCap Investments and CoreCap Advisors. “Typically, the choice of registration is based on the size of the firm.”
Here’s how that breaks down:
- A small advisor has less than $25 million of assets under management.
- A midsize advisor has $25 million to $100 million of AUM.
- A large advisor has more than $100 million of AUM.
Generally speaking, small and midsize advisers are registered with and regulated by their state, while large advisers are registered with and regulated by the SEC.
What does an RIA do?
Investment advisors advise their clients about securities, including stocks, bonds, mutual funds, limited partnerships, and commodity pools.
“An RIA works closely with clients to create and implement personalized investment strategies aligned with their financial goals,” said Brian Seymour II, CEO of Prosperitage Wealth. “This involves analyzing the client’s financial situation, risk tolerance and objectives to provide tailored advice on asset allocation, portfolio management, retirement planning and other investment-related matters.”
RIAs have a fiduciary duty to their clients, meaning they must provide investment advice that is in their clients’ best interests.
How do RIAs register?
RIAs are required to register with either their state or the SEC, depending on their assets under management. The process for small and midsize firms required to register with their state may vary.
“Launching my state-registered RIA in Georgia took approximately three months to complete, with some minor back-and-forth with the regulator to provide clarification,” Seymour said. Additionally, we must update our filing with the regulators annually to ensure compliance with the latest rules and regulations.”
Firms large enough to register with the SEC do so by completing and electronically filing Form ADV, which has two parts:
- Part 1 of Form ADV is primarily for SEC use and requires information about the advisor’s business, ownership, employees, business practices, clients and more. The SEC uses this information to determine whether a firm can register.
- Part 2 of Form ADV requires the advisor to prepare a brochure for clients that discloses information about its business practices, investment strategies, fees, conflicts of interest and more.
Once a firm has completed a filed Form ADV, the SEC will decide whether to grant registration within 45 days.
RIA services
RIAs provide services related to securities and investments. However, many RIAs provide far more than that. Some RIAs are full-service firms that offer comprehensive financial planning.
“RIAs offer a wide range of services in a mix that is unique to each firm,” Steeno said. “Some of the most common services RIAs provide are financial planning, wealth management, estate planning, charitable planning, education planning, budgeting, debt repayment, insurance, retirement, planning and many others.”
Consider your financial needs when choosing an RIA to work with. RIAs should be upfront about their services so you can narrow your search to those that meet your unique needs.
RIA requirements
RIAs are subject to five key requirements: fiduciary duty, substantive requirements, contractual requirements, recordkeeping requirements and administrative oversight.
Fiduciary duty
All RIAs have a fiduciary duty to their clients, meaning they must act in their clients’ best interests. The fiduciary standard is higher than the suitability standard some other advisors are held to. The suitability standard requires an advisor to recommend suitable products and strategies for their clients.
An RIA’s fiduciary duty includes obligations to disclose material facts to clients, especially those related to conflicts of interest, provide suitable advice and have a reasonable basis for recommendations, and seek the best execution of securities transactions for clients.
Substantive requirements
The SEC’s substantive requirements for registered advisors are designed to prevent fraud and protect current and prospective clients. They apply to client transactions, advertising, custody of client assets, proxy voting and more.
Contractual requirements
Advisory contracts must include certain provisions, such as advisory and performance fees, notification of partnership changes, hedge clauses, and termination penalties.
Recordkeeping requirements
The SEC requires all registered advisors to maintain certain records, which fall into two categories:
- Typical accounting and other records a business would normally keep include checkbooks, bank statements, written agreements with clients, invoices and financial statements.
- Additional records the SEC deems necessary in light of the advisor’s fiduciary duties, which may include records of the personal securities transactions of advisors and employees, written communications related to certain topics, copies of advertisements, copies of powers of attorneys, lists of accounts over which advisors have discretionary authority, and copies of the code of ethics and records of violations.
Firms must maintain and preserve records in any easily accessible place for at least five years.
Administrative oversight
RIAs’ records are subject to examination by the SEC. The three types of inspections are:
- Examinations of high-risk investment advisors are often based on information from regulatory filings or assessments made during previous examinations.
- Exceptional purpose reviews, which seek information about specific areas of concern in the financial services industry.
- Cause examinations, which are generally based on tips or complaints.
If the SEC finds violations during an inspection, it will send an exam summary letter outlining them. The RIA will have an opportunity to take corrective action and submit a written response.
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RIA vs. IAR
As mentioned, a registered investment advisor is a financial firm registered with either its state or the SEC. RIAs are always firms, not people.
Individuals who work for RIAs and provide investment advice to clients are known as investment advisor representatives. IARs register with the state where they provide investment advice and have a fiduciary duty to their clients.
The services an IAR can provide differ based on their credentials. Most states require IARs to pass the Series 65 exam, which covers topics the North American Securities Administrators Association has determined are necessary to provide investment advice to clients.
While passing the exam is generally a prerequisite for being licensed by a state, other requirements may include an application, a background check and a fee payment.
Most states allow you to substitute one of the following certifications for passing the exam:
- Certified financial planner.
- Chartered investment counselor.
- Chartered financial consultant.
- Personal financial specialist.
- Chartered financial analyst.
How RIAs make money
RIAs generally make money through the fees they charge their clients, often as a percentage of assets under management.
“This fee structure aligns the interests of the RIA with those of the client, as the advisor’s compensation is tied to the growth and performance of the client’s investment portfolio,” Seymour said. “This structure attempts to remove conflicts of interest that can arise from the advisor being compensated by someone other than their clients.”
The average fee charged by an advisor is about 1%, according to most data.
The SEC prohibits RIAs from charging fees that “substantially exceed” those charged by other investment advisors. An advisory fee above 2% of AUM is considered excessive and in violation of the Investment Advisers Act unless the advisor discloses that the fee is higher than the industry norm.
RIAs may charge other fees, such as hourly or flat, depending on their services.
