Registered Investment Advisors (RIAs): A Guide

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The financial services industry is chock-full of acronyms. From ETF to REIT, IRA to CFP, the list is long enough to leave you exclaiming, “SMH!”

But if you’re in the market for financial advice, there’s one acronym that’s especially important to understand: RIA.

A registered investment advisor (RIA) is a type of financial advisory firm bound by fiduciary duty to always act in your best interests as a client. They’re highly regulated by the Securities and Exchange Commission (SEC) and state regulatory agencies. These features can offer you some peace of mind in a world where a wide range of individuals can call themselves financial advisors, but not all can claim RIA status.

The big question: What is an RIA?

A registered investment advisor (RIA) is a company or person who provides investment advice to clients. RIAs stand out from other firms that may give financial advice because they are fiduciaries regulated at the federal or state level.

The history
Following the financial wreckage of the Great Depression, the U.S. Investment Advisers Act of 1940 established what constitutes an investment advisor and set rules in place for registration. RIAs must register with the SEC or a state securities regulator.

Not all financial advisors are RIAs, though. Stockbrokers — also known as registered representatives — may market themselves as financial advisors but aren’t subject to the same oversight and fiduciary standard. Instead, these advisors only must adhere to a “suitability standard” when making investment recommendations — an investment has to “suit” your needs but doesn’t have to be the best choice.

How do investors benefit from RIA status?

Pick up any packaged item at a grocery store, and you’ll see a mandatory label that lists its ingredients and nutritional information.

The same holds true for registered investment advisors. These companies must file a public document with the SEC or state regulators called Form ADV and update it annually. This record includes how much money they manage, how much they charge for their services and much more. Think of it as the ingredients label for an RIA.

Not only does this documentation help the regulators keep track of advisors, but it also increases transparency and investor confidence. Your advisor can’t operate in the shadows and must adhere to specific rules and regulations and face potential discipline if they run afoul.

Registered investment advisors must be fiduciaries

Just as you’d trust the advice of a close friend or family member, RIAs aim to instill the same level of trust. That’s because RIAs are fiduciary financial advisors and are legally required to always act in your best interests.

Unlike broker-dealers or insurance agents, RIAs follow the fiduciary standard of care by placing your interests ahead of their own at all times.

Fiduciary status also means registered investment advisory firms must publicly disclose potential conflicts of interest and any disciplinary actions taken against them in the last 10 years. You’ll also find this information in a firm’s Form ADV.

For example, some firms receive sales commissions when clients purchase insurance products through affiliates. This creates a conflict of interest because the RIA has a financial incentive to recommend particular products that make them money over others that may be more appropriate for you.

As a fiduciary, the RIA must disclose this potential conflict and any others in its Form ADV Part 2 — a narrative brochure that provides a detailed overview of the company, its business practices and how it handles your money.

Registered investment advisors are regulated

RIAs are regulated either by federal or state agencies based on how much money they manage for clients:

  • Large firms. The SEC regulates RIAs with at least $100 million in total assets under management (AUM).
  • Mid-sized firms. State authorities typically regulate RIAs with between $25 million and $100 million in AUM. However, mid-sized firms in New York and Wyoming must register with the SEC.
  • Small firms. States also regulate RIAs with less than $25 million in AUM. However, firms operating in 15 or more states may opt to register with the SEC instead.

The SEC maintains a database of RIA firms on its Investment Adviser Public Disclosure website. There, you can look up firms and individual advisors and access their Form ADV regardless of state or SEC registration.

RIAs are also responsible for filing an updated version of their Form ADV every year. They must disclose any significant changes the business has undergone, including a change in ownership or a new fee structure. These “material changes” can always be found at the very front of a firm’s Form ADV Part 2 brochure.

Registered investment advisors want long-term relationships

Financial advice isn’t a fly-by-night operation. RIAs are in the business of establishing long-term relationships with clients by providing more than just investment advice.

Many RIAs offer financial planning. These firms can advise you on multiple aspects of your financial life, helping you navigate life’s changes (raises, marriage, kids) and surprises (divorce, aging parents, financial emergencies). They create a financial plan that considers your assets, financial goals, tax situation, estate planning goals and other factors.

RIA vs. IAR — What’s the difference?

Now that you understand RIAs, here’s yet another abbreviation to add to the bowl of acronym soup: IAR.

Investment advisor representatives (IARs) are individual financial advisors and planners who work for RIAs in client-facing roles. Think of an RIA as a football franchise and the IARs as the individual players on the team.

Unlike the firms themselves, IARs don’t register with the SEC. However, they must register with the states where they operate, regardless of their company’s SEC registration status.

So how does an IAR get licensed? They typically must pass the FINRA Series 65 exam or both Series 7 and Series 66 exams. However, some advisors may automatically qualify if they hold specific professional certifications like the certified financial planner (CFP) or chartered financial analyst (CFA) designation.

Advisor vs. adviser — which is the right spelling?

If you’re wondering about the difference between “advisor” and “adviser,” the answer is simple enough: there is none.

Both spellings refer to firms or professionals who give financial advice. While the SEC uses “adviser,” you’ll see the alternative spelling just as often. The critical thing to remember is they mean the same thing.

Do you have to be rich to work with an RIA?

Working with an RIA isn’t reserved for the rich and famous. Instead, RIAs may work with a range of clients, including new investors, retirees and, of course, the ultra-affluent.

With that said, RIAs often set investment or account minimums for new clients These minimums can range from as little as a few thousand bucks to tens of millions of dollars. Some firms also charge a minimum annual fee. RIAs typically disclose this information in their Part 2 firm brochures and may publish them on their websites.

Whether managing your portfolio or planning for significant life events, an RIA can be a valuable partner as you pursue your financial goals. Investors turn to RIAs for a fiduciary relationship, added transparency and the peace of mind that government oversight can provide.

What’s next?

Now that you know about RIAs, why not keep the momentum going and dive deeper into the financial advisory world? MagnifyMoney is here with ideas for the next steps:

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