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.
These firms are highly regulated by the Securities and Exchange Commission (SEC) and state regulatory agencies. As a result, they are required to publicly disclose a wide range of information — including business practices, fees and regulatory violations. This increased transparency can help you better vet different advisors to find one that best matches your budget and financial goals.
A registered investment advisor (RIA) is a company or person providing 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.
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. For example, 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.
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 for registered investment advisors, which must file an annual Form ADV with the SEC or state regulators. Think of it as the ingredients label for an RIA. It includes how much money the firm manages, how advisors charge for services and whether the firm or its affiliates have faced any regulatory issues in the past 10 years.
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 they face potential discipline should they run afoul.
Just as you’d trust the advice of a close friend or family member, SEC-registered investment advisers aim to instill the same level of trust. That’s because RIAs are fiduciary financial advisors legally required to always act in your best interests. And unlike broker-dealers or insurance agents, RIAs follow the fiduciary standard of care by placing your interests ahead of their own at all times.
The 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 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.
RIAs are regulated either by federal or state agencies based on how much money they manage for clients:
The SEC maintains a database of RIA firms on its Investment Adviser Public Disclosure website. You can look up firms and individual advisors and access their Form ADV regardless of state or SEC registration.
When RIAs file their annual Form ADV (required by March 31 each 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 front of a firm’s Form ADV Part 2 brochure.
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.
Investment adviser representatives (IARs) are individual financial advisors and planners who work for RIAs in client-facing roles. Think of an RIA as an NFL football team and IARs as the individual players. Investment adviser representatives can be employees of an RIA or independent contractors. There’s no status that’s preferable. Instead, it simply concerns how an RIA structures its business.
While RIAs are always entities, IARs are always individuals. And unlike the firms themselves, IARs don’t register with the SEC. However, regardless of their company’s SEC registration status, they must register with the states where they operate.
Advisors typically must pass the FINRA Series 65 exam or both Series 7 and Series 66 exams to qualify for IAR status. However, some advisors may automatically qualify if they hold specific professional certifications like the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designation.
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 “registered investment adviser,” you’ll see the alternative “advisor” spelling just as often. The critical thing to remember is they mean the same thing.
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.
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: