| SEC Registration | RIAs with more than a certain level of AUM are required to register with the SEC, as well as a state governing body depending on the location and the number of clients. |
| Disclosure | RIAs are required to disclose any risks or possible conflicts of interest regarding the specific transactions that they recommend to their clients and ensure that the client understands any risks. |
| Assuming the Burden of Proof | If a client confronts an RIA about an investment, the RIA bears the burden of proof—meaning that the RIA must prove that the risk was disclosed and that the investment could be considered in the client's best interest. |
| Fiduciary Duty | RIAs must act as fiduciaries, meaning that they must act in clients' best interests and avoid any conflict of interest concerning products and services offered to them. |
| FINRA Compliance | RIAs must meet certain compliance requirements with the SEC and the Financial Industry Regulatory Authority (FINRA). In addition to providing online applications for RIA registration, the SEC requires Form ADV to be filed. |
| Documentation | RIAs must maintain extensive documentation in compliance with SEC record-keeping regulations. |
How to Register As a Registered Investment Advisor (RIA)
Registering as an RIA does not imply any recommendation or endorsem*nt by the SEC or any other regulator. It means only that the investment advisor has fulfilled all that agency’s requirements for registration. Registering with the SEC requires disclosing information that includes the following:
- Investment style of the advisor
- Assets under management (AUM)
- Their fee structure
- Any disciplinary actions that were taken against the advisor
- Any current or potential conflicts of interest
- Key officers, if the RIA is a company
RIAs must update their information annually on file with the SEC, and the information must be made available to the public.
RIA vs. IAR
An RIA is a company that offers financial guidance to clients. An investment advisor representative (IAR) is a person who gives financial advice. The RIA can have many employees, including several IARs, or it can be just one person who is both the RIA and the IAR. The IAR thus works for the RIA and provides the actual financial services to the clients.
Registered Investment Advisors (RIAs) vs. Broker-Dealers
RIAs differ from broker-dealers in essential ways. RIAs advise on all finance-related matters, including investments, taxation, and estate planning. Broker-dealers tend to focus more narrowly on facilitating purchases and sales of assets like stocks.
RIAs are expected to act in afiduciarycapacity when they interact with their clients. Broker-dealers, on the other hand, are only required to satisfy the suitability standard. Clients of RIAs can be assured that their advisors always and unconditionally put their best interests first. Clients of broker-dealers need to be aware that the broker-dealer is permitted to dispense advice that is merely suitable for their client’s investment portfolios.
Unlike RIAs, broker-dealers are not required to disclose potential conflicts of interest or inform their clients about less expensive or more tax-efficient investment alternatives.
How Registered Investment Advisors (RIAs) Make Money
The following are some common fee structures for investment advisory firms:
- Management Fees: An RIA can collect a management fee annually as a percentage of the RIA’s AUM. Management fees can align incentives, as an RIA who can raise the value of a client’s portfolio can collect a higher management fee. This is how most RIAs earn their income.
- Performance-Based Fees: An RIA can assess a fee based strictly on the performance of a portfolio. Not all clients are eligible for this type of fee structure, though, only those withat least $1.1 million in assets managed by the RIA or $2.2 million in net worth generally qualify.
- Asset Class-Based Fees: Some RIAs who charge management fees vary the percentage rates based on the asset class. An RIA might charge a management fee of 1.5% for equities like stocks and a 0.75% management fee for fixed-income investments such as bonds.
- Hourly or Flat Fees: RIAs increasingly provide fee-based services not contingent upon the client's investment amount. Investors can work with RIAs that charge fees hourly or flat rates, with some RIAs offering subscription-based services.
How to Choose a Registered Investment Advisor (RIA)
Always do some careful research before selecting an investment advisor. You need a firm that is aligned with your interests and needs. An excellent source and starting point is the SEC’s Investment Adviser Public Disclosure website, which allows you to search for every RIA in the country.
When choosing an RIA, you hire the financial firm you will be working with—not necessarily an individual advisor (unless that's how they operate). Investment advisor representatives are the individuals who work for the RIA and directly provide advice to clients. An RIA may have just a single advisor or several IARs, each with its own areas of expertise and approach to investing.
Therefore, when selecting an RIA, you're not just choosing a firm but potentially also among the individual IARs within that firm. Ensure that you understand the RIA's philosophy and standards and the specific skills and qualifications of the IAR who may be handling your portfolio.
Once you select those firms that fit your location requirements, you can review each firm’s website and social media for information on the types of services offered, the registration, the representatives, and the total amount of money managed by the RIA.
Offered Services
The type and level of advice that RIAs provide can vary widely from firm to firm, so make sure the areas on which they focus fit your needs. This means that you shouldn't
SEC Form ADV
RIA firms are required to file SEC Form ADV, which is the uniform form used by investment advisors to register with both the SEC and state securities authorities. The form, which should be offered to you by the firm in which you are interested, provides detailed information about the firm, from fees and client types to assets under management and more.
Investment Advisor Representatives
To check the record of an advisor, you have two major sources for information:
- The IAPD website, managed by the SEC, provides comprehensive information about investment advisor firms and their representatives, including employment history and disciplinary actions
- FINRA's BrokerCheck, which is primarily used for broker-dealers and registered representatives, also offers details on IARs who are dually registered as brokers
- State securities regulators, accessible through the North American Securities Administrators Association (NASAA) website, can provide local regulatory information
Assets Under Management (AUM)
Search the total AUM of the firm in which you are interested by using the SEC’s Investment Adviser Public Disclosure website and compare them with yours to see if your assets are on the low or high side for the firm. You can find this information directly on the company's website, its financial disclosure forms, or its annual report.
What Are the Benefits of Working With an Registered Investment Advisor?
First, RIAs are legally obligated to act in your best interest. They also tend to provide
more personalized services. Since they aren't paid on commission, they don't have an incentive simply to deal with only when selling something. RIAs typically have transparent fee structures, often charging a percentage of assets under management or a flat fee, which aligns their interests with yours. Finally, most RIAs offer a broad range of financial planning services that address a wide range of needs.
How Do You Register as a Registered Investment Advisor?
A firm can register as an RIA by filing Form ADV with the SEC. Within 45 days of the filing, the SEC must either grant registration or begin proceedings to deny it. In addition, RIAs are also required to abide by the “brochure rule,” which requires them to inform clients with information about their practice, educational, and business backgrounds. RIAs must also maintain accurate books and records, subject to examination by the SEC.
Which Regulators Must an Registered Investment Advisor?
RIAs may register with the SEC if they manage at least $25 million in assets, and are required to do so if they manage more than $100 million. Investment advisers managing smaller amounts of money are typically required to register with state-level agencies.
The Bottom Line
Demand for RIAs is growing, with the expectation that about a third of the market will be managed by RIAs by 2027. Although you don't need to work with one, if you decide to hire an RIA, that advisor doesn’t even need to be human. You have a choice of robo-advisors—automated software tools that dispense investment advice based on information about yourself and the investment preferences that you provide. The availability of this technology has further lowered the price of working with an RIA.
