What Is a Registered Investment Advisor (RIA)?

When you look for financial guidance, it’s critical to prioritize professionals and firms with accredited credentials and designations. These typically uphold a fiduciary duty and put your interests above all else. One that you’ll often see is a registered investment advisor (RIA). These are organizations that have registered with the U.S. Securities and Exchange Commission (SEC) or a state securities agency to provide financial advice to clients.

This article will outline what an RIA is and why they’re at the top of the ladder when it comes to providing professional advice. We’ll also offer an overview of the process a company must complete to earn the designation, as well as highlight the title’s distinction from investment advisor representatives (IARs).

RIA Definition

An RIA is a firm that provides financial advice to clients. As the name suggests, they specialize in helping clients build and manage an investment portfolio. But this isn’t all they bring to the table. Generally, RIAs are also capable of helping you develop a personalized holistic plan based on your goals, risk tolerance, and circumstances. This may include services such as:

• Financial planning
• Retirement planning
• Estate planning
• Wealth management
• Budgeting
• Buying a home
• Planning for college tuition
• Paying off debt
• Managing insurance

RIAs stand out because of the high standard of professionalism and client devotion they’re required to practice. Specifically, bound by the Investment Advisers Act of 1940, entities bearing the title hold a fiduciary commitment to their clients. Because they deliver advice that can affect your bottom line, they must ensure your interests remain at the forefront. In addition, while carrying the title, they agree to perform proper, careful research before recommending products or plans.

Becoming an RIA

To acquire the designation, an RIA must register with the government, either with the SEC or a state securities regulator. This varies based on the number of assets under management (AUM) they have. According to the North American Securities Administrators Association (NASAA), an RIA must register with the SEC if they have upwards of $100 million AUM. Otherwise, they should register with the state in which they do business.

To exhibit total transparency with clients, firms must disclose important information about their business practices to the public upon registration. This involves filing Form ADV with the Investment Adviser Registration Depository (IARD). Here’s a summary of the kind of information the form contains about an advisor:

• Number of assets under management (AUM)
• Number of employees
• Available services
• How they make money (fee structures, commissions, etc.)
• Possible conflicts of interest
• Company leadership
• Previous disciplinary actions handed down by the SEC or state securities agency
• Investment preferences and philosophies

Difference Between RIAs and IARs

While researching financial advisor certifications, you might see the title, Investment Advisor Representative (IAR), alongside the RIA designation. Though the two share some similarities, including the need to register with a government agency, they’re not alike.

The primary contrast between the titles is that IARs are individuals, while RIAs refer to the larger firms they work for. So, when you do business with an RIA firm, the actual advisory professional you’ll work with will be an IAR. These individuals will often have wide-ranging experience in the finance field and perform many of the functions we listed in the above section.

Beyond the required government registration, it’s not uncommon for an IAR to carry other professional certifications, such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Chartered Financial Consultant (ChFC).

To gain the title, prospective IARs must pass the Series 65 (Uniform Investment Adviser Law) exam, offered by NASAA and administered by the Financial Industry Regulatory Authority (FINRA). However, if someone holds another professional title, such as the ones mentioned above, they may be able to forego the exam. This is because these designations already require rigorous coursework, exams, and job experience before completion.

How RIAs Make Money

Because they adhere to a fiduciary duty, RIAs offer their advisory services through a strictly fee-only structure. This means they only earn money from the advisory services they provide. Receiving commissions by recommending products or investments could present a conflict of interest and, therefore, would put their true priorities into question.

The type of fee structure an RIA might use may vary based on several factors, such as company size and the number of customers it works with. Companies may commonly use the assets under management (AUM) payment model. This is where the fee you pay is a certain percentage of your total assets. It varies by the business, but it’s often 1%.

Firms might also charge you a flat fee or by the hour. This is most common if you need more short-term services, such as help planning taxes or a single consultation.

Since RIAs must follow strict regulations and often hire highly qualified individuals, it’s likely to come at a higher cost to work with one. So, you’ll want to research the companies you’re considering and pick one with a fee structure that works for you. Fees can be negotiable in some cases, but how much wiggle room you have depends on the company.

Be aware, however, that an RIA may also be registered as a broker-dealer. In this case, it may recommend products and services and earn a commission. This is typically a separate business from its advisory services, but may intersect at times. For instance, if an advisor assists with making trades on your behalf, the firm may collect revenue from custodial costs.

Choosing an RIA

Before choosing a financial advisor, it’s critical to spend time assessing your current situation and where you want to go financially. This is especially important in helping you ascertain which type of expert would be best for your needs. For comprehensive planning and investment expertise, you can’t go wrong by searching for RIAs.

Be aware, though, that not all RIAs are the same. They can differ in the fee structures they use, service offerings, and more. Some may even have had disciplinary actions taken against them by the SEC or their respective state agency. For this reason, it’s recommended to research any firms you’re weighing as a viable option. Here are three tools you can use to quickly get an idea of a company’s reputation and business practices:

• Investment Adviser Public Disclosure (IAPD). This is an SEC website that allows you to search for an RIA and examine its Form ADV. You can also use it to look up information about IARs that work at RIA companies.
• FINRA BrokerCheck. You can use this to verify whether an advisory firm has registered with the SEC or a state securities agency.
• SEC Action Lookup. This will show whether a representative at an RIA has had court actions taken against them by the SEC.

Another effective way to find an advisor is by using a free matching tool. This can help you dramatically narrow your search and find a professional that fits your needs and acts as a fiduciary.

Frequently Asked Questions

What is the difference between RIAs and broker-dealers?

Broker-dealers are firms that are free to operate on a commission basis. They don’t follow a fiduciary standard and, therefore, may recommend or help you buy securities that could benefit them, provided they’re suitable for you. Registered investment advisors, on the other hand, are fiduciaries. This means they must be cautious that the investments and strategies they recommend reduce conflicts of interest. They only earn income by offering advice to clients.

What services can you expect an RIA to offer?

RIAs, and their representatives by extension, can help with a sweeping range of financial needs. This includes retirement planning, managing a diverse investment portfolio, and strategies for managing risk. If you’re working on a plan for your retirement, for example, a registered advisor will help you analyze the moving parts in your portfolio and work with you to create a custom roadmap.

What is the primary benefit of working with an RIA?

Aside from their ability to help you with several areas of your finances, the main draw to working with a registered firm is their fiduciary commitment. As you sit down with a representative of one of these organizations, you’ll be able to know that the law binds them to put your interests above their own and practice with a high degree of professionalism.

Why is “registered investment advisor” sometimes spelled with an “e”?

When it’s written out, you’ll sometimes see the word “advisor” spelled with an “e.” This is generally the more formal spelling of the word. It’s how it appears in official documents, legal materials, and websites from the SEC or state agencies.