What Is an RIA? Requirements and What They Do - MagnifyMoney

What Is an RIA? Requirements and What They Do

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An RIA is a registered investment advisor. RIA firms register with the SEC or state government regulators and are tasked with working in their clients’ best interests when making investment recommendations.

Below, we examine what an RIA is, so you can decide whether working with one makes sense for you.

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What is a registered investment advisor (RIA)?

The term RIA describes a firm that manages the financial assets of its clients. The individuals working with clients at the RIA are called investment advisor representatives (IARs). It is possible for an individual to be sole proprietor of an RIA firm that is a one-person operation, and for the firm to be registered in his or her name, but they are technically working for themselves as an IAR of their RIA.

Whether an RIA must register with their state or become an SEC-registered investment advisor depends on its size. There is a wide range of sizes for RIAs, with the largest managing money for tens of thousands of clients nationwide, while small firms may operate in one state, with just a few hundred clients or less.

One key feature of an RIA is that their advisors must follow a fiduciary standard. A fiduciary advisor must place your interests over their own when recommending investment strategies. For example, they must avoid recommending investment products simply to receive a commission. They also must be transparent about their fees, and avoid any potential conflict of interest with a client.

Registered investment advisor requirements

If a person decides they want to register their firm as an RIA, the first step is passing an exam run by the regulatory organization FINRA (Series 65 or Series 66 depending on their securities license.) They also need to register their firm with the state or the Securities and Exchange Commission (SEC).

When does an RIA have to register as an investment advisor with the SEC? Once the firm has more than $110 million in assets under management. If a firm has between $100 to $110 million, they have the choice to register either with the state or the SEC, but once they hit that $110 million mark, it’s a requirement.

After registering, the RIA will need to set up policies and procedures to prevent, detect and fix potential rule violations related to working with clients. The RIA will also need a compliance officer who makes sure the firm follows the appropriate rules under the Investment Advisers Act of 1940. They will also need to submit an annual filing called the Form ADV with the SEC or with their state regulator, along with other documents depending on their state rules.

To research an RIA, you can check their latest ADV filing through the Investment Adviser Public Disclosure (IAPD) website.

What does a registered investment advisor do?

Since RIAs are investment advisors, their main service is helping clients manage their investments. This includes giving investment advice and potentially managing a client’s portfolio. For this service, RIAs usually charge an hourly fee or a percentage of their assets under management, rather than charging commissions, which could lead to conflicts of interest with clients.

Some RIAs feature a mix of other financial professionals, along with investment experts. For example, they might also have CPAs, attorneys, life insurance agents, financial advisors, Certified Financial Planners (CFPs) and other professionals that help a client meet all their needs in one place. A CFP, for example, not only manages a client’s investments but also helps them develop a broad financial plan that can include saving for educational expenses, determining tax strategies, managing retirement income and planning for long-term care.

Before signing up with an RIA, make sure their specialties line up with your needs.

Who can benefit from working with an RIA?

As a client, the fiduciary standards of an RIA might give you an extra feeling of security. You can be assured that a good investment advisor at an RIA will not recommend products simply to get a commission, and that he or she will be working for your best interests.

On the other hand, some advisors say this standard may reduce the flexibility of investment strategies, as RIAs may be worried about getting into regulatory trouble. Advisors who do not follow a fiduciary standard could potentially offer a greater variety of products.

An RIA could be a good fit for you if you have a larger portfolio. Many RIAs have a required minimum portfolio size, such as $250,000 or $1 million, so if you have a smaller portfolio, your selection could be limited. Other advisors, such as brokers and insurance agents, could give you advice for a smaller portfolio in exchange for charging commissions on product recommendations. You could also consider working with a robo-advisor if you don’t care as much about getting the personal one-on-one service that a human advisor provides.

Registered investment advisor FAQ

Yes, all RIAs must operate under the fiduciary standard. It’s part of how the SEC defines a registered investment advisor. RIAs must show undivided loyalty to their clients and cannot engage in activities that conflict with client interests.

A broker-dealer executes investment trades and can also invest your money on your behalf, similar to an RIA. However, broker-dealers can also invest money on their own behalf. Before new regulations put into place in 2020, a broker-dealer’s recommendations needed only to follow the weaker suitability standard.

The new rules tightened up regulations for broker-dealers that make them more in line with the fiduciary standards of RIAs, meaning they need to pledge to work in a client’s best interests when recommending investment products and strategies.

However, the new regulations have been controversial, and noted industry experts such as Michael Kitces, cofounder of XY Planning Network, say the standards are still not in line with the fiduciary standard of an RIA. Broker-dealers such as LPL Financial and Raymond James also work with RIAs as custodians, meaning they maintain the clients’ assets and holdings and carry out the trades on their behalf. Some RIAs maintain hybrid models, meaning they can offer advisory services as an RIA but also run a commission-based business through working with an independent broker-dealer.

Financial publications such as Barron’s release rankings each year for the top RIA firms. In 2020, the top five firms on their list were Edelman Financial Engines, Fisher Investments, Hightower Advisors, Iconiq Capital and Mariner Wealth Advisors. MagnifyMoney also publishes rankings of the top advisors in particular states and cities if you’d rather search for top advisors by location.

While these rankings can be a good start to your research, the best advisor for you depends on your specific needs, as well as your location.

For a firm to become an RIA, they need to register with either the SEC or the state government, depending on their size. Technically, an RIA is a firm and not a person, although you may see one-person operations that are RIAs. An individual advisor can become an IAR through being hired by an RIA firm. Individuals must pass the necessary licensing test from FINRA.

You may notice that, when reading about financial advisors, you will sometimes see the “advisor” spelling and other times you will see “adviser.” Is there any real difference between the two? No, there isn’t. The terms are interchangeable. Different sources and publications choose to use either spelling for style purposes.

As noted previously, the Investment Adviser Public Disclosure website uses the “e” spelling for “Adviser”. At MagnifyMoney, we generally use the “advisor” spelling, unless referring to a law or other official document that uses “adviser.” But whether you use an investment advisor or adviser, the spelling difference shouldn’t factor in making this decision.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.