Starting An Independent Financial Advisory Firm – A registered investment advisor (RIA) is a financial firm that advises clients on investing in securities and may manage their investment portfolios. RIAs are registered in the US. Securities and Exchange Commission (SEC) or state securities administrators.
RIAs and the people who work for them owe fiduciary duties to their clients, which means they have a fundamental duty to always and only provide investment advice that is in their client’s best interest.
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Investment advisers were regulated by the Investment Advisers Act of 1940. This law requires individuals or companies that provide professional investment advice to register with the SEC, although there are exemptions for smaller companies.
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Investment advisers can register with the SEC if they manage a minimum of $25 million in assets, although it is not required. However, it becomes mandatory for those firms managing $100 million or more, as RIAs managing at least that amount must disclose their holdings to the SEC. Investment advisers that manage smaller amounts of investment money are usually required to register with state securities authorities.
Note that there is a difference between a Registered Investment Advisor (RIA) and an Investment Advisor Representative (IAR). An RIA is a firm that provides financial guidance to clients. The IAR is the person who provides the financial advice. The RIA may have many employees, including several IARs, or it may be a single person who is both the RIA and the IAR. Thus, IAR works for RIAs and provides real financial services to clients.
Registration as an RIA does not imply any recommendation or approval by the SEC or any other regulatory body. It just means that the investment adviser has met all of that agency’s requirements for registration. Registration with the SEC requires the disclosure of information including:
RIAs must update SEC filing information annually and the information must be made publicly available.
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RIAs differ from broker-dealers in important ways. RIAs provide advice on all aspects of finance, including investments, taxation and estate planning. Brokers tend to focus more on facilitating the buying and selling of assets such as stocks.
Most importantly, in their interactions with clients, RIAs are expected to act in a fiduciary capacity, while intermediaries are only required to meet the suitability standard. RIA clients can be confident that their advisors always and unconditionally put their best interests first. Clients of broker-dealers should be aware that the broker-dealer may provide advice that is only “right” for its clients’ investment portfolios.
Unlike RIAs, intermediaries are not required to disclose potential conflicts of interest or to advise their clients of less expensive or more tax-efficient investment alternatives.
Many RIAs charge fees based on the amount of investment money they manage. But other fee structures are emerging that may be more suitable for smaller investors.
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Always do careful research before selecting an investment advisor. You need a company that is aligned with your interests and needs. A great source and starting point is the SEC’s Investment Adviser Public Disclosure website, which allows you to search all RIAs in the country.
Keep in mind that when you choose an RIA, you are choosing the financial firm to work with and not necessarily an individual advisor. Investment adviser representatives (or IARs) are people who work for RIAs and provide advice directly to clients. It is quite possible for an RIA to have only one advisor, or to have multiple IARs, each with their own areas of expertise and investment approach.
So when you select an RIA, you’re not just choosing a company, you can also choose from individual IARs within that company. Make sure you understand both the RIA philosophy and standards, as well as the specific skills and qualifications of the IAR managing your portfolio.
Once you select the companies that fit your location requirements, you can review each company’s website and social media. Too:
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In other words, the RIA is the entity (or company), while the IARs are the people who work under that entity. The RIA firm as a whole owes a fiduciary duty to its clients, and each individual RIA owes that duty as well. When a client hires an RIA, they will typically interact with an IAR who will be their personal advisor.
A firm can register as an RIA by filing Form ADV with the SEC. Within 45 days of the filing, the SEC must grant the registration or initiate proceedings to reject it. In addition, RIAs must adhere to the “brochure rule,” which requires them to inform clients of their practice, education, and business training. RIAs must also maintain accurate books and records, subject to examination by the SEC.
RIAs can register with the SEC if they manage at least $25 million in assets and must do so if they manage more than $100 million. Investment advisers who manage smaller amounts of money usually register with state-level agencies.
RIAs can collect fees in a number of ways. The most common type of fee is the annual management fee, which is based on an RIA client’s assets under management (AUM). RIAs may also charge fees based on performance, asset class or hours worked.
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You don’t need an RIA to invest money. However, demand for RIAs is growing, with assets under management by US RIAs growing by 12% annually between 2016 and 2021. Consulting firm McKinsey & Co. finds that younger customers prefer to consolidate where they receive their financial services.
If you choose to work with an RIA, that advisor doesn’t even have to be human. You have robo-advisors – automated software tools that provide investment advice based on the information and investment preferences you provide. The availability of this technology has further reduced the price of working with an RIA.
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