What is a Registered Investment Advisor (RIA)?
A Registered Investment Advisor (RIA) is a person or firm who advises high-net-worth individuals on investments and manages their portfolios. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients' best interests. As the first word of their title indicates, RIAs are required to register either with the Securities and Exchange Commission (SEC) or state securities administrators.
Who Needs to Register as an RIA
The Investment Advisers Act of 1940 defined an RIA as a "person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications."
Which regulators advisers need to register with depends mostly on the value of the assets they manage, along with whether they advise corporate clients or only individuals. In general, advisers who have at least $25 million in assets under management or provide advice to investment companies are required to register with the SEC. Advisors managing smaller amounts typically register with state securities authorities.
Registering as an RIA isn't meant to denote any form of recommendation or endorsement by the SEC or state securities regulators. It means only that the investment advisor has fulfilled all the requirements for registration. For advisors who register with the SEC, the required information includes the advisor's investment style, assets under management (AUM), fees, any disciplinary actions, and, for a firm, the key officers. Other requirements include the RIA informing the SEC of any potential conflicts of interest that have arisen for them in their work, or that might do so in future.
Filed using Form ADV, the submission must be updated annually to include information such as any new disciplinary decisions against the RIA. The form must be made available as a public record.
Some critics complain that it is too easy to become an RIA compared with the obligations for other professionals. Investopedia writer Mark Cussen describes the entrance requirements for becoming a RIA as "barely a blip on the radar screen compared to those of other prestigious occupations such as law, medicine, or accounting." He advocates for rigorous examinations and coursework such as those required for such designations as Certified Financial Planner (CFP). Those, he says, could "help to elevate the level of service that [RIAs provide] to the public."
The RIA's Ongoing Obligations
Beyond simply registering to receive their certification, RIAs must follow certain practices and procedures when furnishing advice to their clients. Those include disclosing any risks or possible conflicts of interest of the specific transactions they recommend, and ensuring the client understands those.
If, at any point, an advisor is confronted by a client over the suitability of an investment, the burden is with the advisor to demonstrate that all measures were taken to disclose the risk, as well as to ascertain suitability.
From the perspective of the SEC, documentation is everything. If the SEC were ever to get involved in the investigation of an investor complaint, it requires full documentation on the investment strategy used, along with client records that demonstrate knowledge of the client’s investment profile and risk tolerance.