What Is a Registered Investment Advisor (RIA)?
A registered investment advisor (RIA) is a firm that advises clients on securities investments and may manage their investment portfolios. RIAs are registered with either the U.S. Securities and Exchange Commission (SEC) or state securities administrators.
RIAs have fiduciary obligations to their clients, meaning that they have a fundamental duty to always and only provide investment advice that is in their clients’ best interests.
- Registered investment advisors (RIAs) manage the assets of individual and institutional investors.
- RIAs must register with the U.S. Securities and Exchange Commission (SEC) or a state regulatory agency, depending on the value of assets under the RIA’s management.
- RIAs typically earn their income through management fees, calculated as a percentage of a client’s assets under management by the RIA.
- Unlike broker-dealers, RIAs have a fiduciary duty to put the best interests of the client first.
- RIAs must register with the SEC if they manage more than $100 million in assets.
Understanding Registered Investment Advisors (RIAs)
The rules on investment advisors were formulated by the Investment Advisors Act of 1940. This law requires individuals or businesses that dispense professional investment advice to register with the Securities and Exchange Commission, although there are exemptions for smaller firms.
Investment advisors are permitted, although not required, to register with the SEC if they manage a minimum of $25 million in assets. But it becomes mandatory for those firms that manage $100 million or more, as RIAs managing at least that amount are required quarterly to disclose their holdings to the SEC. Investment advisors who manage smaller sums of investment money typically are required to register with state securities authorities.
Registering as an RIA does not imply any recommendation or endorsement by the SEC or any other regulator. It means only that the investment advisor has fulfilled all of that agency’s requirements for registration. Registering with the SEC requires disclosing information that includes:
- 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 annually update their information on file with the SEC, and the information must be made available to the public.
RIAs vs. Broker-Dealers
RIAs differ from broker-dealers in important ways. RIAs provide advice on all matters related to finance, including investments, taxation, and estate planning. Broker-dealers tend to focus more narrowly on facilitating purchases and sales of assets like stocks.
Most importantly, in interactions with clients, RIAs are expected to act in a fiduciary capacity, while broker-dealers are only required to satisfy the standard of suitability. 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 clients’ investment portfolios.
Unlike RIAs, broker-dealers are not required to disclose potential conflicts of interest or make their clients aware of less expensive or more tax-efficient investment alternatives.
Requirements of RIAs
As fiduciary agents, RIAs must follow certain practices and procedures when furnishing advice to their clients. These include:
- Disclosure: RIAs are required to disclose any risks or possible conflicts of interest pertaining to the specific transactions that they recommend to their clients. RIAs must also ensure that the client understands any risks.
- Assumption of burden of proof: RIAs, if confronted by a client about the suitability of an investment, bear the burden of proof—meaning that the RIA must prove that the risk was disclosed and that the investment could be considered as suitable.
- Documentation: RIAs are required to keep extensive documentation in compliance with SEC record-keeping regulations.
Many RIAs collect fees based on how much investment money they manage. But other fee structures are emerging that may be better suited for smaller investors,
How 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.
- 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—in general, only those with at least $1.1 million in assets managed by the RIA or $2.2 million in net worth can qualify.
- Asset-class based fees: Some RIAs who charge management fees vary the percentage rates based on 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 are increasingly providing fee-based services that are not contingent upon how much money the client has to invest. Investors can work with RIAs who charge fees on an hourly basis or at a flat rate, with some RIAs offering subscription-based services.
Who Qualifies as a Registered Investment Advisor (RIA)?
A registered investment advisor (RIA) is any person or firm that advises clients on investments and manages their portfolios, and is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities authority.
How Do You Register as a Registered Investment Advisor?
A firm can register as a registered investment advisor (RIA) by filing Form ADV with the Securities and Exchange Commission. 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 practices, educational, and business background. RIAs must also maintain accurate books and records, subject to examination by the SEC.
Which Regulatory Agency Do RIAs Register With?
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 advisors managing smaller amounts of money are typically required to register with state-level agencies.
What Fees Do RIAs Charge?
RIAs can charge fees in several ways. The most common type of fee is the annual management fee, which is based on the value of a client’s assets under management (AUM) with the RIA. RIAs can also charge fees based on performance, asset class, or hours worked.
The Bottom Line
You don’t need an RIA to invest money. Nonetheless, demand for RIAs is growing, with the assets managed by U.S. RIAs increasing annually by 12% from 2016 through 2021. The consulting firm McKinsey & Co. finds that younger clients are preferring to “consolidate” where they receive their financial services.
If you decide to work with 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 investment preferences that you provide. The availability of this technology has further lowered the price of working with an RIA.