The Role of a Registered Investment Advisor

Couple gathered with an investment advisor looking at paperwork on a table
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A registered investment advisor (RIA) is a person or firm that provides advice on buying or selling securities. RIAs are set apart from other investment professionals and firms, because they're bound by a fiduciary duty to always put the interests of their clients above their own. A fiduciary duty is the highest standard of care under the American legal system. It's a much more stringent rule than the "suitability" standard to which stockbrokers are held on taxable accounts. That standard requires that brokers make buy and sell recommendations based only on their clients' needs.

Key Takeaways

  • A registered investment advisor (RIA) is a person or firm that provides advice on buying or selling securities.
  • RIAs are bound by a fiduciary duty to always put the interests of their clients above their own interests.
  • In smaller RIAs, the representative is often the owner of the firm; for larger firms, the RIA tends to be a subsidiary of the parent holding company.
  • The RIA should ideally work on a fee-only basis. That is, they should be paid fees directly for their work.

How an RIA Works

Each RIA is represented by people who have met the licensing or examination rules enforced by the regulatory body overseeing the firm, such as passing the Series 65 or the Series 66 and the Series 7 exams. These requirements can sometimes be waived when the person has an advanced professional certification, such as Chartered Financial Analyst, or CFA.

If it's a company, an RIA is often a limited liability companylimited partnership, or other business entity that has registered with the Securities and Exchange Commission if it has $25 million or more of assets under management or provides advice to investment company clients. It may be registered with the state it's located in.

The representative is often the owner or partner of the firm itself in the case of smaller, independent RIAs. The RIA is often a subsidiary of the parent holding company for larger financial institutions.

Asset Management vs. Asset Allocation

A registered investment advisor would be staffed with a highly skilled asset manager who could invest client money in individual stocks, bonds, and other securities. The manager would be someone with the knowledge and experience to analyze balance sheetsincome statementsannual reports and 10-K formsproxy statements, and other disclosures to decide which investments provide the best long-term, risk-adjusted options to provide good returns to clients.

Many RIAs recommend asset allocation plans to clients. They leave the asset management decisions to a third party. The heads and employees of these businesses seek to be central spokespersons in their clients' wealth planning needs. They focus on things like managing mandatory distributions from retirement accounts, finding the right 529 college savings plan, or reassuring clients during stock market crashes.

Some investment advisors in this mold may have relationships with other specialists, such as tax attorneys and tax accountants, who can help clients structure family trusts or lower estate tax burdens through careful planning.

These types of investment advisors often outsource the job of making investment decisions to asset management companies. They may have clients buy mutual funds and exchange-traded funds from the asset management company. A number of investment advisors engaged in this type of business have begun thinking of asset management outsourcing as a "best practice" so they can focus on the clients' other needs, not on managing money.

Some RIAs still invest their clients' money. They manage portfolios directly for clients in private accounts in exchange for fees. 

Some larger companies, such as UBS and Vanguard, have divisions that perform both roles. They work closely with clients to address all types of needs while also steering them into the firms' own asset management products.

What to Look for When Hiring an RIA

There are many factors to take into account when deciding which RIA to hire. Some key things to think about include that the RIA should work on a fee-only basis. They should be paid fees by you directly for their work, not in fees or commissions by companies for selling those companies' investment products to you. Fee-only advisors may charge a fee that's a percentage of the amount of assets under management or a per-hour fee. They may use some other fee-based system.

You should look for an RIA that doesn't outsource its asset management to another firm if you would prefer to avoid fees from two companies. Your RIA's own annual fees shouldn't be higher than 1.5% of assets under management, and they should be much lower, perhaps no more than 0.25%, for passively managed index accounts.

The RIA's owners and staff should have a good amount of their own money invested in similar or the same securities and strategies that they would use for your capital.

Your RIA should provide quarterly updates on the asset managers' current thinking.

Your RIA should keep your assets with a third-party custodian, such as a bank trust department, that charges reasonable custody fees and has a rock solid balance sheet.

You're also going to want to look at the RIA's Form ADV, which discloses all sorts of information about the firm's business practices, and the educational and professional experience of its decision makers. It will tell you whether any of the representatives have gone bankrupt or committed fraud.

The Form ADV will also detail fee arrangements and billing terms. One RIA might bill clients quarterly, in advance, based on the net liquidation value of their account on the first day of the quarter. Another might bill in arrears for services already rendered.

Article Sources

  1. U.S. Securities and Exchange Commission. "General Information on the Regulation of Investment Advisers." Introduction.

  2. Investor.gov. "Form ADV."