The Role of a Registered Investment Advisor

Registered Investment Advisor Definition
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A registered investment advisor (RIA), or adviser, is a person or firm that provides advice on buying or selling securities. If it's a company, an RIA is typically 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—or with the state it's located in.

One of the things that make RIAs different from other investment professionals and firms is that they are bound by a fiduciary duty to always put the interests of their clients above their own interests. It is the highest standard of care under the American legal system and is a much more stringent rule than the "suitability" standard to which stockbrokers are held on taxable accounts. That standard requires stockbrokers to make buy and sell recommendations based only on their suitability for their clients' specific circumstances.

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

In the case of smaller, independent RIAs, the representative is often the owner or partner of the firm itself. For larger financial institutions, the RIA is most likely a subsidiary of the parent holding company.

Asset Management vs. Asset Allocation

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

Many RIAs are now more likely to recommend a strategy of asset allocation to clients and leave the specific asset management decisions to a third party. The heads and employees of these advisory businesses seek to be a central spoke in their clients' wealth planning needs, focusing 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 frequently outsource the job of making specific investment decisions to asset management companies. They may have clients buy mutual funds and exchange-traded funds from—or, in the case of high-net-worth clients, open individually managed accounts with—the asset management company. In recent years, 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 and not on managing money. Whether or not the additional layer of fees is justifiable is up to the client to decide. 

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

Some larger companies, including, for example, UBS and Vanguard, have different divisions that perform both roles. They work closely with clients to address all types of financial needs while also steering clients 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 consider include:

  • The RIA should ideally work on a fee-only basis—that is, 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 or use some other fee-based system.
  • If you would prefer to avoid fees from two companies, you should look for an RIA that doesn't outsource its asset management to another firm. Your RIA's own fees shouldn't be higher than 1.5% of assets under management annually. And in the case of passively managed index accounts, they should be considerably lower, perhaps no more than 0.25%.
  • The RIA's owners and staff should have a respectable amount of their own money invested in similar or the same securities and strategies 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 that 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, the educational and professional experience of its decision makers, and whether any of the representatives have gone bankrupt or committed fraud.

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

Article Sources

  1. Securities and Exchange Commission. "General Information on the Regulation of Investment Advisers." Introduction. Accessed Jan. 25, 2020.