A registered investment advisor is registered with the Securities and Exchange Commission and/or their respective state securities administrator.

One requirement to be an RIA is to pass the licensing and examination requirements of the regulators in charge of overseeing their activities. This requirement is typically either the North American Securities Administrators Association (NASAA) Series 65 or 66 exams and the Financial Industry Regulatory Authority (FINRA) Series 7 exams[1]. However, if the RIA is also a Chartered Financial Analyst (CFA), the exam requirement may be waived.

Registered investment advisors are fiduciaries, which means they have the highest legal duty to their clients and must act in their best interests. All financial advisors are obligated to recommend suitable investments and strategies, but a registered investment advisor is held to a higher standard due to their fiduciary relationship with clients.

Two RIA Models

RIAs usually operate according to one of two advisory models. They can either focus strictly on the more common asset allocation strategies or work in combination with asset managers who make specific investment decisions.

In the first model, the registered investment advisor acts as the central planner of the overall wealth management strategy. The RIA works with a network of tax lawyers and accountants to structure trusts and other estate planning vehicles and develop long-range plans to help clients accumulate, grow, and protect their wealth. Their clients’ money is held in individually managed accounts under the supervision of a third-party asset manager.

SEC regulators require an investment advisor or advisory firm to register when they have at least $100 million in assets under management for individual clients or if they advise investment companies. A state securities administrator typically regulates financial advisors who do not meet that threshold.

RIAs must make public disclosures about their investment style, fee structure, assets under management, complaints, and disciplinary actions, and any potential conflict of interest. These disclosures are found on form ADV and are available in the public disclosure section of the SEC website or the website of the state securities administrator.

Most investors deal with some type of financial advisor over the course of their careers, so it is important to understand the roles and responsibilities of each before forming an advisory relationship.

The biggest difference between RIAs and other types of advisors, such as broker-dealers, lies in how they are regulated[2]. As mentioned, a registered investment advisor is governed by the SEC or state securities administrator. Broker-dealers are essentially self-regulated via voluntary membership in FINRA. For this reason, each type of professional has a different level of responsibility to their clients.

All financial advisors are held to the suitability standard[3], which means they must be familiar with their clients’ needs and circumstances and sell them appropriate or suitable investments. A registered investment advisor’s responsibility is fiduciary, legally requiring them to put their clients’ needs ahead of their own.

This fiduciary relationship affects the way registered investment advisors are compensated for their services. As fiduciaries, RIAs cannot accept commissions or other types of compensation for the products they sell unless they eliminate it first or disclose any potential conflict of interest.

Other types of financial advisors can and often do get compensated on a commission basis. This can lead to unethical practices such as account churn to generate higher commissions.

Registered investment advisors are generally paid an hourly rate, a flat advisory fee, or a percentage of assets under management. For this reason, they may be less expensive than other advisors.

Given the complex financial advisor ecosystem, choosing the right professional can be challenging. However, every investor should consider certain things before hiring a registered investment advisor.

• Check the RIA’s ADV for evidence of fraud, disciplinary action, or if any of the firm’s representatives have gone bankrupt.
• Be sure the advisor’s compensation framework is transparent and fee-based. Fees should not exceed 1.5% of assets under management. If the advisor agreement includes buying, selling, and managing investments, check the fee schedule for those services.
• Most RIAs have other professional qualifications and licenses that demonstrate their financial planning and wealth management expertise. Look for RIAs who are also Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), Chartered Investment Counselors (CICs), or Personal Financial Specialists (PFSs). These dual-credentialed professionals take a more holistic approach to wealth management.

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Registered investment advisors or RIAs are licensed financial professionals who specialize in wealth management. RIAs are regulated by the Financial Industry Regulatory Authority (FINRA) and a state securities administrator.

RIAs are fiduciaries, which means they have a legal duty to act in their clients’ best interests. They must also publicly disclose their fee structure, investment style, assets under management, and any complaints or disciplinary action.

1. Financial Industry Regulatory Authority. (n.d.) Series 7 – General Securities Representative Exam. Retrieved from https://www.finra.org/registration-exams-ce/qualification-exams/series7
2. Frontier Wealth. (n.d.) RIA vs. Broker-Dealer: What’s the Difference? Retrieved from https://frontierwealth.com/ria-vs-broker-dealer-whats-the-difference/
3. Lazaroff, P. (2016.) The Difference Between Fiduciary And Suitability Standards. Forbes. Retrieved from https://www.forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/#290a36a62556