What Is A Registered Investment Advisor?

What Is A Registered Investment Advisor?

When you are looking to hire a Financial Advisor, you will encounter several industry-specific terms that are important to understand before you contract the services of a wealth management firm.

This article explains what those terms mean and highlights the qualifications for a Registered Investment Advisor (RIA).

What is a Registered Investment Advisor?

A Registered Investment Advisor (RIA) is a firm or company (not a person) that advises on the assets and investments of individuals or institutions. If they manage over $100MM in assets, the RIA must register with the Securities and Exchange Commission (SEC) and follow strict guidelines and processes for running their practice. There are periodic SEC examinations as well to ensure the RIA is following protocol and adhering to the SEC rules. For RIAs that manage less than $100MM, they register with their state agency in which they are headquartered and follow similar regulatory protocols.

The financial professionals who work for RIAs are Investment Advisor Representatives. IARs have passed one or more financial industry exams in order to be able to provide investing and financial advice to clients.

7 Important Aspects of a Registered Investment Advisor

When looking for an RIA, there are several questions you should ask prior to hiring a firm to manage your assets and provide financial advice. Learning what to ask is an important first step in making sure you hire the right Financial Advisor for you.

  • Are you a Fiduciary? RIAs have a fiduciary obligation to their clients, meaning they must act in the client’s best financial interests rather than their own. That involves making decisions aligned with documented and agreed-upon objectives, disclosing any conflicts of interest, and having a reasonable basis for the advice
  • How are they Paid? RIAs are compensated through a fee-only structure. They do not receive commissions for investment recommendations. This helps to remove potential conflicts of interest.
  • What is Their Investment Philosophy? The RIA’s investment philosophy should be similar to your own
  • How Do the Firm’s Advisors Personally Invest? For those that are employees of the firm, including the owners, it is important that they buy into their own investment philosophy. Ask them how they build out their own portfolios. It should align with the firm’s investment philosophy.
  • Where will Your Funds Be Held? While the RIA manages your assets, they do so through a third-party custodian, like Charles Schwab or Fidelity. This way, the account is yours and is protected from misuse of your money.
  • What types of Advisors and Employees work for an RIA? Many firms hire Certified Financial Planners (CFPs) or Chartered Financial Analysts (CFA). Both qualifications require significant study time and the passing of one or more exams. In addition, Advisors and other employees that provide advice and financial planning services may be an Investment Advisor Representative. This means they have passed financial industry exams to be able to provide such services to the RIA’s clients.
  • Is there a Succession Plan in Place? What happens if one of the Financial Advisors from the Registered Investment Advisor firm retires or moves on? The RIA should be set up in such a way that all advisors share the firm’s investment philosophy and processes for serving clients. Should your Advisor leave or retire, there should be a plan in place to continue serving you in a seamless manner.

What Makes a Registered Investment Advisor Different from Other Advisor Firms?

RIAs are different from other investment firms, like broker-dealers, because they are registered with SEC or state securities regulators. In addition, they are Fiduciaries. This means they are legally bound by a fiduciary duty to their clients. They must put their clients’ interests ahead of their own and they must be compensated without receiving any commissions from the investments they recommend. This helps remove the potential for conflicts of interest.

In contrast, a broker-dealer is not legally obligated to act in the best interests of their clients. Rather, they are obligated to their employer. The only requirement they have is that the investments they recommend must be “suitable” for the client. The suitability standard is not as high of a standard as doing what is in the best interest of the client.

What are the Requirements for a Firm to be a Registered Investment Advisor?

RIAs managing $100MM or more in assets have to register with the Securities and Exchange Commission (SEC). If they manage less than $100MM they must register with their state.

The SEC or state agency periodically conducts exams of RIAs to make sure everything is being done and managed a certain way. RIAs are required to have written policies and keep impeccable records related to servicing clients and managing employees. In addition, an RIA must appoint a Chief Compliance Officer.

What Does a Registered Investment Advisor Do with My Assets?

RIAs and the Investment Advisor Representatives they employ typically create investment portfolios with their clients’ money, operating according to their investment strategy and stated client goals and needs.

In some cases, they have discretionary authority over your investments, meaning they make the buy and sell decisions without getting your approval for every transaction.

While the RIA can trade on your behalf, the assets themselves are not held at the RIA firm. Rather, they are held at a third-party custodian, like Charles Schwab or Fidelity. This protects clients from misuse of their money.

What Else is a Registered Investment Advisor Responsible for?

In addition to managing the investments for clients, many (but not all) RIAs often do comprehensive financial planning which includes retirement planning, tax planning, estate planning, college planning, etc.

It is important for you to ask the RIA firm that you are interviewing if they do comprehensive financial planning along with investment management.

What Does a Registered Investment Advisor Charge?

RIAs do not accept any form of commissions for compensation. Rather, they are paid through a “fee-only” structure. This can be in the form of a percentage of the overall assets managed or through an hourly rate.

Working with ML&R Wealth Management

Once you understand these responsibilities and qualifications for a Registered Investment Advisor, you are ready to find the right RIA for your investment needs. At ML&R Wealth Management, we provide fee-only wealth management services, including comprehensive financial planning and investment management that focuses on evidence-based investment strategies while prioritizing your goals and values. In addition to providing wealth management services in Austin to individuals, couples, and families, we also offer investment and fiduciary services to nonprofits and corporate 401(k)s.

If you would like to engage with a Registered Investment Advisor, ML&R Wealth Management can help you achieve your financial goals through comprehensive financial planning and investment management. Please contact us today to set up your free consultation.

About Author

Carli Smith, CFP®

Carli Smith is ready to embark with you on your financial journey. She will take the time to understand your values and listen to your goals. With this solid foundation, she will build out a long-term investment strategy and a dynamic portfolio based on the comprehensive financial planning built out around what matters most to you. Her attention to detail, love of problem solving, and compassion for clients allows her to be an ideal investment management advisor.

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