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Financial Literacy

What is a Registered Investment Advisor (RIA)?

Wealth management is a field that stretches all the way from fiduciary-led personal retirement planning up to financial advisory for ultra-high net worth individuals. The higher you skew on the spectrum, the more important it becomes to chat with a Registered Investment Advisor (RIA). This is an individual who has undergone financial investment training, completed certification and agreed to adhere to certain rules, to ensure all recommendations and trades made in your best interest, to properly meet your investment goals.

As registered individuals, RIAs need to maintain their status with the Securities and Exchange Commission (SEC) and state security administrators. Moreover, they have a fiduciary duty to every client, which makes them highly credible and trustworthy. Needless to say, consulting with an RIA is one of the best things a well-off investor can do to ensure the continued growth of their wealth. 

A registered investment advisor at work

What Does it Mean to be an RIA?

As mentioned, Registered Investment Advisors register directly with the SEC. This puts them right up against the most powerful governing body overseeing investment markets. RIAs need to follow a rigorous set of standards, ethics and guidelines to maintain their accreditation. These include:

  • Working in a fiduciary capacity whenever advising clients
  • Unconditionally putting the needs and wishes of clients first
  • Disclosing any potential conflicts of interest when advising clients
  • Transparency in advisory or management fee structures
  • Ethical and moral behavior and decision-making 

In practice, RIAs need to follow even more principles to ensure they’re acting in a fiduciary capacity at all times. This includes assessment and disclosure of investment risk to clients, explanation of investment strategy and documentation of all management activity. This last practice is extremely important in the event of an audit, wherein the Registered Investment Advisor must prove that their actions or recommendations were in good faith. 

Who Needs to Register as an RIA?

Both individuals and companies can register as RIAs with the SEC. Criteria for registration fall under the Investment Advisers Act of 1940, which defines qualified candidates as:

“A person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications.”

Typically, those managing high-value accounts (+$25 million) or managers tasked with corporate wealth management will need to register as RIAs. That said, any investment advisor can register with the SEC if they so choose.

It’s important to understand that Registered Investment Advisors don’t receive any special privilege or benefit, and don’t come more or less recommended by the SEC. The purpose of registering is to show a keen understanding of financial management practices. RIAs also show willing compliance with the SEC code of ethics. 

Registered Investment Advisory Service Fees

Like any financial advisor, RIAs charge fees for their services. This is how they make their money. Most advisors structure their fee as a percentage of assets under management; however, there are a variety of performance-based fee structures out there. These fees fall in alignment with fiduciary practices, since the advisor doesn’t make any money unless the client increases their asset base. 

How much will it cost to hire a Registered Investment Advisor? Most investors can expect to pay between 0.35% and 1%, with some high-end managers charging over 1%. Generally, the smaller the portfolio and the fewer assets under management, the lower the advisory fee. Most fees hover around 1%, to stay competitive with general fund managers and to compete with other managed products. 

There are advisors who charge flat-rate fees or a la carte fees for their services. To participate in this fee structure, RIAs need to obtain a Series 65 license, administered by the Financial Industry Regulatory Authority (FINRA).

Alternatives to Registered Investment Advisors

Despite the many advantages to doing so, investors and companies don’t need to work with an RIA. There are other options in the realm of wealth management. Some of the chief competitors of Registered Investment Advisors and their advantages include:

  • Fund managers. Fund managers perform many of the same duties as RIAs and for much the same price—sometimes lower. The difference is that investors buy into a fund, instead of choosing their own strategy and selecting their own investments for an RIA to manage. 
  • Robo advisors. Computer algorithms have the power to execute sophisticated investment strategies within user-defined parameters. While they lack human intuition, machine learning offers incredible management potential. They’re ideal for smaller portfolios and tend to come with a very nominal fee, if any at all. 
  • Discount brokers. While large, full-service brokerages are best-known for providing wealth management services, many discount brokers now offer many of these same services in more limited capacities. As a result, more individuals have access to investment experts at a lower rate than most RIAs charge. 

There are pros and cons to each type of managed investment strategy. Registered Investment Advisors tend to come out on top because they demonstrate superior understanding of investments, backed by a fiduciary duty and the SEC code of ethics. 

Put Your Money in the Right Hands

As your wealth accumulates, managing it becomes a more complex and involved process. It’s often best to delegate this task to someone who can do it full time. When choosing an investment professional, there’s no better choice than a Registered Investment Advisor (RIA). These individuals aren’t just extremely knowledgeable; they’re also held to high ethical and moral standards. Working with an RIA guarantees sound investment management and straightforward, practical advice. Above all, you can rest assured your investment professional has your best interests at heart. 

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