What Is A Registered Investment Advisor (RIA)?

A registered investment advisor, or an RIA for short, is an individual or company that offers investment advice. RIAs have a fiduciary duty – in other words, the highest standard of care in equity – to act in the client’s best financial interest.

To learn more about registered investment advisors, and whether an RIA is right for you, read on.

What Does An RIA Do?

An RIA manages the investment portfolios of high-net-worth individuals. RIAs are fundamentally obliged to advise their clients in a way that will always act in their best interests.

Typically, the role of an RIA will involve offering guidance and advice on various investment strategies, and making trades for the client in or out of a portfolio.

RIAs must register with state securities administrators or the Securities and Exchange Commission (SEC).

There are a number of groups that RIAs compete with in investment provisions, including mutual funds, online brokers for DIY investors, hedge funds, wire house firms, and even robo advisors.

Note: you may have noticed that RIAs are referred to as both “investment advisers” and “investment advisors”. There is no difference between the two aside from the spelling.

What Makes Registered Investment Advisors Stand Out?

Here’s what makes registered investment advisors unique in the financial space:

●     RIAs have a fiduciary obligation to their customers, meaning they must advise clients to make decisions that best suit their interests. A non-RIA investment advisor, on the other hand, must adhere to suitability standards and have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.

●     To practice as a registered investment advisor, an individual or business must sign up with either the state securities regulators or the Securities and Exchange Commission (SEC).

●     It’s common for RIAs to offer advice on other financial aspects, including insurance, estate planning and retirement planning, and investment advice. A registered investment advisor will typically have a long-term, ongoing relationship with their client, and can tailor their advice to suit the client’s interests over a period of years, perhaps even decades.

How Much Does a Registered Investment Advisor Charge?

The price of working with a registered investment advisor varies from company to company. A common practice for RIA firms is to charge an annual fee based on assets under management. Some firms offer services for a flat fee often ranging between 1%-2% of AUM. Other firms offer a tiered fee schedule where the fee decreases as one’s account value grows.

While this is still the most common method that an RIA will use to calculate fees, note that there are other emerging fee types that this type of financial advisor may use. For instance, you may work with an RIA who offers a fee per hour, charges per project, or uses your income to work out an annual fee. 

Introductory consultations with RIAs are generally free of charge. These consultations are a good opportunity to discuss the best pricing options for your requirements. Not all RIAs are flexible with pricing options, so you may need to browse around to find a registered investment advisor who offers a suitable fee structure for you.

The Importance of Fiduciary Responsibility

Because RIAs are investment fiduciaries, working with this type of advisor helps you to make appropriate money management decisions for yourself – whether that’s in buying a product or enlisting in a particular service. Adhering to a fiduciary standard means that an RIA is obliged by law to always work to your interests, rather than their own.

It’s important that an RIA offers investment advice that is as accurate as possible based on the tools and information they use to evaluate investments. RIAs are responsible for providing cost-effective, efficient guidance to their clients.

As mentioned above, another standard in this industry is the “suitability standard”. This standard requires advisors to provide investment advice that is “suitable” for the client, which means they must have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.  

This can often be confusing for clients, as anyone can call themselves a financial advisor, whether they adhere to a suitability standard or a fiduciary standard. It’s important to focus your search on RIAs alone if you’re looking for advisors that have a fiduciary obligation.

Who Needs an RIA?

Many people assume that RIAs only offer their service to the very rich and wealthy. However, these investment advisers have the tools and knowledge to help people of all financial backgrounds, at any stage of their life.

Traditionally, it was more common for RIAs to take on the role of asset managers for the wealthy, but a recent shift has seen many RIAs begin to offer services to clients who have not yet accumulated assets. That’s why it is more common to see RIAs offer pricing models that aren’t based on client assets nowadays.

If you’re just starting out on your financial journey, but you still need advice on transactions or investment strategies, you should find plenty of investment advisor representatives who are happy to work with you to develop suitable investment objectives.

There are many benefits of working with an RIA firm. You’ll receive personalized advice based on your financial situation, life stage, risk tolerance, and investment objectives. An RIA can help you devise strategies that help you pursue your goals or navigate a major life change.

If you choose to work with a fee-only advisor, you know that you’re only paying directly for services, and your RIA won’t earn from commissions.

It’s easier than ever nowadays to find a financial planning association that offers low-cost subscription models. You may even want to consider robo advisors, which offer much lower fees, if your financial situation is uncomplicated and you’re not looking for tailored advice.

Choosing an RIA is a big deal and should not be rushed into. Be sure to investigate your RIA’s Form ADV as a point of reference before signing any agreements or contracts. This paperwork is publicly available online and discloses important information about a company’s fees, practices, experience, and anything to watch out for, like fraud and bankruptcy.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy ensures success or protects against loss.

In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs.