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Registered Investment Advisor (RIA) Definition

Last updated 03/28/2024 by

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Summary:
If you’re looking for personalized investment advice, you may come across the term Registered Investment Advisor (RIA). These are licensed professionals who offer a range of investment services, including portfolio management, financial planning, and retirement planning. But what exactly is an RIA, and how do they differ from other types of financial advisors?

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What is an RIA?

A Registered Investment Advisor (RIA) is a financial professional who provides personalized investment advice to individuals or institutional clients for a fee. They are typically independent of larger financial institutions and have a legal obligation to act in their clients’ best interests. This means they must disclose any potential conflicts of interest and provide advice that is appropriate for their clients’ needs and risk tolerance.

Understanding RIAs

Registered Investment Advisors (RIAs) are financial professionals who are registered with the Securities and Exchange Commission (SEC) or state securities regulators. They must follow strict regulations and adhere to a fiduciary standard, meaning they must act in their clients’ best interests at all times. This includes disclosing any potential conflicts of interest, such as receiving compensation from third-party sources. RIAs must also provide clients with information about their fees and any risks associated with investments.
RIAs can provide investment advice on a wide range of financial products, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They can also provide financial planning services, such as retirement planning, estate planning, and tax planning.

Registering as an RIA

If you’re interested in becoming a Registered Investment Advisor (RIA), the registration process can be complex and time-consuming. However, it’s a necessary step if you want to provide personalized investment advice to clients. Here’s what you need to know about registering as an RIA:
  1. Determine which regulatory body you need to register with: RIAs can register with either the Securities and Exchange Commission (SEC) or state securities regulators, depending on the size of their business and the number of clients they have. If your firm manages over $110 million in assets, you’ll need to register with the SEC. If your firm manages less than $110 million in assets, you’ll need to register with your state’s securities regulator.
  2. File Form ADV: To register as an RIA, you’ll need to file Form ADV with the SEC or state securities regulator. Form ADV is a two-part form that provides information about your firm, including its ownership, business practices, and disciplinary history.
  3. Meet the requirements: To become an RIA, you’ll need to meet certain requirements, including passing the Series 65 exam or having other relevant professional qualifications. You’ll also need to have a certain level of net worth or assets under management.
  4. Pay the registration fee: There is a fee associated with registering as an RIA with both the SEC and state securities regulators. The amount of the fee varies depending on the size of your business and the state you’re registering in.
  5. Submit to background checks: As part of the registration process, you’ll need to submit to background checks, including fingerprinting and a credit check. This is to ensure that you have not engaged in any fraudulent or unethical behavior in the past.
Once you’ve completed the registration process, you’ll need to maintain your registration by filing annual reports and updating your Form ADV as necessary. It’s important to stay up-to-date with any regulatory changes and ensure that you’re always acting in your clients’ best interests.

Responsibilities of an RIA

As a Registered Investment Advisor (RIA), you have a fiduciary responsibility to act in your clients’ best interests. This means that you must provide advice that is suitable for each client’s individual needs and investment goals. Some of the specific responsibilities of an RIA include:
  1. Providing personalized investment advice: RIAs must provide customized investment advice to their clients based on their specific financial situation and investment goals.
  2. Avoiding conflicts of interest: RIAs must avoid any conflicts of interest that could compromise their ability to act in their clients’ best interests. For example, an RIA should not recommend an investment that would generate high fees for themselves but may not be the best choice for the client.
  3. Disclosing any conflicts of interest: If there are any potential conflicts of interest, the RIA must disclose them to clients so that they can make informed decisions.
  4. Maintaining accurate records: RIAs must maintain accurate records of all client transactions and communications.
  5. Acting with prudence: RIAs must act with prudence and care when making investment decisions on behalf of their clients.
  6. Monitoring investments: RIAs must monitor their clients’ investments and make changes when necessary to ensure that their investment strategy remains appropriate.

Requirements of an RIA

To become an RIA, you must meet certain requirements. These requirements are designed to ensure that you have the knowledge and experience necessary to provide high-quality investment advice. Some of the specific requirements include:
  1. Passing the Series 65 exam: The Series 65 exam is a comprehensive exam that tests your knowledge of securities regulations and investment strategies. Passing this exam is a requirement for becoming an RIA.
  2. Obtaining relevant professional qualifications: In addition to passing the Series 65 exam, you may need to obtain other relevant professional qualifications, such as a Certified Financial Planner (CFP) designation.
  3. Meeting minimum net worth or asset under management requirements: RIAs must have a certain level of net worth or assets under management to be registered. The exact requirements vary depending on the regulatory body you’re registering with.
  4. Maintaining registration: Once you’ve registered as an RIA, you’ll need to maintain your registration by filing annual reports and updating your Form ADV as necessary. You may also need to renew your professional qualifications periodically.
By meeting these requirements, you can ensure that you have the knowledge, experience, and resources necessary to provide high-quality investment advice to your clients as a Registered Investment Advisor.

RIAs vs. broker-dealers

Registered Investment Advisors (RIAs) and Broker-Dealers are two types of financial professionals who offer investment advice to clients. However, there are some key differences between the two.
RIAs are held to a fiduciary standard, which means they are legally obligated to act in their clients’ best interests. They must disclose any conflicts of interest and put their clients’ needs ahead of their own. Broker-Dealers, on the other hand, are held to a suitability standard, which means they must ensure their investment recommendations are suitable for their clients based on factors such as their risk tolerance, investment goals, and financial situation. However, they are not legally obligated to act in their clients’ best interests.
RIAs are typically fee-only, which means they charge their clients a percentage of assets under management or a flat fee for their services. Broker-Dealers, on the other hand, are typically commission-based, which means they earn a commission on the products they sell to their clients.
Overall, the main difference between RIAs and Broker-Dealers is the standard to which they are held and how they are compensated. RIAs are held to a higher standard and are typically fee-only, while Broker-Dealers are held to a lower standard and are typically commission-based.

How RIAs make money

Registered Investment Advisors (RIAs) make money by charging their clients a fee for their services. There are two main ways that RIAs typically charge their clients:
  1. Percentage of Assets Under Management (AUM): RIAs typically charge their clients a percentage of the assets they manage on their behalf. This percentage can vary but is typically around 1% per year.
  2. Flat Fee: Some RIAs charge their clients a flat fee for their services, regardless of the amount of assets they manage. This fee can vary depending on the complexity of the client’s financial situation and the services provided.
RIAs may also charge additional fees for specific services, such as financial planning, tax preparation, or estate planning.
One of the benefits of working with an RIA is that they are typically fee-only, which means they don’t earn commissions on the products they recommend. This can help eliminate conflicts of interest and ensure that the RIA is always acting in the client’s best interests.

How to choose an RIA

Choosing the right Registered Investment Advisor (RIA) is an important decision, as they will be responsible for managing your investments and providing you with personalized advice. Here are some factors to consider when choosing an RIA:
  1. Credentials and qualifications: Look for an RIA who holds relevant professional qualifications and credentials, such as the Certified Financial Planner (CFP) designation. This demonstrates that they have the necessary knowledge and expertise to provide high-quality investment advice.
  2. Fee structure: RIAs typically charge a fee based on a percentage of the assets they manage for you. Make sure you understand the fee structure and any additional fees you may be charged, such as transaction fees or account maintenance fees.
  3. Investment philosophy: Make sure the RIA’s investment philosophy aligns with your own. Some RIAs specialize in certain types of investments, such as socially responsible investing or value investing, while others may have a more general approach.
  4. Communication and transparency: Look for an RIA who communicates regularly and clearly with their clients, and who is transparent about their investment decisions and fees. You should feel comfortable asking questions and getting updates on your investments.
  5. Reputation and track record: Research the RIA’s reputation and track record before making a decision. Look for reviews and testimonials from clients, and ask for references if necessary.
Choosing the right RIA can take time and research, but it’s important to find someone you trust and who can help you achieve your investment goals.

RIA FAQs

Here are some frequently asked questions about Registered Investment Advisors (RIAs):

What is the difference between an RIA and a broker-dealer?

RIAs are registered with either the Securities and Exchange Commission (SEC) or state securities regulators, and are held to a fiduciary standard, which means they must act in their clients’ best interests. Broker-dealers, on the other hand, are registered with the Financial Industry Regulatory Authority (FINRA) and are held to a suitability standard, which means they must make recommendations that are suitable for their clients but not necessarily in their best interests.

How do RIAs make money?

RIAs typically charge a fee based on a percentage of the assets they manage for their clients. This fee can range from 0.25% to 2% or more, depending on the size of the portfolio and the complexity of the investments.

What are the responsibilities of an RIA?

RIAs are responsible for managing their clients’ investments and providing personalized investment advice. They must also adhere to a fiduciary standard, meaning they must act in their clients’ best interests and disclose any conflicts of interest.

Do all RIAs have the same qualifications?

No, the qualifications of RIAs can vary depending on their background and experience. However, most RIAs hold relevant professional qualifications and credentials, such as the Certified Financial Planner (CFP) designation.

How do I know if an RIA is right for me?

Choosing the right RIA depends on a number of factors, including their qualifications, fee structure, investment philosophy, and reputation. It’s important to do your research and ask questions before making a decision.

Key takeaways

  • A Registered Investment Advisor (RIA) is a financial advisor who provides personalized investment advice to individuals or institutional clients for a fee.
  • RIAs must act in their clients’ best interests and are held to a fiduciary standard.
  • RIAs make money by charging a percentage of the assets they manage.
  • When choosing an RIA, consider their qualifications, experience, investment philosophy, and fee structure.

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