Many novice investors start out managing their brokerage account on their own, reading up on various stocks and other financial products and making their own buy-and-sell decisions. But at some point, they may want professional advice to create a more comprehensive investment plan that covers short- or mid-term goals like saving for a down payment on a home or college tuition for their kids, plus long-term goals like retirement. That’s where a Registered Investment Advisor can come in.
What is a Registered Investment Advisor?
A Registered Investment Advisor (RIA) is exactly what it sounds like: an advisor who will offer investment advice and is officially registered with the Securities and Exchange Commission or a state’s security agency. Advisors who have $100 million or more in assets under management or provide advice to investment companies register with the Securities and Exchange Commission (SEC). Those with smaller amounts under management typically register with their state’s securities administrator.
What you might not realize is that an RIA can be a person (“advisor”), but it also can be a firm (“adviser”). For example, Acorns Advisers is an SEC-registered investment adviser (or firm), which means it’s authorized to provide investment advice.
The most important thing to know about RIAs is that they have a “fiduciary” responsibility, which means that they are required to give advice that is in their clients’ best interests. That is, they are legally bound to act ethically on their clients’ behalf as it relates to the assets they are managing.
Now that might seem obvious, but there are also many investment professionals who are not required to be fiduciaries (more on them later).
What does fiduciary responsibility mean for a Registered Investment Advisor?
Acting in their clients’ best interest includes keeping ample documentation detailing why they have recommended a specific strategy. This is in order to demonstrate that they adequately disclosed risks or conflicts of interest should a client later question the suitability of an investment.
As part of putting their clients’ interests above their own, RIAs must disclose any potential conflicts of interest. For example, if they own a stock or other investment vehicle they are recommending to you, they must let you know. Normally these conflicts of interest are immaterial, but it can be comforting to know they are required to tell you.
Another way that RIAs ensure they are acting in their clients’ interest is reflected in the way they are typically paid. In most cases, RIAs earn their compensation through a “management fee” for the assets they handle for a client. It’s typically a percentage of the total assets under management that falls in the range of 0.5 percent to 1.5 percent.
RIAs aren’t the only financial advisors who are paid a percentage of the assets they manage as a fee. But this type of payment model can work favorably for a client because it largely reduces the element of conflict of interest. The more your assets grow, the more money they make, which is a win-win situation. Occasionally as your investment portfolio grows, your RIA might be willing to negotiate the percentage down a little.
That’s in contrast to other ways that advisors can be paid. Some might collect a fee each time they buy and sell a stock for you, which could theoretically encourage them to make unnecessary trades to bump up their income. Others charge by the hour, which means they could hypothetically drag out the time they spend working on your account in order to reap a larger fee. Others make money from commissions, earned when they recommend and sell specific financial products to you, which may incentivize them to promote specific products.
It’s important to note that these behaviors are atypical: Certainly most investment professionals of any type are ethical. But it’s worth considering these different compensation arrangements if you are seeking out an investment professional to potentially manage your money.
What are the requirements to become a Registered Investment Advisor?
First, an RIA must be “registered” under The Investment Advisers Act of 1940, which was passed soon after the stock market crash of 1929 in order to better regulate the professionals who were dispensing advice.
An official RIA is designated based on:
- What type of advice they offer
- How they are compensated
- Whether this is their primary professional function (i.e. whether the majority of their income is derived from providing investment advice)
However it’s important to note that obtaining registration doesn’t count as an “endorsement” or “recommendation” by the SEC. It merely means that they have disclosed the elements noted above.
RIAs also must reveal any disciplinary actions that have been taken against them, and if the firm is the RIA, it must share their key officers.
In addition, RIAs must obtain a “Series 65” license by taking a test called the Uniform Investment Adviser Law Examination that covers laws, regulations and ethics, along with a wide variety of investment topics. Then annually they must file a Form ADV that updates any conflicts of interest or new disciplinary actions.
How is a Registered Investment Advisor different from other investment professionals?
As you may have discovered, there are lots of investment professionals other than RIAs who provide investment advice. These include:
Registered representatives: These financial professionals work for a stock brokerage firm and serve as its representatives to help clients trade investment products like stocks, bonds and mutual funds. Their work is more transactional, rather than being focused on your entire financial plan.
They typically work on commission, which means they are paid certain amounts for selling you different products—and are not bound by fiduciary responsibility. Stockbrokers generally must pass the Series 7 and Series 63 securities examinations, and be registered with a firm that is a member of the Financial Industry Regulatory Authority (FINRA).
Financial planners: These professionals work with clients to create a plan that will meet their long-term financial objectives by talking about their goals, risk tolerance and potential strategies for diversification during different life stages. They also might consult on other financial activities, such as budgeting, tax planning and insurance coverage. While there are no official requirements to be a planner, many become designated as a Certified Financial Planner (CFP), which requires passing a rigorous exam (among other criteria).
Investment consultants: This can be a catch-all term that can relate to anybody who provides investment advice. Make sure to check for a designation that indicates they are registered and have passed the requisite exams. There are many designations that financial professionals might go by, such as Chartered Financial Analyst (CFA), Chartered Investment Counselor (CIC), Chartered Financial Consultant (ChFC), and Personal Financial Specialist (PFS)—all with different regulations that govern their ability to use those official titles.
But be aware: the Financial Industry Regulatory Authority (FINRA) lists nearly 175 different types of professional designations that financial professionals may use, some of which don’t require any specific education or training.
The key is to make sure they are licensed and find out as much as you can about their background before trusting them with your savings—and your future. A smart place to start to get more background is through the SEC's Investment Adviser Public Disclosure database or FINRA’s BrokerCheck.
How to choose a Registered Investment Advisor who’s right for you
Choosing an RIA—whether an individual or a firm—can be daunting. After all, getting the best return on your investment is important for a secure retirement. Of course, no RIA has a crystal ball, and they all will caution you that despite everyone’s best intentions, it is possible that you could lose money in the market. (No one can time or beat the market flawlessly, though it’s important to note that, historically, the stock market has always come back to new gains after suffering a dip or even a recession.)
The investment advice an RIA gives should be based on your own personal situation, including your goals, your time horizon and your appetite for risk. These are the hallmarks of an RIA who has your best interest in mind.
Aside from those generalities, questions to consider when choosing an RIA include:
- Do you want to meet with them in person and how often?
- Do you need advice on all aspects of your financial situation or just some?
- Do you prefer having your investment portfolio automated (so that it’s automatically rebalanced, for example) once it’s set up—or actively managed?
- Do you want to have access to advisors if you have questions, even with an automated account?
- Do you know all the fees that will be charged, from account minimums to trade fees?
Just as you wouldn’t trust your car repair or home remodeling to an amateur, make sure that you are making an informed decision when choosing an individual or firm to handle your investments. After all, your financial future depends on it.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.