What Is A Registered Investment Advisor (RIA)? – Low Cost Advisor
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A Registered Investment Advisor (RIA) is an individual financial advisor or a company that provides its clients with financial advice. Unlike other types of financial advisors, RIAs have a fiduciary duty to act in your best interest. Here’s what you need to know about RIAs and how to determine if an RIA is the right kind of financial advisor for you.
What Is an RIA?
An RIA is a company registered with federal or state regulatory agencies to provide investment advice. In the financial advice space, Registered Investment Advisors stand out for these reasons:
- RIAs have a fiduciary duty to their clients. This means they’re obligated to always act in your best financial interest and to offer the lowest-cost products that fit your needs. Non-RIA financial advisors, such as broker-dealers, may only have to offer advice that is suitable to clients. This means they can offer financial advice that meets a client’s needs but may earn them sales commissions or higher fees.
- RIAs register with either the Securities and Exchange Commission (SEC) or state securities regulators. SEC and state regulation helps ensure RIAs serve your interests as fiduciaries. In addition, you can research any complaints against them on FINRA’s BrokerCheck.
- RIAs provide more than just investment advice. RIAs generally advise on a range of subjects that are part of your financial life, from retirement planning to insurance and estate planning.
RIAs come in various sizes. An RIA might be a giant financial planning firm servicing tens of thousands of clients, or it might be a single advisor operating through their own RIA. “An advisor generally is going to have an ongoing relationship with their client,” says Evelyn Zohlen, president of Inspired Financial in Huntington Beach, Calif., and chair of the Financial Planning Association.
How Much Do RIA Charge in Fees?
RIAs generally charge clients annual fees equal to a percentage of the assets they manage. In 2019, the average RIA fee was 1.17% of assets under management (AUM). That means that a client with $100,000 in assets managed by an RIA would pay the firm $1,170 per year for their services.
However, other fee types are becoming common as advisors work with clients in new ways. “There are many ways that you can engage with an advisor, such as for an hourly or project-based fee, a retainer, a minimum fee or a fee based on assets or income,” says Jennifer Grant, a certified financial planner with Perryman Financial Advisory in Dallas.
With these new models, you may be able to pay $200 for an hour of consulting, a flat fee on a monthly basis or a $1,000 fee for a year of all the advice and guidance you need. During an introductory consultation with an RIA (which are generally free), they will help you determine what kind of relationship and pricing makes the most sense for your needs. Keep in mind that not all RIAs offer alternative pricing models, and you may have to shop around to find one who offers the kind of relationship and fee structure you want.
RIAs Register with the SEC and State Agencies
All RIAs must register with either their state agency or the SEC. Whether they register with one or the other depends largely on size: If an RIA has $100 million or more in regulatory assets under management, they generally must register with the SEC. If they have less, they typically register with their state securities commission.
There are some exceptions. If an RIA must register in 15 or more states, it can choose to register with the SEC instead. An RIA can also register with the SEC if their state doesn’t have a statute regulating advisors.
Advisor vs Adviser
Within the financial advising industry, you may see advisor and adviser used somewhat interchangeably. Although it may seem confusing, ultimately there is no difference between the two spellings.
“Unfortunately, the SEC uses one, and you’ll see states using another,” Zohlen says. “Within the financial services industry and within the financial services press, we use them interchangeably.”
One caveat you should know: Because the Investment Advisers Act of 1940 uses the “er” spelling, there’s some feeling that “registered investment adviser” and “investment adviser representative” should be spelled with the “er” because that’s how the law is written. (But not everyone does this.) When evaluating advisors (or advisers), the important word to look for is “fiduciary.” A fiduciary has your best financial interest at heart, regardless of how they choose to spell advisor.
What Is an Investment Advisor Representative (IAR)?
An investment advisor representative (IAR) is a financial professional who works under the umbrella of an RIA. While many investors think of RIAs as people, RIAs are the businesses that IARs work for. An RIA, then, can employ one IAR or hundreds of IARs.
To become an IAR, you must either pass the Series 65 exam or pass both the Series 7 and Series 66 exams. In some states, you may be able to use a professional designation, such as certified financial planner (CFP) or chartered financial analyst (CFA), instead of passing the Series 65.
That said, not all CFPs and CFAs are IARs—and not all IARs are CFPs or CFAs. If you want comprehensive financial planning in addition to investment advice, look for an IAR who is also a CFP. “If I was telling my mom or sister what to be looking for, I would want both,” Zohlen says.
Why Is Fiduciary Responsibility Important?
Fiduciary responsibility is important because it ensures that the person managing your money is also making the best choices for you in terms of products and fees. As fiduciaries, RIAs are legally obligated to put your interests above their own and to disclose any potential conflicts of interest.
“Some advisors operate under a lesser standard known as the ‘suitability standard,’” says Michael Baughman, a CFP with Parsec Financial in Tryon, N.C. “The suitability standard only requires that an investment be ‘suitable’ for a client. These advisors are not required to disclose potential conflicts of interest or make a client aware of less expensive or more tax-efficient alternatives.”
This is a common source of confusion. No matter whether an advisor adheres to a fiduciary standard or a suitability standard, they can call themselves a financial advisor. Only advisors who are IARs and work at an RIA have a fiduciary obligation.
“When I was with a large brokerage company, there was a conflict that kept growing because the company offered proprietary products and had sales goals,” says Freddy Garcia, a CFP with Left Brain Wealth Management in Naperville, Ill. “I decided four years ago to leave and join an independent small RIA.”
In other words, if you visit an RIA, you can be assured that their representatives are recommending investments that are best for you. “The difference between going to my broker down the street, versus me hunting down an RIA, is that an RIA is required to put the best interest of the consumer first, fully,” Zohlen says.
Are RIAs Only for Rich People?
People of all financial backgrounds may benefit from RIAs. Registered investment advisors are equipped to help people at various life stages, including beginner investors who may not have amassed much yet.
“While traditionally RIAs have focused on the wealthy, there is a new movement that is focused on providing guidance even if the client has not accumulated assets,” says Grant. To address this development, some RIAs are using the pricing models outlined above, beyond asset-based percentages, offering more adhoc relationships. These help people who are just starting out on their financial journeys but who still need financial advice.
Some financial planning associations, like XY Planning Network, specialize in providing access to advisors using low-cost subscription models. Those looking for lower-cost financial advice might also consider robo-advisors, which offer investment advice for much lower fees than conventional RIAs that employ investment advisor representatives.
Do I Need an RIA or a Robo-Advisor?
If you have an uncomplicated financial situation and you’re looking for investment recommendations based on your broad situation, a robo-advisor may be a good fit for you.
A robo-advisor is a financial advisory service, typically offered online or via an app, that provides automated investment recommendations based on your goals, risk tolerance and investing timeline, among other things. Although some platforms offer access to live humans, robo-advisors primarily use algorithms to come up with targeted advice. Notably, most robo-advisors are also RIAs, meaning they have a fiduciary responsibility to look out for your financial best interests.
Expenses for robo-advisors are typically less than other RIAs. Robo-advisors Betterment and Wealthfront, for instance, will manage your portfolio for an annual fee of 0.25% of assets. For a balance of $100,000, that works out to be more than $700 a year less than a conventional RIA would cost. But keep in mind that you may not get the very personalized advice that an investment advisor representative can offer.
RIAs Offer More Tailored Advice & Services
“It’s kind of like going into the local big box store to discuss your remodeling plans,” says Brenda Knox, a CFP and founder of Financial Elements in Rolling Meadows, Ill. “There will be some level of assistance, but it’s probably not very specific to your overall housing situation. They probably won’t take the time to ask you about your long-term goals for the space, or how you use it today, or how it all fits together.”
If you work with a fee-only IAR, they’ll get to know you and help you put all the pieces of your financial life together. This generally comes with a higher fee, but many feel it’s worth the money to get that level of service.
“A robo-advisor is a great solution for somebody who has a lot of confidence in their own decisions and they’re looking for a solution to just take care of the transactions and keep things in balance for them,” Zohlen says. “For an individual who wants more support, somebody who is going to be available to talk over ideas or talk you off the ledge if there’s something really dramatic going on in the market, a robo-advisor is not in a position in many cases to do that.