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What Is an RIA Firm, and What Do They Do?

A registered investment advisor (RIA) is an individual financial advisor or advisory firm that gives investment advice to clients. All RIAs register with either the U.S. Securities and Exchange Commission (SEC) or a state-level authority. Part of the reason why working with an RIA is so desirable is that they all must abide by fiduciary duty. This means they must act in their clients’ best interests at all times. Understanding what an RIA firm is and how they help their clients can help you decide whether it’s the right path for you. If you’re interested in working with a local financial advisor, try SmartAsset’s free matching tool.

What Is a Registered Investment Advisor (RIA)?

The true definition of a registered investment advisor comes from the Investment Advisers Act of 1940. It describes an RIA as “any 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, to register as an investment adviser with the Securities and Exchange Commission (SEC).”

RIAs must register with either the SEC or a state securities administration. Holding the title of “RIA” doesn’t mean the SEC or state authority endorses the firm or advisor. Instead, it only means that it has met the initial and ongoing requirements for registration.

Registering as an RIA involves disclosing the following information:

  • Investment styles and strategies
  • Total client assets under management (AUM)
  • Fee structure
  • Past disclosures and disciplinary actions
  • Any potential conflicts of interest

If you’re researching an RIA firm, you can find this information on the website of the SEC or a state security administration. This allows would-be clients to find essential info and compare firms at a glance.

What Does an RIA Firm Do?

“RIAs are investment advisory firms which provide financial planning, investment advisory and wealth management services for clients in a fiduciary capacity,” says Riley Adams, a certified public accountant and founder of personal finance site Young and the Invested.

RIAs often work with high-net-worth clients and institutional investors to manage their assets. That may involve making trades in or out of a portfolio on a client’s behalf or offering advice and guidance on various investment strategies.

The key difference between an RIA and other types of investment advisors is that RIAs must legally act in a fiduciary role at all times. In the eyes of many, this makes RIAs much more trustworthy than some of their main competitors, like hedge funds, mutual funds, online brokers, robo-advisors and more.

Explaining Fiduciary Duty

What Is an RIA Firm, and What Do They Do?

In a nutshell, adhering to a fiduciary standard indicates an RIA must act in the best interest of its clients at all times. That means providing investment advice based on what’s best for the client, not what may be most profitable or beneficial for the advisor. The SEC may bring enforcement action against an RIA that breaches its fiduciary duty.

RIAs are required to make sure the investment advice they’re offering is as accurate as possible according to the information they have available to evaluate investments. As fiduciaries, they have a responsibility to keep efficiency and cost in sight when executing trades on behalf of clients. Furthermore, RIAs have an obligation to disclose any potential conflicts of interest as they arise.

For reference, Section 206 of the Investment Advisers Act of 1940 “prohibits misstatements or misleading omissions of material facts and other fraudulent acts and practices in connection with the conduct of an investment advisory business.” Therefore, as a fiduciary, an advisor cannot engage in any activity that goes against their client’s consent.

A fiduciary advisor with a fee-based or commission-based fee structure may still recommend securities for which they receive a sales commission or other compensation. However, the financial product must be in the client’s best interest, and they must also disclose that conflict of interest.

Benefits of Working With an RIA Firm

Undoubtedly, the biggest mark in favor of using an RIA firm is the fiduciary standard to which they abide by.

“The fiduciary standard goes a long way toward combating conflicts of interest in most situations,” Adams says. “Because of this, RIAs have a more trustworthy standing than other investment advisors not bound by this fiduciary standard.”

Another advantage is cost transparency. RIAs may charge a flat fee or an hourly rate for their services. With a flat fee structure, the fee is usually a percentage of the client’s assets under management. Because a firm must register with the SEC to become an RIA, these costs will always be transparent to you. This helps to take some of the guesswork out of the sometimes intimidating world of investing.

An RIA can offer personalized advice based on your investment objectives, risk tolerance, age and life stage. They can pinpoint strategies or investments that may be best suited to reaching your goals and help guide you through major life changes or periods of market volatility. Because RIAs are fiduciaries, they are generally more objective in their approach.

What You Should Look for When Hiring an RIA

What Is an RIA Firm, and What Do They Do?

When hiring an RIA, you should prioritize working with a fee-only advisor. This means that you will pay directly for services, and the RIA cannot make money from commissions.

Clients who work with fee-based RIAs will also pay them directly for services. However, these advisors can get additional compensation from commissions. If your RIA makes money from commissions, make sure to ask about their fiduciary duty.

Generally, as an investor you will pay a higher percentage in fees when you have less assets under management. These can typically cost between 1% and 2% each year. Ask your RIA to break down their fee structures and which services they cover. Fixed fees could range from $1,000 to $3,000, and hourly fees for other services could cost between $100 and $400 per hour.

If your assets are small and the fee percentage is too high, you may consider working with a robo-advisor first. Their fees can be as low as 0.25% of assets under management.

Finally, just like with any investment, you will also want to look up your RIA’s Form ADV, which discloses key information about their business practices, experience, fee arrangements and billing terms, as well as any red flags like bankruptcy and fraud.

Bottom Line

Regardless of whether you’re brand new to investing or you just need some help managing your current portfolio, the services of a registered investment advisor could be helpful. RIAs have a number of characteristics that make them reliable financial advisors. The most important among these are fiduciary duty and the regular disclosure of RIAs’ fees, conflicts of interest and more.

RIAs come in many different shapes and sizes. In other words, it’s extremely important that you do your research before picking which RIA you work with. After all, these advisors will have direct control over your assets and investments.

Tips for Choosing a Financial Advisor

Photo credit: ©iStock.com/monkeybusinessimages, ©iStock.com/designer491, ©iStock.com/seb_ra

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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