The term "RIA" suffers both from definers who provide too much nuance and too little.

What exactly is an RIA?

The letters stand for registered investment advisor but then it gets complicated

October 4, 2011 — 3:07 PM UTC by Brooke Southall

9 Comments

Brooke’s Note: In preparing to write this article, Nevin checked to see how often the question “What is an RIA?” is asked on Google and the answer was an astounding 1.2 million times per month. No doubt many of those are aimed at Rich Internet Application. Here we are only addressing what an RIA is in terms of financial advice. Answering that question is challenging enough, it turns out. We take full responsibility for the accuracy of this article but we can tell you it’s much better for having been run past Scott Brown and Les Abromovitz, compliance attorneys at MarketCounsel and National Compliance Services, Inc. respectively, to minimize any technical errors.

The term “RIA” is thrown around with abandon in the financial services industry but if you ask people what it means, you are likely to get a confusing array of answers.

The confusion about defining and describing an RIA lies not only in what is being described but in the fact that it can stand for different depths of explanation depending on its context and who is using it. So it’s a case where the reader can be confused equally by the definer who wants to be thorough and the one who wants to keep it down to its barest meaning.

Layers

In this attempt at definition, we will try to let it unfold in layers and the reader can stop when they have heard all they want to hear or plow on and understand “RIA” in all its nuance.

In simple terms, an RIA is a registered investment adviser. This generally means a financial firm that engages in advising others about investing in securities, gets paid for it and is subject to oversight by the Securities and Exchange Commission or their equivalent regulator at the state level.

Under this structure, these companies are paid a fee similar to the way a mutual fund charges clients. For instance, a typical arrangement might call for an advisor to charge an annual fee of 1% of assets under management. On a $1 million account, a client would be charged $10,000. RIAs, however, can also charge fixed or hourly fees though these methods are employed with less frequency.

A confusing factor is that people often believe that the term “RIA” applies to an individual that works for the advisory firm. However, this is inaccurate. Individuals who provide advice on behalf of the firm are referred to as investment adviser representatives. It’s the firm itself that is called an RIA.

Hoops

To become an RIA or IAR, there are some hoops to jump through. Both the firm itself and the individual IARs generally have to submit separate applications to become licensed to do business. The RIA has to submit its application using the Form ADV, whereas each IAR has to submit their application using the Form U4.

Moreover, most states require each individual IAR to be qualified before they will approve their applications. While there are nuances depending on the particular state in which an IAR application is filed, most states will consider an IAR qualified if they either: 1. have a specific professional designation likes a CFP or CFA; 2. have passed the Series 65 exam; or 3. passed both the Series 7 and Series 66 exams combined.

All RIAs fall under either federal or state jurisdiction. Traditionally RIAs with less than $25 million of assets under management will register with state regulators, but soon that amount will be raised to $100 million of AUM. Even if an RIA has less than $100 million in AUM, it may opt for SEC registration if it is required to be registered with fifteen or more states. See: What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation.

Another level of confusion is that the term “RIA” applies to both large institutions like American Funds that have hundreds of billions of AUM and the financial planner who advises clients about their investments but does not manage their portfolios. “RIA” in this context may also encompass advisers to mutual funds and hedge funds as well as pension consultants who also may need to register.

29,000 RIAs, not really

There are about 29,000 RIAs in the technical sense — both registered with the SEC and with the states, according to RIADatabase of Charlotte, N.C. When we use the term RIA at RIABiz, we are primarily referring to about 13,000 financial advisory firms that are either registered with the Securities and Exchange Commission or their equivalent state regulator and perform wealth management-related duties primarily for affluent individual investors. In this view, we are again following the lead of RIA Database that breaks out RIAs accordingly. See: Six things to know about how and where RIAs are growing.

There are about 16,000 other RIAs that we are referring to more obliquely because they are broker-dealers, mutual funds, hedge funds, separate account managers or other financial firms obligated to have this structure in order to operate as businesses. Right now anyone with $25 million of AUM answers to the SEC. Soon it will only be advisors with $100 million or more as the states take greater control over RIAs. Approximately 4,100 RIAs will switch from SEC to state registration once the new rules take effect, according to what Carlo di Florio, director of SEC compliance said at the IA Watch best practices seminar on March 21.

For the most part RIAs work directly with individual investors in providing them advice related to their investments. But most advisors that work for these firms today have assumed a broader role in counseling clients more broadly on all issues relating to their personal finances. This can range from buying a house or car to overseeing accounting and estate matters. See: Why Joe Duran believes that classic RIA firms face extinction.

Elevator pitch

Still, what nobody has yet developed to our knowledge is an “elevator pitch” description of an RIA — one that captures its effectiveness as a business model and how it is generally a better firm structure for delivering good and ethical financial advice.

When people ask me, here’s what I say:

People starting an RIA are basically entering into a compact with the SEC whereby they agree to hold themselves accountable for the advice they give to clients. In exchange, the SEC permits these advisors to do two things that are essential for carrying out the successful rendering of advice: charging fees for that advice and making decisions on a discretionary basis so they can act efficiently. See: 11 steps to becoming an RIA without upsetting Merrill Lynch, the SEC or your clients.

It is my hope that people with better, more intuitive descriptions share them here in a comment or email them to me at Brooke@RIABiz.com and I will pass them along to readers. See: How RIAs describe exactly what they do in a few choice words.

Editor’s Note: If you’re like me, you know an RIA when you see it. Or at least you think you do. But clients and potential clients are another story. We wrote this article as Schwab is revving up to spend substantial resources to close the gap. See: Schwab to pump millions of dollars into promoting RIAs as a channel.

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Share your thoughts and opinions with the author or other readers.

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Dennis Myhre said:

September 29, 2015 — 1:18 AM UTC

I understand the Registered Investment Adviser is required to be a fiduciary…. a lot of brokers are using the designation of Registered Investment Advisor, implying a fiduciary duty, but since the spelling of “Advisor” differs from “Adviser,” they are getting away with it.

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Grayson G said:

February 28, 2012 — 9:42 PM UTC

Thanks for this useful information! I worked in Investment Management for the last 2 years and am thinking about switching to an RIA. It seems that going forward RIA’s are only going to become more valuable, important, and essential for clients’ well-being.

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Stephen Winks said:

October 5, 2011 — 11:58 PM UTC

Kevin,

Couldn’t agree more.

How about, I provide patented and proven institutional services and am accountable for expert personalized advice rendered in the consumer’s best interest, not presently possible within a commission brokerage format.

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Kevin said:

October 5, 2011 — 10:59 AM UTC

An elevator pitch or better, the “30 Second Commercial” should entice the listener to query “Please tell me more.” Anything longer than about 10 words won’t work. Focus on your core business and what separates you from your local competetion. Mine is this:

“My firm seeks to eliminate client conflict of interest in investment and planning.”

When asked for more information, I ask to exchange business cards and for an opportunity to meet.

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Stephen Winks said:

October 4, 2011 — 8:48 PM UTC

Technically an RIA (a) provides personalized client specific advice for a fee, (b) is accountable for every recommendation they have ever made resulting in continuous comprehensive counsel, (c) has an ongoing fiduciary duty of care and loyalty to the consumer which requires the adviser to act on behalf of the consumer in the consumer’s best interest.

Brokers (a) are not accountable for their investment recommendations after a sale is executed , (b) have no ongoing fiduciary duties as it is a violation of the internal compliance protocol of their supporting broker/dealer to either acknowledge fiduciary responsibility to act in the consumer’s best interest or that they render personalized advice, and© have preagreed upon arbitration proceedings to manage client disputes that absolves the broker for any responsibility for their recommendations.

Essentially brokers do not render advice, they simply make the consumer aware of their investment alternatives. It is solely up to the consumer to determine investment merit on their own, regardless how limited the consumers investment knowledge and experience may be. Brokers only offer generalized advice such as buy gold, but can not tell you how the recommendation improved return, reduced risk or enhanced the tax efficiency, liquidity, cost structure, etc. of your client’s holdings as a whole—as those are services required of advisers.

The brokers services are limited to the clerical function of trade execution as by being personally client specific as to how a recommendation affects the client’s portfolio—they are rendering advice and trigger fiduciary responsibility for which their supporting broker/dealer is responsible. The brokerage industry’s defense to having tens of thousands of brokers independently providing advice for which it is responsible is to simply maintain that brokers do not render advice and make it a violation of its internal compliance protocol for brokers to (a) acknowledge that advice is provided and (b) there is a fiduciary obligation requiring brokers to act in the consumers best interest, based on 800 years of common law.

This inability of the broker to act in the consumers best interest has resulted in the loss of trust and confidence of the investing public and has required an act of Congress (Dodd-Frank) to extend the same consumer protections afforded by advisers to consumers to brokers.

This is why the DOL can not retreat from holding brokers to the fiduciary standard of care in dealing with IRAs. Eighty percent of IRA assets are roll overs from retirement plans afforded the fiduciary protection of ERISA. When ERISA assets are rolled over into an IRA, those assets should be afforded the same fiduciary protection they once enjoyed. Anything less would neither be in the best interest of the consumer nor would be sound public policy protecting the public trust.

It should be noted that the SEC has established that it is the broker/dealer’s responsibility to properly support the broker as there are fiduciary duties beyond the control of the individual broker that can only be managed by the b/d such as treating trade execution as a cost center on behalf of the consumer in their best interest rather than being managed as a profit center—thus creating a fee for ongoing service business model. Continuous comprehensive counsel also requires the real time management of information which changes how one approaches portfolio construction. Real time data access and the electronic management of complex values like tax efficiency, cost structure and trade execution cost is accomplished through the use of real time buy/sell research and overlay management take the industry in a different direction. Retail mutual funds, which can neither be client specific as they are governed by prospectus nor afford holding transparency, are not well suited for personalized continuous comprehensive counsel.

The question of is the best interests of the consumer being well served in a brokerage business model has a very clear answer. No. So, what will Congress do about it? It passed Dodd-Frank. Will the brokerage industry comply? Absolutely not, as the FSI has engaged hundreds of lobbiest to advocate on behalf of the industry’s best interest. So even when literally the best interest of the consumer are so clear—the brokerage industry advances its own interest.

What is so sad is top industry executives know exactly how to make large scale institutionalized support for fiduciaey standing safe to acknowledge, highly scalable and easy to execute. Advisor productivity would go up by as much as 5X, earnings will dramatically, cost are streamlined around prudent process and the industry achieves three times the earnings multiple.
Harvards’s Clayton Christensen (Innovators Dilemma) observes the biggest mistake established industry’s make when faced with industry redefining innovation is to look at innovation in the context of the existing business model when a new business model is in order.

There is a lot of work to be done, which should take no more than 12 months which would greatly elevate the role and counsel of the advisor, provide an unprecedented level of investment and administrative counsel to the consumer and greatly enhance the economic metrics of the industry. If the criteria is what is the best interest of the consumer—hands down fiduciary standing trumps commissions sales.

So why is there even a question. For the good of the industry and modernity—Dodd-Frank must prevail.

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TJ Gilsenan said:

October 4, 2011 — 8:22 PM UTC

Key information in this article? That “What is an RIA?” is googled 1.2 million times a month. That’s 1.2 million opportunities a month to get your practice in front of someone interested enough in learning about an RIA to search for it in google.

How do you make this work for you? Answer this question with a post to your blog or a new page on your website. 1.2 million people are waitting…

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Jeff Spears said:

October 4, 2011 — 7:50 PM UTC

My only addition to the elevator pitches above is to substitutute investment advice with wealth management advice. Below is a url from HBR that is a good tool for building your elevator pitch.

http://www.alumni.hbs.edu/careers/pitch/

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Dave Bromelkamp said:

October 4, 2011 — 4:02 PM UTC

Brooke, I really like the question that you ask and I believe that your definition of an RIA is correct. An even shorter and succinct version would be that an RIA is “a firm that is registered with the SEC to provide investment advice for a fee”. Most people understand this simple description. The enlightened consumer would also be wise to understand that the RIA has a fiduciary duty to act in the best interests of the client. Not all sources of investment advice are required to live up to this high fiduciary standard of care. More education on the registration of investment advisors would be good for the general public as the individual consumer has to make choices about where to get investment advice.

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Tim Welsh said:

October 4, 2011 — 3:57 PM UTC

Nice piece Brooke! Well defined.

My elevator speech for what an RIA is: A small business focused on providing objective, independent advice to investors for a fee.


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