The letters stand for registered investment advisor but then it gets complicated
October 4, 2011 — 3:07 PM UTC by Brooke Southall
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.
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.
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.
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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