Registered Investment Advisers (RIA’s): What is an RIA and Their Role in the Financial Industry

Are you curious about the role of Registered Investment Advisers (RIA’s) in the financial industry? This informative article will demystify the world of RIAs, explaining their responsibilities, regulatory aspects, and career opportunities. Perfect for beginners considering a career in financial services, this article will provide valuable insights and enhance your understanding of RIAs.

Definition of a Registered Investment Adviser (RIA)

A Registered Investment Adviser (RIA) is a company that provides investment advice for compensation and is registered with the Securities and Exchange Commission (SEC) or state securities authorities. RIAs have a fiduciary duty to act in the best interest of their clients and must adhere to strict compliance and disclosure requirements. 

An investment adviser is different from a financial advisor. An investment adviser is a legal term for a company or person that advises on securities. Financial advisor, financial planner, and financial coach are all unregulated terms and can be used by anyone.

If you want to become a financial advisor who advises on investments, you must either register through the RIA route or the Broker Dealer route. The financial advice industry is regulated two different ways. Scroll down to learn more about their differences.

RIA’s are required to maintain detailed records, provide disclosures to clients, and undergo regular examinations to ensure compliance with regulations. This regulatory oversight is designed to protect investors and maintain the integrity of the financial markets. The compliance departments at RIA firms have plenty of work to do.

Here’s my Complete Guide on How to Become a Financial Advisor.

What is an Investment Adviser Representative?

Definition of an Investment Adviser Representative

An Investment Adviser Representative (IAR) is an individual who works for an RIA and provides investment advice to clients. IARs are required to pass qualifying exams such as the Series 65, and they must register with the SEC or state securities authorities.

These acronyms can be confusing for beginners. Here’s the difference: An RIA (Registered Investment Advisor) is the company. An IAR (Investment Adviser Representative) is the person doing the advising.

So if you get a job at an RIA (after the Series 65 and the registration process) and start providing investment advice, you would legally be an IAR. Normal people will call you a financial advisor or financial planner but technically, the legal term is Investment Advisor Representative.

You can still work in an RIA and not be an IAR. You could be one of the support staff such as a receptionist or paraplanner. A paraplanner is someone who supports the financial planner. Here’s the differences between a paraplanner and a financial advisor.

Qualifications and Licensing Requirements

To become an IAR, you must pass the Series 65 (Uniform Investment Adviser Law Exam). It’s a 140 question proctored test. It’s covers topics like securities, regulations, client recommendations, etc. It doesn’t test you on how to be a good financial advisor. It mostly tests you on how to not break the law and if you know what a mutual fund is. It’s still difficult for beginners and requires studying even if you’ve been in the industry a long time.

Many states will let you skip the Series 65 if you have one of their pre-approved designations. If you have the CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), ChFC (Chartered Financial Consultant), PFS (Personal Financial Specialist), or the CIC (Chartered Investment Counselor), you can apply to skip the Series 65 exam.

Who Regulates RIA’s?

RIAs are regulated by the Securities and Exchange Commission (SEC) or state securities authorities but FINRA (Broker Dealer regulators) support them by handling the site and the data about each advisor. The regulatory framework is designed to protect investors and maintain the integrity of the financial markets. RIAs must adhere to strict compliance and disclosure requirements to ensure that they act in the best interest of their clients.

RIAs are regulated by the SEC or state securities authorities, depending on the size of their assets under management. If the RIA manages more than $110 million of client money, they must register through the SEC and submit their annual reports to them. If the RIA has less than $100 million under management, they must register through whatever state entity governs financial advising.

Many of the states have similar laws for financial advising. The Uniform Securities Act of 1956 provided a non-mandatory template that many states adopted. But there can be important differences. There’s often outdated or simply weird laws specific to each state. The securities laws that govern each state are called Blue Sky laws. These differences can influence where a future investment adviser wants to establish their business.

How RIAs Differ from Broker Dealers

RIA’s differ from broker-dealers in their legal restraints. While RIAs have a fiduciary duty to act in the best interest of their clients, broker-dealers are held to a suitability standard, which means they must recommend investments that are suitable for their clients, but not necessarily in their best interest.

A Broker Dealer company is often a large to very large company. RIA companies are sometimes very large but there’s a wide range of how small or big an RIA is. A Broker Dealer company is almost always well established and well-funded. This is because being a Broker Dealer has high capital requirements because they often have custody (that means they house it) of their clients’ money. RIA’s usually don’t have custody of their clients’ money because that triggers lots of annoying regulations.

Fee-only vs Fee-based

RIA’s typically operate on a fee-only basis, meaning they are compensated solely by the fees they charge their clients. This fee structure aligns the interests of the RIA with those of their clients, as the RIA’s compensation is directly tied to the performance of the client’s investments.

On the other hand, fee-based advisors may also earn commissions from selling financial products, which can create potential conflicts of interest. Financial advisors at Broker Dealers can be paid for services to clients and also receive commissions from their employer for selling investment or insurance products. This means they’re dual registered as both an IAR of an RIA and an agent of a Broker Dealer. This allows them to be paid by both the company and the client.

The fee-only vs fee-based topic is often controversial. Both sides contain conflicts of interests and client biases. Neither is perfect. The RIA side is smaller but is growing much faster than the Broker Dealer side of the industry.

“The most important factor of deciding to work for either an RIA or a Broker Dealer is mostly dependent on your employment preferences.”

Dallin Sorensen

Are Registered Investment Advisers (RIAs) Fiduciaries?

RIAs are fiduciaries, which means they are legally obligated to act in the best interest of their clients. This duty requires RIAs to provide investment advice that is solely in the best interest of the client, even if it means foregoing opportunities for personal gain.

RIAs fulfill their fiduciary duty by providing unbiased and personalized investment advice, avoiding conflicts of interest, and fully disclosing any potential conflicts that may arise. This legal commitment to acting in the best interest of their clients sets RIA’s apart and builds trust with investors. Although many clients don’t know what fiduciary means; or don’t care.

The Future of Registered Investment Advisers (RIAs)

The RIA industry is constantly evolving, with new trends and developments shaping the landscape. Aspiring RIAs should be aware of the opportunities and challenges in the industry, as well as the evolving role of RIAs in the financial industry.

There is a large portion of financial advisors preparing to retire over the next 10 years. These Baby Boomers are looking for advisors to give or sell their client book to. This is a great time to get into the financial advising industry.

Wondering if you’re too old or young to be a financial advisor? Here’s the data on the average age of financial advisors.

The RIA industry is experiencing a shift towards holistic financial planning and personalized investment strategies. Technology is also playing a significant role, with digital platforms changing the way investment advice is delivered.

Aspiring RIAs have the opportunity to provide comprehensive financial planning and investment management services to a growing client base. However, they also face challenges such as increasing competition, regulatory changes, and the need to adapt to technological advancements.

RIAs are increasingly seen as trusted advisers who provide personalized and unbiased investment advice. Their fiduciary duty sets them apart in the financial industry, and their role is likely to continue expanding as investors seek transparent and client-focused financial guidance.

In conclusion, understanding the role of Registered Investment Advisers (RIAs) is essential for anyone considering a career in financial services. RIAs play a crucial role in providing personalized and unbiased investment advice, and their fiduciary duty sets them apart in the industry. As the RIA industry continues to evolve, aspiring RIAs should stay informed about the latest trends and developments to succeed in this dynamic field.