Glossary

Registered Investment Advisor (RIA)

A Registered Investment Advisor (RIA) is a person or firm that provides financial advice and services to clients in exchange for compensation. To become an RIA, individuals must pass the Series 65 or 66 examinations, obtain a license, and may need to register with the United States Securities and Exchange Commission (SEC). They must also comply with the Investment Advisers Act of 1940, other applicable laws, and any regulations imposed by state or local authorities.

The History of Registered Investment Advisors

The concept of the RIA dates back to the 1930s when the U.S. government began regulating financial markets in response to the stock market crash of 1929. The Investment Advisers Act of 1940 protected investors by requiring advisors to register with the SEC and follow certain principles.

The government amended the act several times, most notably in 1996 when Congress passed the National Securities Markets Improvement Act (NSMIA). This legislation reduced the regulation of advisors that manage less than $25 million in assets, making it easier for small firms to become RIAs.

The Responsibilities of a Registered Investment Advisor

RIAs manage their clients’ investments, provide financial advice, and keep their assets safe. To do this, they must thoroughly understand the markets, stay up-to-date on economic news, and select appropriate investments for each client. They should also research potential investments and monitor their performance regularly.

RIAs are responsible for providing accurate and timely disclosures, maintaining complete records of all transactions, and preparing financial statements. Here are some additional responsibilities they undertake:

  • Debt management and repayment
  • Investment management
  • Wealth management
  • Retirement planning
  • Estate planning
  • Budgeting

The Principles That Registered Investment Advisors Must Follow

Registered Investment Advisors must adhere to certain principles to remain compliant with regulations. These are some of the most notable rules and principles affecting their work:

  • Fiduciary Duty: RIAs must always act in their client’s best interest and avoid instances that might involve conflicts of interest. They must also provide advice tailored to the client’s individual needs.
  • Disclosure: RIAs must provide full disclosure of all fees and commissions, as well as any potential conflicts of interest. They should also inform clients of the actual level of risk involved in each investment or money management product recommended.
  • Registration: RIAs must consider the level of assets under management when determining if they must register with the SEC. Some states also have other governing bodies that require registration.
  • FINRA Compliance: RIAs must comply with the regulations set by the Financial Industry Regulatory Authority (FINRA). This includes requirements regarding consumer protection, compliance procedures, and record keeping.
  • Documentation: RIAs must maintain detailed records and documents that reflect their client’s investments and financial goals. Documentation might also include archiving sensitive communications between themselves and their clients.
  • Assumption of Burden of Proof: RIAs must be able to prove that they did the research to ensure an investment is sound. They must also retain proof that they made the proper disclosures to clients regarding the suitability of the investment.

How Registered Investment Advisors Make Money

Registered Investment Advisors make money by charging fees for their services. These fees can take several forms, including a percentage of assets under management, an hourly fee, or a flat rate. RIAs may also receive commissions from asset managers or lenders for selling their products to clients.

Let’s take a closer look at the fees clients might pay:

  • Management Fees: RIAs may charge a fee based on the assets they manage for that client, typically ranging from 0.5% to 2%. The average fee is about 1.17%. It covers their services and covers any administrative costs.
  • Asset-class-based Fees: RIAs may charge a separate fee for each asset class they manage. This allows them to differentiate their services by offering specialized advice and management strategies.
  • Performance Fees: Performance fees are typically a percentage of the returns generated on the client’s investments. RIAs may make this a one-time fee or an ongoing percentage of gains.
  • Commissions: RIAs may also receive commissions for recommending particular investments to their clients. However, they must disclose this, provide accurate risk analyses, and avoid conflicts of interest.
  • Flat or Hourly Fees: Some RIAs may charge a flat fee or an hourly rate for their services. This allows clients to budget how much they’re willing to spend on financial advice.

How an Automated Message Capturing and Archiving Service Can Improve RIA Compliance

An automated message capturing and archiving service can help RIAs stay in compliance with regulations by providing a secure platform to store all communication records. This helps protect client data and ensures that all communication is securely stored. With an automated message capturing service, RIAs can ensure they follow the rules created by governing bodies like FINRA, SEC, CFTC, and others. This includes requirements such as maintaining accurate records and accepting the burden of proof.

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