An RIA firm, or registered investment advisor firm, is a company that provides financial advice and management services to clients, primarily focusing on investments and wealth management. All RIAs register with either the U.S. Securities and Exchange Commission (SEC) or a state-level authority. One of the main reasons why working with an RIA is so desirable is that they all must abide by a 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 its clients can help you decide whether it’s the right path for you.
The true definition of a registered investment advisor comes from the Investment Advisers Act of 1940. An RIA is described 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
An RIA firm offers a range of financial services focused on helping clients manage and grow their wealth. The firm develops tailored investment strategies based on individual financial goals, such as retirement, education savings or long-term growth.
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.
What is a Fiduciary
When an RIA states that it is a fiduciary, it means that the RIA follows a set of fiduciary standards which indicates that 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 an 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
One of the most important benefits with working with an RIA from is the fiduciary standard to which they abide by. the fiduciary standard goes a long way toward combating conflicts of interest in most situations, 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.
An RIA can offer personalized advice based on the client’s investment objectives, risk tolerance, age and life stage. They can pinpoint strategies or investments that may be best suited to reaching their goals and help guide clients through major life changes or periods of market volatility. Because RIAs are fiduciaries, they are generally more objective in their approach.