What Is a Registered Investment Advisor?

An Overview of What an RIA Is and What It Does for New Investors

Registered Investment Advisor Definition
A registered investment advisor is a firm, represented by a qualified individual who has passed certain regulatory requirements, to offer advice on securities or assets in exchange for compensation. Not all RIAs are the same or even have the same business model. Hero Images / Getty Images

A registered investment advisor, or RIA, is a "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" according to The Investment Advisers Act of 1940. Generally speaking, an RIA is a limited liability companylimited partnership, or other business entity that has been registered through the proper channels, submitted the necessary forms, and been approved by the regulatory body that will oversee it; either the Securities and Exchange Commission or one of the many states depending on the specific conditions and circumstances of the business itself including its assets under management and the number of jurisdictions in which it operates.

Each registered investment advisor is represented by individual men and women who have met whatever licensing or examination requirements enforced by the regulatory body overseeing the firm itself, which is often either the Series 65 or the Series 66 + the Series 7. Sometimes, these requirements can be waived when the person possesses an advanced professional certification such as being a Chartered Financial Analyst, or CFA. In the case of independent RIAs, the representative is often the owner or partner of the firm itself. For larger financial institutions, the RIA is most likely a subsidiary of the parent holding company.

One of the things that makes registered investment advisors different from other firms is that it is bound by a fiduciary duty. This is the highest standard of care under the American legal system and requires that the RIA always put the interest of the client above its own.

This is a much more stringent rule than the "suitability" standard to which stock brokers are held on taxable accounts.

How Does a Registered Investment Advisor Function in the Real World?

In the old days, a registered investment advisor would likely be staffed with a highly skilled asset manager who can invest client money in individual stocksbondsREITs, and other securities without having to outsource the job to a third-party; a man or woman of sufficient knowledge and experience to sit behind a desk all day and analyze balance sheetsincome statementsannual reports and 10-K formsproxy statements, and other disclosures to decide what opportunities represent the best long-term, risk-adjusted probabilities of providing good returns to clients.

 

These days, a quick survey of the industry seems to reveal that only a small percentage of RIAs fall into that role. In fact, in my own head, I break down registered investment advisors into several categories based upon the primary function they are providing with the two most important being asset management companies and traditional investment advisors or financial planners.

Asset Management Companies Organized as a Registered Investment Advisor

These are the honest-to-God investors putting money to work in the ultimate end securities such as individual stocks and bonds; the folks reading 10-K filings and staring at Bloomberg machines.  They can manage portfolios directly for clients in private accounts in exchange for some sort of fee or compensation, they can sponsor or manage mutual funds, index funds, and exchange-traded funds, they can manage hedge funds. Generally, they aren't engaged in financial planning or wealth management per se.  Their job is to take a pile of money and put it to work in the ultimate end securities according to an investment mandate.  

Not all asset management companies are organized as registered investment advisors but several of the most respected are.

My own firm, ​, is an asset management company that designs, constructs, monitors, and maintains bespoke portfolios for affluent and high net worth individuals, families, and institutions with at least $500,000 in investable assets who want to put their wealth to work alongside my own family's capital. We expect the clients will hold these custom portfolios of stocks, bonds, and other securities in their own custody account. Other asset management companies include Franklin Templeton, Vanguard, PIMCO, and BlackRock, to name a few.

To learn more, read my article on asset management companies.

Traditional Investment Advisors and Financial Planners Organized as a Registered Investment Advisor

A huge part of the RIA industry, these are firms that have men and women who sit down with individuals and families, figure out what they need, then recommend an asset allocation.

The investment advisor seeks to be a central spoke in the client's wealth planning needs, focusing on things like helping to manage mandatory distribution requirements on retirement accounts or finding the right 529 college savings plan. They are there to hold the client's hand during stock market crashes. Some investment advisors in this mold may have relationships with other specialists, such as tax attorneys and tax accountants, who can help clients structure family trusts or lower estate tax burdens through careful planning.

These types of investment advisors frequently have discretion on how to invest client assets but instead of managing the assets themselves, they outsource the job to asset management companies by having the clients buy mutual funds, index funds, and exchange-traded funds or, in the case of high net worth clients, opening individually managed accounts with the asset management company through a third-party asset manager platform at a global custodian. In recent years, a number of investment advisors who are engaged in this type of business have begun thinking of asset management outsourcing as a "best practice" so they can focus on the client's needs and not managing money. Whether or not the additional layer of fees is justifiable is up to the client to decide.  

Making it even more confusing for new investors is the fact that some asset management companies have their own related advisory businesses in this mold, as well, which then steer the clients into the firm's asset management products and services; two separate and distinct operating units. Vanguard, J.P. Morgan, and UBS are examples of this. Adding even further confusion is the fact that, sometimes, it can look like this is the case when it's not. Take, for example, a famous East Coast registered investment advisor that caters to the super-rich. It's really an asset management company.  It usually charges a flat 1.50% on invested equity for all client balances under management and requires a minimum investment of $5 million to $10 million to establish an account. It also sponsors a few mutual funds which are open to the general public or bought by other investment advisors on behalf of their clients.Those funds, which have performed satisfactorily over long periods of time, pay a 1.25% management fee to the firm. This firm will sometimes have its own private clients buy shares of the mutual fund. The difference here is, because the mutual fund is run by the same people running the private accounts, it's really a way for them to help their clients save money, shaving off 0.25% per annum in costs as the firm waives the 1.50% fee on the portion of a private account invested in the proprietary funds.  

Stock Brokers Are Not Registered Investment Advisors

One commonly confusing fact new investors sometimes fail to grasp is that regional brokerage houses such as Edward Jones are broker-dealers, not registered investment advisors.  This means, even if you refer to your stock broker as your investment advisor, it is not the same thing.  These broker-dealers are not held to the same fiduciary duty RIAs are on taxable accounts. In addition, many RIAs operate on a fee-only model, which means their revenue is generated from fees on assets under management, flat fees, hourly fees, or other fees (to learn more, read Registered Investment Advisor Fees). Most broker-dealers, in contrast, make money by earning a profit on commissions, getting clients to buy mutual funds with sales loads, earning kickbacks on annuities they can convince the client to purchase, etc.  

What I Would Look for If I Were Hiring a RIA To Manage My Family's Money

If I weren't a managing director of Kennon-Green & Co., what would I look for if I were seeking a registered investment advisor to handle my family's investments? I touched on this a bit in What to Look for in Your Search for a Registered Investment Advisor, but my personal answer includes the following:

  • I'd want to find a RIA working on a fee-only basis as I believe it significantly lowers conflicts of interest. I want them choosing investments based on what is right for me, not because they get paid to push some particular fund or product on me.
  • I'd want to find an RIA that was an actual asset management company so it was me and the representatives of the firm at the table with no intermediary and no double layer of fees except in rare cases (e.g., smaller accounts that don't have the scale for individual stocks or bonds or the occasional use of a basket approach in certain industries, such as pharmaceuticals, when the industry appears significantly undervalued).
  • I'd want the RIA's owners and staff to have a respectable amount of their own family's money invested in similar and, in some cases, the same securities and strategies used for my capital.
  • I'd want the RIA's owners and staff to be independently wealthy, ideally with a background in running businesses or finance.
  • I'd want the RIA to have reasonable fees. For me, that means at the absolute high end, the most I'd be willing to pay under ordinary circumstances would be 1.50% of assets under management per annum unless dealing with small accounts that cannot be accommodated easily. For certain strategies, such as passively managed private index accounts, I'd want the fees to be considerably lower, perhaps as low as 0.25%, but the 1.50% would be my upper limit if putting more than half a million dollars to work except in cases where the RIA was willing to manage on a performance basis, receiving no money unless I made money, too, but getting a cut of the profit if I generated a profit.
  • I'd want quarterly letters from the RIA's portfolio managers detailing their current thinking.
  • I'd want the RIA to be willing to shut the doors to new clients when bargains were scarce if their total assets under management became sufficiently large that it posed a problem to finding and taking advantage of new opportunities.  
  • I'd want to be able to tailor my portfolio to my own circumstances.
  • I'd want my assets held by a third-party custodian such as a bank trust department, that charged reasonable custody fees, and which had a rock solid balance sheet.

I'd deal with my attorneys, tax specialists, and other planning needs separately, having my team work together.

Don't Forget to Pull the Form ADV on Any Registered Investment Advisor You Are Considering

You're also going to want to pull the RIA's Form ADV, which discloses all sorts of information about firm's business practices, the educational and professional experience of the decision-makers, whether or not any of the representatives have been involved in certain events (e.g., bankruptcy or sanctions for fraud), typical fee arrangements, breakpoints for fee discounts, billing terms, and much more. For example, certain firms might offer a significant reduction in published fee rates for universities or religious institutions. One RIA might bill clients quarterly, in advance, based on a snapshot of the net liquidation value of their account on the first day of the quarter while another might bill in arrears for services already rendered at the end of every quarter using the weighted average daily balance method.