In the financial industry, RIA refers to a registered investment advisor. “Registered” indicates registration with a regulatory authority. The term “investment advisor” is formally defined by the Investment Advisers Act of 1940 (Advisers Act). While the regulation uses the spelling “adviser,” the more commonly used “advisor” is also acceptable. There are three elements which must be satisfied in order to meet the definition of an investment advisor: a firm that (1) provides advice or analysis on securities, (2) receives compensation for the advice provided, and (3) engages in a regular business of providing advice to others regarding securities. Additionally, an RIA may implement the investment advice provided, but managing the assets is not essential for a firm to be considered an RIA registered investment advisor.
The stock market crash of 1929 served as a catalyst for the Advisers Act. Congress determined that the securities market and investment advisory industry required greater oversight. Deeming the securities industry to be of national concern, Congress first enacted the Securities Exchange Act in 1934 providing for the regulation of the markets and the establishment of the U.S. Securities and Exchange Commission (SEC). The SEC is the federal regulatory authority over RIAs, and the Advisers Act outlines the RIA regulations which investment advisors must follow.
Registered Investment Advisor Requirements
The SEC is careful to note that registering as an RIA should not be considered RIA certification and does not imply a certain level of skill or training. However, certain requirements must be met for a firm to register with the SEC. Registered investment advisory firms managing $100 million or greater in assets are required to register with the SEC. Smaller advisory firms are generally required to register with state agencies. All registered investment advisory firms are subject to examination at any time by the applicable regulatory authority. Following its initial registration with the SEC, an RIA must meet renewal deadlines by filing an annual updating amendment which includes but is not limited to the value of assets under management (AUM), types of clients served, categorization by percentage of securities held in client accounts, description of advisory services and fees, and disclosure of all conflicts of interest.
RIA registered investment advisors bear a fiduciary duty to always act in the best interest of the client. The SEC maintains that fiduciary duty should be based on general principles which inform the written RIA regulations. They have affirmed that the fiduciary duty “comprises a duty of care and duty of loyalty.1” The advisor’s duty of care encompasses providing advice that is in the best interest of the client, seeking best execution of client trades, and performing regular monitoring of client accounts. The duty of loyalty necessitates full and fair disclosure of all material facts in the advisory relationship. The SEC emphasizes that RIA registered investment advisors must seek to eliminate or disclose all conflicts of interest. Furthermore, full and fair disclosure encompasses the nature of the client and the scope of services provided.
The SEC distinguishes between retail and institutional clients. Retail clients are generally individuals who invest their own money for their own benefit. Institutional clients are entities which invest money on behalf of others, typically a company or organization. Due to investment experience, access to market research, and size of accounts, institutional clients are presumed to have a greater level of sophistication than retail clients. Therefore, retail clients are subject to greater protection under RIA regulations.
RIAs are subject to registered investment advisor requirements which set forth extensive recordkeeping obligations. Books and records maintenance for prescribed periods includes but is not limited to firm trading activity, financial statements, marketing materials, client communication, and documentation to support performance calculations and suitability of investments. RIAs must adopt and implement a Code of Ethics applicable to all employees of the firm. Registered investment advisor compliance must incorporate policies and procedures which are adequate to address risks and to prohibit fraud. Furthermore, RIA regulations require that firms conduct an annual review of their policies and procedures and document their effectiveness.
The most common fee arrangement for an RIA registered investment advisor is for fees to be calculated as a percentage of the client assets managed by the advisor. Alternatively, an RIA may charge fixed or hourly fees that are not related to the size of a client’s account and may not require that the client have an account with the advisor. Typically, these fees are for consulting services such as financial planning, retirement planning, estate planning, or to develop a suitable portfolio allocation for the client to implement on their own. Offering consulting as a standalone service provides access to the registered investment advisory firm’s experience and expertise for investors who may not meet a minimum account size or who wish to seek an outside review of their investments.
Investment Advisor Representatives
An important related term to define is investment advisor representative (IAR). While an RIA is a firm, an IAR is a person who provides investment advice on behalf of a firm. Therefore, an individual person should not be referred to as an RIA, only the firm. An IAR’s registration is associated with the registered investment advisory firm for whom they work. As the name implies, IARs are considered representatives of the registered investment advisory firm for whom they provide advice. Consequently, IARs are expected to act in a manner consistent with the standards demanded by registered investment advisor requirements.
Registered Investment Advisor Compliance
Registered investment advisor requirements exist to protect investors. Similarly, an effective compliance program protects a registered investment advisory firm by adopting policies and procedures which are deemed adequate and effective. Registered investment advisor compliance can properly address risk and prohibit fraud which further promotes the protection of investors.
Is your organization interested in working with a registered investment advisory firm? Cornerstone’s RIA services are developed with the needs of Christian nonprofits in mind. As a fiduciary, our firm acts in the best interest of our clients to provide customized investment solutions. Our commitment to the fiduciary standard allows us to build lasting partnerships with our clients. Please contact us to learn more about Cornerstone and our approach to investment consulting and planned gift administration services.
- “Commission Interpretation Regarding Standard of Conduct for Investment Advisers,” SEC Release IA-5248 (June 5, 2019) ↩︎