The term Registered Investment Adviser (RIA) is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term "Investment Advisor" (IA) (spelled "Investment Adviser" in U.S. financial law). An IA is defined by the Securities and Exchange Commission as an individual or a firm that is in the business of giving advice about securities.
Individuals or firms that receive compensation for giving advice on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds are deemed to be investment advisers. It is also common for investment advisers to manage portfolios of securities. RIAs generally are paid in any of the following ways: a percentage of the value of the assets they manage for you, an hourly fee, fixed fee, a commission on the securities they sell (if the adviser is also a broker-dealer).[1]
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An IA must adhere to a fiduciary standard of care laid out in the US Investment Advisers Act of 1940. This standard requires IAs to act and serve a client's best interests with the intent to eliminate, or at least to expose, all potential conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not in the best interest of the IA's clients.[2]
The financial industry and lawmakers have yet to establish a consistent standard for providing investment recommendations to retail investors.
Section 202(a)(11)(C) of the Investment Advisers Act of 1940[3] exempts from the definition of an Investment Adviser (and therefore the associated fiduciary standard) "any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."
In Release 34-51523;[4] the Financial Industry Regulatory Authority (FINRA), the US Securities Self Regulatory Organization (SRO) having authority over Brokers and Dealers, determined that Broker-Dealers (BD) are "not to be deemed investment advisors" and therefore are not subject to the same fiduciary standards as IAs when recommending investments to clients, as are Registered Investment Advisers (RIA).
Registered Representatives (RRs) affiliated with a Broker Dealer are therefore required to recommend securities that are deemed "suitable" for non-institutional clients. The FINRA "Suitability" standard requires that a member shall make reasonable efforts to obtain information concerning a client's:[5]
RRs of a Broker-Dealer who also engage in the business of providing investment advice are required to affiliate with a Registered Investment Adviser. As Investment Adviser Representatives (IARs) they are held to the "Fiduciary Standard" as defined under the US Investment Advisers Act of 1940 when providing investment advice to clients. This requires the dually registered Financial Advisors recommending a security to clearly communicate to their clients whether they are brokering a suitable security as a RR or providing investment advice as an IAR and therefore acting as a fiduciary.[6]
In 2012, suitability and "know your customer" rules will expand with FINRA rule 2111. This rule will effectively expand liability for recommendations of strategy. Over the years, investment advisors have been taught to know the customer's: suitability, objectives, time horizon and risk tolerance and to limit speculative or aggressive recommendations based on information from the customer. With the new rule 2111, brokers may be liable for their product and service recommendations which are part of a strategy. A strategy could include tax, retirement, investments, funds, or even estate planning. Therefore, a registered advisor may want to make better use of CPA advice or licensed attorneys.[7] "New FINRA Rule 2111 generally is modeled after former NASD Rule 2310 (Suitability) and requires that a firm or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
In general, RIAs managing assets totaling less than $100 million must register with the state securities agency in the state where they have their principal place of business.[8]
In general, RIAs who manage $100 million or more in client assets must register with the US Securities and Exchange Commission (SEC).[9] While the process is not as involved as registration as a broker-dealer, it can be complex.[10]
Agents of the RIA who are charged with providing investment advice are called an "Investment Adviser Representative" (IAR). These IARs must generally complete the FINRA (List of Securities Examinations) Series 66 in addition to the Series 7 or Series 6 Exams, or by meeting the exam waiver requirement by holding one or more of the following pre-qualifying designations; Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC); Personal Financial Specialist (PFS), Chartered Financial Analyst (CFA), or Chartered Investment Counselor (CIC).[11][12]