A Registered Investment Advisor (RIA) is an individual or a company that receives compensation for providing investment advisory services. While many people and companies can use the term financial advisor, a registered investment advisor has a fiduciary responsibility to their clients and is registered with either the SEC or a state securities regulator. The SEC oversees investment advisors and offers resources to consumers to assist them in assessing the reliability of the companies they may consider for services. Unlike a broker, who is probably compensated by transaction volume, an RIA will usually receive payment as a percentage of the assets they manage for a client.
What Is Fiduciary Responsibility?
In basic terms, a fiduciary standard means that the advisor has a duty to put the client's interests first. It’s challenging to put your client’s best interest ahead of your own if you earn more money by making more trades, so some investors prefer fee-based advisors that are not compensated on a per-transaction basis. The Center for Fiduciary Studies says that a fiduciary is “someone who is providing investment advice or managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.” 1
Does a Broker also Have a Fiduciary Responsibility?
Brokers are likely to be registered representatives, not investment advisor representatives (IAR). A registered representative must meet a suitability standard when advising clients. This standard is less strict than the responsibility carried by a fiduciary. According to FINRA (the Financial Industry Regulatory Authority), the Suitability Rule requires that a firm or person have a reasonable basis to believe that a recommended strategy or transaction involving a security is suitable for the customer, based on reasonable diligence.
While FINRA is not a government agency, the SEC has delegated to that agency the authority to regulate and discipline brokers and broker-dealers. FINRA administers the exams that brokers must pass to become licensed to work directly with investing clients. Although brokers typically take the Series 7 and 66 exams, an IAR must pass the Series 65 exam. In some states, an IAR can bypass the Series 65 if they hold designation as a Certified Financial Planner, Certified Financial Analyst, Chartered Investment Counselor, or Chartered Financial Consultant.
Do I need an RIA or a Registered Representative?
Which type of adviser to choose depends on multiple factors, including the investor’s risk appetite, level of sophistication, and amount of investment capital. If you have a considerable portfolio and prefer to receive substantial guidance, engaging an RIA to provide a comprehensive strategy may be wise. On the other hand, if you know what you want to do with your investment funds, you may save money by using a transaction-based broker to execute your trades. The decision may also depend on your knowledge, comfort level with investing decisions, and the other resources you have at your disposal.
1. Forbes. Tools to Weed out Predatory Financial Advisors