What is a Registered Investment Advisor?

In the financial services industry, despite  the confusing array of names, titles and descriptions used, there are only two types of financial professionals advising and managing the finances and investments of clients- Brokers ( also known as broker-dealers), and Registered Investment Advisors (RIAs). Brokers, which can be a company or an individual, often use a myriad of generic names to describe themselves, such as financial consultants, investment consultants, registered representatives, and financial advisors. RIA's  are only known as Registered Investment Advisors, or sometimes Investment Advisors. If you are considering working with someone to assist you with your finances, they are one or the other, and it's important that you know which one you are dealing with, as there are significant differences between the two that greatly impact the relationship. To find out, simply ask if they are an RIA, and if so, ask them for a copy of their most current Form ADV (it must be provided to you by an RIA when requested). If you are dealing with a person or entity that is not an RIA, then you are dealing with a Broker. It's that simple.

There are two main differences between Brokers and RIA's. The first is remuneration. Brokers get paid on commissions  based on a sales transaction. This could be for any number of financial products, such as stocks, bonds, mutual funds, as well as insurance products and annuities. Conversely, RIA's provide a service (rather thana one-time transaction) and are forbidden to accept commission based compensation, but instead can only charge a management fee. This is typically expressed as a percentage of the investment portfolio under advisement, but can also be a fixed fee or an hourly charge.

The second difference can be described as the commitment to the client. A Broker has no legal duty to do what is in the best interest of the client; they are free to sell you products that maximize their own profitability. the only legal duty they have to the customer is a "suitability" standard- that is, the product being sold to you has to reasonably fit your needs, objectives and circumstances, in the sole judgment of the Broker. This is a low standard of care, one that allows for conflicts of interests, without a duty to be disclosed to the customer. As such, a Broker is only truly accountable to themselves, and has no ongoing legal obligation to the customer post sale.

By law, an RIA has the duty to work in the best interests of the client. this is known as "fiduciary standard", meaning the Investment Advisor must place his interests below that of the client, a duty of care and loyalty putting the client's interest first, foremost and always. The avoidance of conflicts of interests is important when acting as a fiduciary, and as such must be disclosed to the customer in the RIA's Form ADV (which is filled with the Securities and Exchange Commission at least once a year).

Stated simply, an RIA (a) provides personalized client specific financial advice and ongoing investment management for a fee, (b) is accountable for every recommendation they have ever made resulting in continuous and comprehensive client service, and (c) has an ongoing fiduciary duty of care and loyalty to the client which requires the adviser to act in the client's best interest.

Dually Registered

To make matters even more confusing, many companies operating in the financial services industry are dually-registtered, meaning that they are both an RIA and a Broker (yes, this is legal). Many of these companies describe themselves as "fee- based", a confusing term that blurs the relationship and as such has little meaning. By law, the dually-registered company and its employees are required to inform the clients "which hat" they are wearing when they are making recommendations, however this is often not done, is seldom clear and results in clients and results in clients not knowing who they are dealing with. This means clients must ask the right questions and have a clear understanding of how, who and what they are paying for.

Due Dilligence

Consumers should investigate any potential financial advisor before making a commitment. Information about brokerage firms and individual brokers is available online through FINRA's Broker Check program and by calling toll-free at 800-289-9999. Information about RIA's is available through  the SEC's Investment Adviser Public Disclosure (IAPD) program. Each state securities regulator also maintains a database on Brokers and RIA's. You can find out how to contact your state through the North American Securities Administrators Association. 

Make sure that the firm or person you are talking to has a current license or registration, and have no (or minor) complaints against them.