A registered investment advisor (RIA) is a person or firm that provides advice about buying or selling securities. Registered investment advisors are characterized by their commitment to a duty of loyalty to put their clients’ interests above their own. The duty of loyalty is the highest standard of care in the U.S. legal system. It is a much stricter rule than the “suitability” standard followed by brokers for taxable accounts. This standard requires brokers to make buy and sell recommendations based solely on their clients’ needs.
How does an RIA work?
Each registered investment advisor is represented by individuals who have met the licensing or examination requirements imposed by the regulatory agency overseeing the firm, such as passing the Series 65 or Series 66 and Series 7 exams. These requirements can sometimes be waived if the individual has an advanced professional designation, such as a Chartered Financial Analyst (CFA).
If it’s a firm, the RIA is often a limited liability company or a limited partnership or another business entity registered with the Securities and Exchange Commission if it manages at least $25 million in assets under management or provides advice to investment company clients. It may be registered in the state in which it operates.
The representative is often the owner or partner of the firm itself in the case of a small, independent RIA. It is common for a registered investment advisor (RIA) to be a branch of the parent holding company of large financial institutions.
Asset Management vs. Asset Allocation
Registered investment advisors are equipped with highly skilled asset managers capable of investing client funds in individual stocks, bonds, and other securities. The manager is someone who possesses the knowledge and experience to analyze balance sheets, income statements, annual reports, 10-K forms, proxy statements, and other disclosures to make decisions about investments that provide the best long-term options and fit the risk to achieve good returns for clients.
Many registered investment advisors recommend asset allocation plans for clients. They leave asset management decisions to third parties. Department heads and employees at these firms strive to be the central speakers for their clients’ wealth planning needs. They focus on matters such as managing required distributions from retirement accounts, finding the appropriate 529 college savings plan, or reassuring clients during stock market downturns.
What to look for when hiring a registered investment advisor
There are many factors to consider when deciding to hire a registered investment advisor. Some key things to think about are that the RIA should work on a fee-only basis. They should charge direct fees from you for their work, not fees or commissions from companies for selling their investment products to you. Fee-only advisors may charge fees that are a percentage of the assets under management or an hourly fee. They may use another system based on fees.
You should look for an RIA that does not outsource asset management to another firm if you prefer to avoid fees from two companies. The annual fees of the RIA should not be higher than 1.5% of the assets under management, and should be much lower, perhaps no more than 0.25%, for passively managed index accounts.
The RIA owners should have a good amount of their own money invested in securities and similar strategies that they will use for your capital.
The RIA should provide quarterly updates on the managers’ thoughts on the assets.
They should
On RIA keeping your assets with a regulatory entity, such as a bank’s credit department, which charges reasonable custody fees and has a very strong security.
You will also want to consider the RIA Form ADV, which discloses all kinds of information about the company’s business practices and the educational and professional experience of the decision-makers. It will inform you if any of the representatives have filed for bankruptcy or committed fraud.
The ADV form will also disclose fee arrangements and billing terms. One RIA may bill clients quarterly, in advance, based on the net fair value of their account on the first day of the quarter. Another may bill for services rendered thereafter.
Source: https://www.thebalancemoney.com/what-is-a-registered-investment-advisor-357220
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