Registered Investment Advisor - RIA
A Registered Investment Advisor (RIA) is an advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission (SEC) or state securities authorities. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide suitable investment advice and always act in their clients' best interests.
BREAKING DOWN 'Registered Investment Advisor - RIA'A Registered Investment Advisor (RIA) is defined by The Investment Advisers Act of 1940 as a "person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications."
In general, investment advisors that have at least $25 million in assets under management or that provide advice to investment company clients are required to register with the SEC, while smaller advisors are required to register with state securities authorities. Registration of an investment advisor is not meant to denote any form of recommendation or endorsement by the SEC or state securities regulators. It simply means that the investment advisor has fulfilled all the requirements for registration as an investment advisor. In order to register with the SEC as an investment advisor, registrants must file Form ADV and keep it current by filing periodic amendments.
The RIA as a Fiduciary
In translating fiduciary principles into application, an RIA is required to implement certain practices and procedures to ensure conformance to the law. At the heart
of conformance is the registration form (ADV Parts I and II) that financial advisors must file with the SEC. It is ADV Part II; in which the advisor must disclose all material information a client needs in order to make an informed decision about the advisory relationship or a specific transaction. The information and disclosures required include:
• All material facts of any instance in which a conflict of interest may exist; past, present, or future
• Any type of arrangement or relationship the advisor has that could present a conflict of interest, including participation or an interest in any client transaction
• All material risks involved with methods of analysis used in determining suitability
• Any unusual risk involved in a specific investment strategy or security
This detailed information must then be compiled into a client brochure and written in clear language in a specified format, so investors may compare one firm to another as apples-to-apples.
If, at any point, an advisor is confronted by a client over the suitability of an investment, the burden is with the advisor to demonstrate that all measures were taken to disclose the risk, as well as to ascertain suitability. From the perspective of the SEC, documentation is everything. If the SEC were ever to get involved in the investigation of an investor complaint, they require full documentation on the investment strategy used, along with client records that demonstrate knowledge of the client’s investment profile and risk tolerance.