What is a Registered Investment Advisor (RIA)

What is a Registered Investment Advisor (RIA)

 

What is a Registered Investment Advisor (RIA)? Many people are confused by the term “Investment Advisor”, to whom it applies, what it means in regards to how an individual might interact with one, and even on the proper spelling – is it spelled “advisor” or “adviser”?

The United States Securities and Exchange Commission (SEC) defines the term this way:

“An investment adviser is a person or firm that is engaged in the business of providing investment advice to others or issuing reports or analyses regarding securities, for compensation. Investment advisers may include money managers, investment consultants, financial planners, general partners of hedge funds, and others who are compensated for providing advice about securities.1

FINRA, the Financial Industry Regulatory Authority defines the term like this:

“Although most people would use an ‘o,’ we purposely spell adviser with an ‘e’ when we talk about investment advisers. That’s because the laws that govern this type of investment professional spell the title this way.

Many investment advisers are also brokers—but these two types of investment professional aren’t the same. Technically, a broker is a registered representative, while common names for investment advisers include asset managers, investment counselors, investment managers, portfolio managers, and wealth managers”2

Finally, Investopedia provides this helpful summary definition of an RIA:

“A Registered Investment Advisor (RIA) is a person or firm who advises individuals on investments and manages their portfolios. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients’ best interests. As the first word of their title indicates, RIAs are required to register either with the Securities and Exchange Commission (SEC) or state securities administrators.”3

So, that is what the authorities have to say. Ultimately, RIAs are governed by the Investment Advisers Act of 1940, which defines when an individual is subject to the Act (basically, anyone who provides advice or recommendations on securities, for compensation, as their primary business function).

What the Act goes on to say is that, regardless of spelling, advisers and/or advisors have a fiduciary duty to clients. Fiduciary duty has a long history in the law, and includes the duties of loyalty, due care, and utmost good faith. Simply put, fiduciary law provides that RIAs must always act in their clients’ best interests.