Money and Responsibility

What's Special About A Registered Investment Advisor?

The financial world is littered with official-sounding titles that aren't backed by much, but a registered investment advisor (RIA) is a specific type of professional who has legal obligations to their clients. Let's take a look at what some of those are and why you might want to hire one as an investment advisor.

Fiduciary Duty

Not all people in the investment world have a legally binding responsibility to look out for their clients' best financial interests. In fact, there are tons of fee-free advisors who make their money by pushing financial products on behalf of other parties. That's a heck of a thing to think about when you're looking at your nest egg.

A registered financial advisor has a fiduciary obligation. That means when they provide you with advice, they are required to look out for your interests to the best of their abilities. When you ask them a question, the law requires them to respond with absolute candor and loyalty. Failing to do so comes with serious penalties.

Registration With the SEC

A RIA also has to be registered with the Securities and Exchange Commission (SEC) or state-level agencies with similar oversight powers. In most situations, SEC registration becomes mandatory once a registered investment advisor has at least $25 million under management.

Be aware, however, that this is not any sort of special affirmation from the SEC or your state regulators. Just as a general contractor doesn't come recommended by your state's licensing board, be aware that all this means is that they're on the regulatory radar screen. Government regulators will monitor their transactions and those of their clients for unusual activities, potentially flagging issues like fraud or malfeasance.

Licensing

If a RIA chooses to charge their clients fees based on a percentage of a client's assets under management, they must obtain a Series 65 license. They will have to undergo and pass an exam that covers ethical, legal, tax code, economic, and regulatory concerns in detail. The exam includes 130 questions, and the prospective RIA must get at least 94 of them right.

Compliance

Every RIA must submit regular paperwork regarding their own assets and those under management on behalf of their clients. This paperwork includes an explanation of their preferred investment style. If they operate a firm, they must also list the company's officers. Likewise, a RIA must declare all of their potential conflicts of interest. All compliance records are available to the public so you can review them.