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What’s an ETF? How can you invest in the bond market? Is it a smart idea to buy mutual funds? If you’re just getting started in investing, you probably have lots of questions about the equities you should invest in and how you can maximize your profits.
A registered investment advisor (RIA) is an investing expert who can help guide your investment strategy and help you minimize investment risk. But what exactly does an RIA do — and how much will an RIA cost you? Let’s take a closer look at what RIAs do and how they differ from other types of investment professionals.
What Does RIA Stand for?
RIA stands for registered investment advisor. The term RIA is a legal classification that specifically refers to an investment firm that’s registered with the Securities and Exchange Commission (SEC) or its state control board. A company cannot call itself an RIA if it isn’t registered with either the SEC or its state government.
Most RIAs are corporations or partnerships. To qualify for registration as an RIA, an investment advising firm must be headed by an investment advisor or a team of investment advisors who have passed FINRA’s minimum required RIA exams. This typically includes the Series 7 exam and either the Series 65 or Series 66 exam, tests on the basics of investing and the stock market. Passing these tests proves that the firm’s management knows enough about the investing landscape to offer reliable advice to its clientele.
What Does an RIA Do?
An RIA may provide you with a wide range of investment advice and services. Some of the most commonly-offered services include:
- Asset management. Your RIA will first sit down with you and learn more about your unique financial situation and your investing goals. From there, you’ll hand over power of attorney to your RIA to buy, sell and trade assets like stocks, bonds and funds on your behalf. Your RIA may rebalance your portfolio throughout the year and send you regular reports on how your money is growing.
- Retirement planning. Will you have enough money to maintain your current lifestyle after you retire? An RIA can help you decide where to retire and how much you’ll need to save in order to maintain your current lifestyle.
- Estate planning. Your RIA can help you decide how to split your inheritance if you have multiple heirs. They can also help you minimize tax contributions.
- Insurance services. Some RIAs are also licensed to sell life insurance.
The specific services you’ll have access to will depend on the RIA you choose.
RIA vs. Broker-Dealer
Many investors confuse RIAs with broker-dealers. Broker-dealers and RIAs both buy and sell assets on your behalf but only RIAs are fiduciaries.
A fiduciary is an advisor legally obligated to act only in your best interests. When your RIA registers with the SEC or state board, it agrees to take steps to avoid financial conflicts of interest with clients. If an RIA fails to uphold its fiduciary standard, it may lose its designation.
Most RIAs accomplish this by changing you a flat-rate fee or an hourly fee for asset management services instead of accepting commissions on the sale of particular assets. This means that when you work with an RIA, you know for sure that the advisor recommending purchases and sales to you isn’t receiving a kickback from any outside company.
Broker-dealers, on the other hand, aren’t required to register with the SEC. This means they only need to meet a “suitability” standard instead of the full fiduciary standard. By the suitability standard, broker-dealers must recommend products and services that are “suitable” to your needs. Most broker-dealers make money on commission when they recommend particular purchases.
The suitability standard is much less strict than the fiduciary standard. If you want to make sure that you’re getting 100% unbiased investment advice, it’s always better to choose an RIA to manage your assets.
RIA vs. Financial Advisor
The terms “RIA” and “financial advisor” also aren’t interchangeable. Let’s take a look at a few of the differences between an RIA and a financial advisor.
The term “financial advisor” is a catch-all term that refers to any individual who offers financial advice or services in exchange for a fee. A financial advisor might offer everything from asset management to general budgeting advice to insurance sales. Nearly any financial professional can call himself or herself a financial advisor. There’s no type of exam or registration required to advertise yourself as a financial advisor.
On the other hand, the term “RIA” is a legal classification. The only companies and advising firms that may call themselves RIAs are those who have completed the necessary FINRA exams and registered with the correct board of control. RIAs may offer a range of financial services, but they usually focus on asset management.
All RIAs may consider themselves financial advisors. However, every financial advisor isn’t an RIA.
How Much Do RIAs Cost?
Most RIAs charge clients a flat-rate annual percentage fee based on the dollar amount of assets you have under management. For example, if you have $100,000 of assets in your portfolio and your RIA charges a 2% annual fee, you’ll pay $2,000 for service each year. This helps the RIA avoid the inherent conflict of interest that comes with accepting commissions from outside companies.
Most RIAs charge between 1% and 2% of your total asset balance each year. If you have a higher total asset balance, you’ll pay a smaller percentage in annual fees. Many RIAs also charge an annual flat-rate fee in addition to your percentage fee. This flat-rate fee might fall between $2,500 and $7,500 annually, depending on the specific services you need.
How to Find an RIA
With so many RIAs, how can you find the one that’s right for your needs? The key to choosing the right RIA is to work with an advisor whose investing strategy matches up with your goals.
Begin by checking out our list of the top investment advisors in the city closest to you. From Nashville, Tennessee to New York City, we’ve compiled a list of some of the largest RIAs in most major cities. Take a look at each advisor’s account minimums and investment strategies and schedule a consultation with one that fits your needs.
At your consultation, you should ask your investment advisor about his or her individual investing strategy, fee structure and services offered. Don’t be afraid to ask your advisor plenty of questions to make sure that you understand how your RIA will manage your money and your investments. Don’t feel 100% sure that the company you’re meeting with is right for you? Move onto another option.
You can also use SmartAsset's free tool to find 3 advisors in your area. You then have the freedom to choose whichever advisor is best for your situation.
Get an RIA for Your Team
Whether you’re getting ready to start your journey toward retirement or you want to create a stream of passive income, an RIA can be an invaluable asset for future planning. But remember that every RIA doesn’t use the same investing strategy. Each RIA is as individual as the advisors and financial planners that make up the team. This makes it especially important to do your research and compare multiple RIAs before you choose the investing team that’s right for you.