Registered Investment Advisor can be a firm or a person who helps high net-worth individuals or corporations in managing their portfolios and provides advice to them about their investments. It is a fundamental obligation of RIA to deliver advice that acts in the favour of the client. It is their fiduciary duty. To become an RIA, it is necessary that the firm or individual is registered with either state securities administrator or Securities and Exchange Commission (SEC).
The need for registration of an investment advisor is dependent upon the value of the assets managed by them and their client base, that is, whether they deal with corporates, or individuals or both. Those investment advisors who have assets under management worth at least $25 million or provide their services to the corporations need to get them registered with the SEC, generally. Those advisors managing smaller amounts of assets and providing their services to individuals, typically get registration with state securities authorities.
In the US, when a person or corporation gets registered with SEC or state securities regulators, it does not mean that these two institutions are promoting or recommending the Registered Investment Advisor. Rather it only denotes that the investment advisors satisfy all the requirements stated by these institutions. While getting registration, the advisor needs to disclose the information related to the Asset Under Management (AUM), advisor’s style of investment, any disciplinary actions, and fees. The investment advisor firm is also required to disclose the key officer’s related information. Moreover, both firm and individual advisors need to inform SEC if there is any conflict of interest that exists presently and can arise in future. The information is updated on the annual basis.
Academicians and critics have put forth the argument that becoming an RIA is an easy process when compared to other professions like medicines, accounting, and law. RIA plays a critical role in society, though achieving registration is still a piece of cake. It is recommended that the process should become rigorous with coursework or certifications.
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The obligations of RIA are not limited to getting registration certificates from authorities, but they must follow certain procedures and practices when extending their services to their clients. The client must have knowledge about the conflict of interest, or any risk associated with the recommendations placed by them. Moreover, RIA must ensure that their client understands the recommendations and risks.
If RIA encounters a case where the client claims that the advice provided was not suitable with the position of the client, then the responsibility falls on RIA to provide justification for the advice and make clear that all the risks were disclosed beforehand. Therefore, RIA must prove the suitability of the recommendations.
In case SEC gets involved in the allegations imposed by the client of any RIA, then documentation plays a critical and crucial role. As per SEC, documentation is key to everything. Through documents, RIA must show the investment strategy employed along with the records indicated that the client had full knowledge about the risk profile of the investment recommended.
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RIA generally collects either of these two types of fees –
Flat fee – It is a fixed amount that is charged on an annual basis. The fixed fee is decided with the mutual decision of both adviser and the client.
Percentage of assets – It is a floating fee whose value is dependent upon the assets of the client managed by RIA. The fee is paid by the client only. Generally, the fee is 1% of the value of the total asset and with the increase in the assets base of the client, this percentage can be negotiated down.
Fee – The fee which must be paid to both a financial planner and investment advisor is dependent upon the services taken and the specific advisor. For example, if an investment advisor has shown a good track record for the past many years, the fee charged will be higher. An advisor generally generates income through three means, flat fee, fee as a percentage of assets or hourly fee. Moreover, if the advisor is able to sell any financial product, then he/she will make money through commission. Generally, in the US, an investment advisor charges a 0.02% to 2% fee on the percentage of assets under management.
On other hand for the financial planner, the fee ranges from US$1000 to US$3000 for a year. Planners fees can vary for fee-based, commission-based and fee only. Fee-based and fee-only planners charge on the basis of the plan created by them as per the client’s requirements. However, commission-based planner earns solely from the commission they earn by selling the financial products.
Relationship with client – Investment advisors need to keep the interest of the client as a priority as a fiduciary duty. Among financial planners, only fee-only planners have this duty and the other forms of advisors (commission-based and fee-based) do not have this duty.
Regulatory requirements – Investment advisors need to register with state and SEC if they manage clients with over US$ 100 million in assets. Financial planners are regulated by SEC and Financial Industry Regulatory authority (FINRA) if they manage clients with over US$ 100 million in assets.
License – Investment advisors need to hold Series 65 licenses and on the other hand financial planners can hold multiple licenses for selling financial products such as series 3, 6, and 7 licenses.