A Registered Investment Advisor, or “RIA” as it is commonly abbreviated, is a person or company engaged in the investment advisory business. That means that they engage in the regular business of providing, for compensation, either directly or through publication, advice on the value of securities or on the advisability of investing in, buying, or selling securities; or, they engage in the regular business of providing, for compensation, either directly or through publication, analyses or reports covering securities.
RIAs have a fiduciary duty or fundamental obligation to always act in the best interest of their clients and to provide suitable investment advice to their clients. In essence, a RIA owes its clients a duty of undivided loyalty and utmost good faith. RIAs must disclose any activity that may present a conflict of interest with any client and they are required to take steps reasonably necessary to fulfill such obligations. This would include, but in no way be limited to, providing full and fair disclosure of all material facts to clients and prospective clients. Facts are deemed to be “material” if a reasonable investor would consider them to be important in making an investment decision. Most RIAs provide services such as individualized advice and portfolios customized to fit specific client needs.
To comply with their fiduciary obligations, RIAs must implement certain policies and procedures. RIAs must file Form ADV Parts I and II annually with the Securities and Exchange Commission (SEC). This is done through the Investment Adviser Registration Depository (IARD). ADV Part II is where the firm must disclose all material information a client needs to make an informed decision about the advisory relationship or specific transactions. These disclosures include: any past, present, or future conflicts of interest; any material risks involved in the methods of analysis or investment strategies; as well as certain disciplinary matters and financial disclosures.
Registered Investment Advisor Registration
In 1940, Congress passed the Investment Advisers Act of 1940, a U.S. Federal Law that defines the roles and responsibilities of investment advisors. Generally, firms who meet the definition of providing investment advisory services must register either with the SEC or with state securities regulators. However, there are some exemptions for professions that provide investment advisory services that are “solely incidental” to the firm or individual’s main interests, including banks, broker-dealers, accountants, lawyers, and more.
SEC Registration vs. State Registration
Whether a firm should register with the SEC or with a state securities regulator is usually determined by the volume of regulatory assets the firm has that receive continuous and regular supervisory or management services. These regulatory assets are referred to as a firm’s “Assets Under Management” or “AUM”.
In general, firms that have over $100 million of regulatory AUM either at the time of registration or will within 120 days of filing are required to register with the SEC. Firms that provide advice to investment company clients are also required to register with the SEC – regardless of their total AUM. Smaller advisors are required to register with state securities authorities instead. There are, of course, exceptions to these rules:
- Pension consultants that provide investment advice to plans with $200 million or more in assets may register with the SEC.
- Internet investment advisors that provide guidance through an interactive website may register with the SEC, but only if the SEC has approved of the website as a website where software-based models or applications provide investment advice based on personal information each client provides through the website.
- Investment advisors that are required to register in more than 15 or more states may also choose to register with the SEC, but only if the 15 or more registrations are required instead of optional.
- Firms that own, are owned by, or are under common ownership with an SEC registered investment advisor may be able to register with the SEC, even with an AUM of under $100 million.
- A firm with its principal office and place of business in the State of New York will generally register with the SEC if it has $25 million or greater AUM.