Registered Investment Advisor

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A Registered Investment Adviser (RIA) is an investment adviser (IA) registered with the Securities and Exchange Commission or a state's securities agency. The numerous references to RIAs within the Investment Advisers Act of 1940 popularized the term, which is closely associated with the term investment advisor (spelled "investment adviser" in U.S. financial law). An IA is defined by the Securities and Exchange Commission as an individual or a firm that is in the business of giving advice about securities.

Individuals or firms that receive compensation for giving advice on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds are deemed to be investment advisers. It is also common for investment advisers to manage portfolios of securities. RIAs generally are paid in any of the following ways: a percentage of the value of the assets they manage for clients, an hourly fee, fixed fee, a commission on the securities they sell (if the adviser is also a broker-dealer).[1]

Standard[edit]

Fiduciary standard[edit]

An IA must adhere to a fiduciary[2] standard of care laid out in the US Investment Advisers Act of 1940. This standard requires IAs to act and serve a client's best interests with the intent to eliminate, or at least to expose, all potential conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not in the best interest of the IA's clients.[3]

Investment Adviser Fiduciary Standard vs. Broker-Dealer Suitability[edit]

The financial industry and lawmakers have yet to establish a consistent standard for providing investment recommendations to retail investors.

Section 202(a)(11)(C) of the Investment Advisers Act of 1940[4] exempts from the definition of an Investment Adviser (and therefore the associated fiduciary standard) "any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."

In Release 34-51523;[5] the Financial Industry Regulatory Authority (FINRA), the US Securities Self Regulatory Organization (SRO) having authority over Brokers and Dealers, determined that Broker-Dealers (BD) are "not to be deemed investment advisors" and therefore are not subject to the same fiduciary standards as IAs when recommending investments to clients, as are Registered Investment Advisers (RIA).

Registered Representatives (RRs) affiliated with a Broker Dealer are therefore required to recommend securities that are deemed "suitable" for non-institutional clients. The FINRA "Suitability" standard requires that a member shall make reasonable efforts to obtain information concerning a client's:[6]

  1. Financial status
  2. Tax status
  3. Investment objectives
  4. Risk tolerance
  5. Other information used or considered to be reasonable

RRs of a Broker-Dealer who also engage in the business of providing investment advice are required to affiliate with a Registered Investment Adviser. As Investment Adviser Representatives (IARs) they are held to the "Fiduciary Standard" as defined under the US Investment Advisers Act of 1940 when providing investment advice to clients. This requires the dually registered Financial Advisors recommending a security to clearly communicate to their clients whether they are brokering a suitable security as a RR or providing investment advice as an IAR and therefore acting as a fiduciary.[7]

In 2012, suitability and "know your customer" (KYC) rules will expand with FINRA rule 2111. This rule will effectively expand liability for recommendations of strategy. Over the years, investment advisors have been taught to know the customer's suitability, objectives, time horizon and risk tolerance, and to limit speculative or aggressive recommendations based on information from the customer. With the new rule 2111, brokers may be liable for their product and service recommendations which are part of a strategy. A strategy could include tax, retirement, investments, funds, or even estate planning. Therefore, a registered advisor may want to make better use of CPA advice or licensed attorneys.[8] "New FINRA Rule 2111 generally is modeled after former NASD Rule 2310 (Suitability) and requires that a firm or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”

Following are some of the more substantive changes under FINRA’s new "know your customer" (KYC) rules :

  • Firms’ and brokers’ efforts to get to know their customers are now expressly governed by a reasonableness standard.
  • Firms’ and brokers’ KYC obligations are now limited to knowing (i) their customers, and (ii) the authority of each person acting on behalf of their customers.
  • The new KYC rule expressly directs that firms and brokers should use reasonable diligence to know those facts required to (i) effectively service their customers’ accounts, (ii) act in accordance with any special handling instructions for their customers’ accounts, (iii) understand the authority of each person acting on behalf of their customers, and (iv) comply with applicable laws, regulations, and rules.
  • Firms and brokers should use reasonable diligence to retain their customers’ KYC information and keep it up to date.
  • The new suitability rule expressly identifies the following information to be used in determining suitability: (i) customer's age, (ii) other investments, (iii) financial situation and needs, (iv) tax status, (v) investment objectives, (vi) investment experience, (vii) investment time horizon, (viii) liquidity needs, (ix) risk tolerance, and (x) any other information the customer may disclose.
  • Suitability now expressly applies to “investment strategies” as well as investments, and it also expressly applies to recommendations to “hold” as well as recommendations to buy, sell, and exchange.
  • The new suitability rule directs firms and brokers to have a reasonable basis for believing an investment or strategy is suitable based on the information they obtain through reasonable diligence (as opposed to based on what their customers tell them).[9]

Uniform Fiduciary Standard[edit]

Section 913 of the Dodd-Frank Act[10] mandated that the SEC study whether a uniform fiduciary standard should be applied to brokers and investment advisers. The results of the SEC's study released in January of 2011[11] recommended that the SEC proceed with rulemaking to adopt a uniform fiduciary standard for brokers and investment advisers when providing personalized investment advice to retail consumers.

On March 1st, 2013, the SEC issued Release No. 34-69013[12] to request information for a cost-benefit analysis to determine the anticipated economic impacts of moving forward with uniform fiduciary standard rulemaking.

Registration[edit]

State Registered Investment Advisers[edit]

In general, RIAs managing assets totaling less than $100 million must register with the state securities agency in the state where they have their principal place of business.[13]

Federally Registered Investment Advisers[edit]

In general, RIAs who manage $100 million or more in client assets must register with the U.S. Securities and Exchange Commission (SEC).[14] While the process is not as involved as registration as a broker-dealer, it can be complex.[15]

Licensing requirements[edit]

Agents of the RIA who are charged with providing investment advice are called an "Investment Adviser Representative" (IAR). These IARs must generally complete The Uniform Investment Adviser Law Examination (see List of securities examinations) known as the Series 65 Exam, or by meeting the exam waiver requirement by holding one or more of the following pre-qualifying designations; Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC); Personal Financial Specialist (PFS), Chartered Financial Analyst (CFA), or Chartered Investment Counselor (CIC).[16][17]

See also[edit]

References[edit]

  1. ^ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  2. ^ http://www.eupraxiainvestorservices.com/fiduciary/
  3. ^ WEBCPA Financial Planners Push to Extend Fiduciary Standard
  4. ^ SEC.gov
  5. ^ SEC.gov
  6. ^ FINRA Manual Online Recommendations to Customers (Suitability)
  7. ^ NASD First Allied
  8. ^ [1]
  9. ^ Greenberg Traurig (July 13, 2012). "FINRA's New Know Your Customer and Suitability Rules". The National Law Review. Retrieved September 17, 2012. 
  10. ^ http://www.dodd-frank-act.us/Dodd_Frank_Act_Text_Section_913.html
  11. ^ http://www.sec.gov/news/studies/2011/913studyfinal.pdf
  12. ^ http://www.sec.gov/rules/other/2013/34-69013.pdf
  13. ^ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  14. ^ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  15. ^ SECLaw.com: Registration and Regulation of Investment Advisers
  16. ^ Investmentadviser.org
  17. ^ North American Securities Administrators Association (NASAA)

External links[edit]