What is a registered investment adviser (RIA)?
A registered investment adviser is an investment firm that registers with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator. RIA firms are subject to rules and requirements meant to protect investors and the health of the broader financial system.
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RIA: The legal definition
The term “registered investment adviser” has two parts. First, we’ll look at what it means to be an investment adviser.
Investment adviser definition
In the U.S., the Investment Advisers Act of 1940 defines the role and responsibilities of an investment adviser, which is any person or firm that provides investment advice to clients in exchange for compensation. There are many different types of investment advisers. Some are individuals who advise a handful of clients on their portfolio management. Others are firms that manage billion-dollar investment funds.
The Advisers Act also authorizes securities regulators—such as the SEC and state regulatory agencies—to create rules for investment advisers to follow. Many of these regulations relate to required filings and reporting, as well as prohibited behaviors. These requirements help securities regulators prevent fraud, reduce systemic risk in the financial sector, ensure that investment advisers are acting in their clients’ best interests, and assign responsibility for any wrongdoing. Securities regulators also have the authority to examine the practices of investment advisers and levy fines when they find evidence of wrongdoing.
Registration with securities agencies
The second part of the definition is registration: Regulations require some investment advisers to register with either the SEC or with the securities agencies in the states where they do business. Registration comes with additional requirements for the investment adviser, typically in the form of additional reporting, recordkeeping, and disclosures.
Who has to register as an RIA?
Unless an exemption applies, all individuals or firms that provide investment advice to clients for compensation have to register with either a state securities regulator or the SEC. Where they register typically depends on the value of their assets under administration.
RIAs are typically investment management firms. Individuals who provide investment advice as the employees of an RIA are not required to register as RIAs individually. Instead, these employees are supervised persons of the RIAs.
Investment adviser representative (IAR)
At retail-facing RIAs (those with clients who are not accredited investors or qualified purchasers) employees of the RIA may also be investment adviser representatives (IAR) and subject to additional state licensing requirements.
There are no federal licensing requirements for individual IARs, but states generally require IARs to register where they have a place of business. To be an IAR, an individual must hold at least a Series 65 license by passing the Series 65 exam administered by the Financial Industry Regulatory Authority (FINRA) or otherwise meet state licensing requirements. Many states will waive Series 65 requirements if the adviser holds one of the following financial certifications:
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Certified Financial Planner (CFP)
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Chartered Financial Analyst (CFA)
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Chartered Financial Consultant (ChFC)
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Personal Financial Specialist (PFS)
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Chartered Investment Counselor (CIC)
Not every supervised person must register with the state as an IAR.
Where to register
SEC registration
Advisers with less than $100 million in assets under management (AUM) are not eligible to register with the SEC and instead register with the state securities regulator in any state where they sell securities, with narrow exceptions. In New York, advisers managing $25 million or more must register with the SEC (unless an exemption is available) because they are not subject to inspection by the New York State securities regulators.
Advisers with between $100 million and $110 million in AUM may elect to register with the SEC but are not required to do so.
Advisers with $110 million or more in AUM are required to register with the SEC unless an exemption applies.
State registration
Each U.S. state has its own securities laws (sometimes called “blue-sky” laws) that govern the sale of securities in the state, as well as a state securities regulator that enforces those laws. State laws lay out which investment advisers, if any, have to register with the state securities regulator.
Depending on their business activities, an adviser may need to register in multiple states. Investment advisers who are required to register in 15 or more states may instead register with the SEC, even if their assets under management do not reach the $100 million threshold required for SEC registration.
Even if an investment adviser is registered with the SEC, RIAs may still be subject to state blue sky notice filing requirements in states where they have a business presence.
Who is exempt from registering as an RIA?
The Advisers Act exempts certain people and entities from registration requirements. These include:
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Banks and credit unions
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Insurance companies
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Mutual funds
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Investment companies
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People who give investment advice as employees of a registered investment company or a bank
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Individuals who only give investment advice to their immediate family members
These people and entities are exempt mainly because they’re already subject to oversight by another regulatory authority. For example, banks are subject to federal banking regulators and insurance companies are regulated by state insurance regulators. Mutual funds and investment companies don’t have to register as investment advisers because they’re already regulated as investment companies under the Investment Company Act of 1940. Individuals who provide investment advice only to their immediate family members are exempt because the scope of their activities is presumed to be limited.
Exempt reporting advisers (ERAs)
Private fund managers are exempt from becoming RIAs if they meet the criteria for being an exempt reporting adviser (ERA). The law provides two exemptions for ERAs:
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Venture capital adviser exemption: This exemption is available to fund managers who solely manage venture capital funds. Unlike the private fund exemption, VC fund managers can raise an unlimited amount of capital without being required to register with the SEC. A venture capital fund isn’t just a fund that makes VC investments. “Venture capital fund” has a legal definition that requires the fund to refrain from certain activities and obey certain limits related to asset allocation.
Read more: Definition of a venture capital fund
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Private fund exemption: This exemption is available to fund managers who solely advise private funds and who oversee less than $150 million in total assets.
Registered investment adviser requirements
Being a registered investment adviser comes with specific responsibilities determined by securities regulators.
Fiduciary duty
By law, RIAs are fiduciaries. This requires them to understand their clients’ risk tolerance and to act in clients’ best interests.
The fiduciary duty is a higher standard than the ones broker-dealers must follow. Whereas RIAs provide investment advice on an ongoing basis in exchange for fees, broker-dealers work on commission and are only required by the SEC to give advice that is “suitable” for their clients. In 2018 the SEC adopted Regulation Best Interest, which requires broker-dealers to act in the best interest of their customer for retail investors, aligning broker-dealers more closely to the fiduciary standard.
Disclosures
RIAs are required to provide their clients with comprehensive written disclosures and supply a copy to the relevant regulatory agency. For SEC-registered investment advisers, instructions for creating these disclosures are found on Form ADV.
Disclosure documents outline an adviser’s fees, services, and any potential conflicts of interest. This transparency is meant to foster trust and confidence in the advisory relationship.
Oversight and inspection
RIAs are also subject to ongoing oversight to ensure they’re properly complying with regulations. Some regulations require RIAs to maintain detailed records of their activities and file annual reports with the SEC or relevant state securities authority.
Advantages and disadvantages of being an RIA
Being an RIA comes with significant compliance obligations that are both costly and time-consuming. But being an RIA also poses certain advantages:
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Greater flexibility: ERAs relying on the venture capital fund exemption are limited in the sorts of investments they can make and activities they can undertake—they have to remain within the statutory definition of a venture capital fund. ERAs that use the private fund registration exemption are limited to $150 million in AUM. None of these restrictions apply to RIAs. SEC registration can therefore make sense for investment firms trying to explore new asset classes, more balanced portfolio constructions, or expensive later-stage investments.
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Attracting investors: Some investors, such as large institutional investors, may be more willing to invest in a fund advised by an RIA. If you’re an RIA, you can use the designation in your marketing and outreach materials for prospective clients. Being an RIA tells investors that you have the industry credentials necessary to register and that your office has the professional capacity to comply with regulatory requirements and industry best practices.
How to become a registered investment adviser
To become an RIA, your firm must first meet the asset management requirements outlined above.
If the firm meets those requirements, you can register by filing Form ADV with the SEC or a state securities regulator.
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