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| Securities Professionals and Their Firms | ||||
|---|---|---|---|---|
| Attributes | Registered Representative (RR) | Broker-Dealer (BD) | Investment Adviser Representative (IAR) | Registered Investment Adviser (RIA) |
| Also known as | Stockbroker | Securities dealer | Financial adviser | Financial advisory, wealth manager |
| Primary Regulating Bodies | FINRA | FINRA, SEC | SEC, state regulators | SEC, state regulators |
| Primary Services | Buying and selling securities on behalf of clients | Facilitating trading of securities | Providing financial advice and planning services | Managing investment portfolios and providing financial advice |
| Compensation | Commissions | Fee-based or Commission-based | Fee-based | Fee-based |
| Examples | Employees of major brokerages like Morgan Stanley | Morgan Stanley, Merrill Lynch, Edward Jones, UBS, Wells Fargo, as well as independent broker-dealers (IBDs) | Employees for firms like Merrill Lynch, JPMorgan, and independent RIAs. | Merrill Lynch, JPMorgan, and independent RIAs. |
Federal and State Registration for RIAs
If providing investment advice or asset management services is vital to your services, the next step to becoming an RIA is to register your firm with either the SEC or the state(s) where you’ll be doing business.
Series 65 test-takers are not required to be sponsored by a broker-dealer, as they are for most other securities-related exams administered by FINRA.
However, you will not have to do this if providing investment services or advice is purely incidental to your practice. Professionals who are often exempt under this exception include the following:
- Accountants
- Attorneys
- Engineers
- Teachers
- Bankers
- Broker-dealers
- Publishers
- Advisors who work only with U.S. government securities
- Advisors who are registered with the Commodity Futures Trading Commission and for whom providing investment advice is not a primary line of business
- Employees of charitable organizations
SEC Registration Eligibility
Here are the SEC requirements on the type of registration an RIA needs, which depend on how much in assets you manage:
- Under $25 million of assets under management (AUM): A small adviser with less than $25 million in AUM is prohibited from SEC registration if its principal office and place of business are in a state that regulates advisers (all states except Wyoming).
- Between $25 million and $100 million of AUM:
- Required to register with the SEC if its principal office and place of business is in New York or Wyoming unless otherwise exempted.
- Prohibited from SEC registration if its principal office and place of business are in any state except New York or Wyoming, and the midsized adviser is required to be registered in that state. If the midsized adviser is not required to be registered in that state, then the adviser must register with the SEC, unless a registration exemption is available.
- Between $90 million and $110 million of AUM:
- May register with the SEC when it reaches $100 million of AUM.
- Must register with the SEC once it reaches $110 million of AUM, unless otherwise exempted.
- Once registered with the SEC, is not required to withdraw from SEC registration and register with the states until the adviser goes lower than $90 million of AUM.
- Over $110 million in AUM: A large adviser with at least $110 million of AUM is required to register with the SEC, unless otherwise exempted.
Any firm or individual who acts as an investment advisor on behalf of an investment company is also required to file with the SEC, no matter the amount of AUM.
Firms that register with the SEC are not required to file with states, but they must file a notice of SEC registration with each state where they do business. Most states don’t require registration or filing of notice if the advisor has less than five clients in the state and does not have a place of business there.
Most firms register with these entities as corporations, with each advisor acting as an investment advisor representative (IAR).
RIAs and Form ADV
The next step in registering is to create an account with the Investment Adviser Registration Depository (IARD), which FINRA manages on behalf of the SEC and states. (A few states do not require this, so advisors who only do business in those do not have to go through this process.) Once the account is open, FINRA will supply the advisor or firm with a CRD number and account ID information. Then, the RIA can file Form ADV and the U4 forms with either the SEC or states.
Form ADV is the official application document for applying to become an RIA. It has several sections, and all must be completed, although only the first section is electronically submitted to the SEC or state government for approval. Part II of the form serves as a disclosure document that is distributed to all clients. It must clearly list all services supplied to clients, as well as a breakdown of compensation and fees, possible conflicts of interest, the firm’s code of ethics, the advisor’s financial condition, educational background and credentials, and any affiliated parties.
Form ADV must also be uploaded electronically into the IARD and made available to all new and prospective clients. Preparing and submitting these forms typically takes most firms a few weeks, and the SEC must respond to the application within 45 days.
Some states may respond as soon as 30 days, but requests for additional information often delay the process. All firms that register with the SEC must also create a comprehensive compliance program that covers all aspects of their practice, from trading and account administration to sales and marketing and internal disciplinary procedures.
Once the SEC approves an application, the firm can start work as an RIA, filing annual amendments to Schedule 1 of the ADV and updating all of the firm’s relevant information (such as the AUM). In addition, while the SEC has no specific financial or bonding requirements for advisors, such as a minimum net worth or cash flow, it does examine the advisor’s financial condition during the application process.
Most states require RIAs to have a net worth of at least $35,000 if they have custody of client funds and $10,000 if they do not. RIAs who fail to meet this requirement must post a surety bond. (The rules for this requirement and several other aspects of registration vary from state to state.)
IARs vs. RRs
Financial professionals become IARs and establish RIAs because it allows them greater freedom to structure their practices—more so than for RRs who also advise and buy and sell securities for individual investors, usually as employees of brokerage firms.
RRs who work for broker-dealers—aka stockbrokers—pay a percentage of their earnings as compensation for their back-office support and compliance oversight.
Brokers also usually work on commission, while most RIAs charge their customers either a percentage of assets under management or a flat or hourly fee for their services. Many RIAs also use another firm, a custodian like Schwab or Fidelity, to house their clients’ assets instead of holding the accounts in-house. This simplifies recordkeeping and administration.
Despite the similar-sounding names, registered representatives (RRs) are not the same as investment advisor representatives (IARs). RRs work for a brokerage firm, serving as its representative for clients trading investments. Brokers are RRs.
Fiduciary Standard
Although the SEC and the states have the responsibility of overseeing RIAs, FINRA has tried at various points to get Congress to let it take on the task. Advisors see FINRA substantially lowering the protection given to RIA clients, as RIAs are legally required to act in a fiduciary capacity for their clients at all times. Brokers and securities licensed reps only have to meet the suitability standard, which only requires that a given transaction performed by a broker must be “suitable” for the client at that time.
What Are the Primary Steps To Becoming an RIA?
Establishing an RIA involves several key steps. First, you need to pass the Series 65 exam or have a valid Series 7 and Series 66, as this is required by most states. Second, draft your firm’s compliance documents, including Form ADV Parts 1 and 2, which describe the nature of your business, types of clients, fees, and potential conflicts of interest. Then, register with the SEC or state regulator by filing the Form ADV along with other required forms. Finally, carry out an ongoing compliance program to follow SEC regulations.
How Much Does It Cost To Start an RIA?
Costs to start an RIA can vary widely depending on a number of factors, including state registration fees, legal and compliance consulting fees, technology costs, and operational expenses. Generally, the startup cost can range from $10,000 to $50,000. However, ongoing costs such as compliance, technology, and staffing should also be considered in the budget.
Can I Operate My Ria in More Than One State?
Yes. Nevertheless, each state will have its own registration requirements, so you’ll need to ensure you follow the regulations in each state where you do business. If your RIA manages $100 million or more in client assets, you can register with the SEC at the federal level instead of with state securities authorities, which will allow you to offer services in multiple states more easily.
What Is the Fiduciary Duty of an RIA and Why Is It Important?
The fiduciary duty of an RIA is a legal obligation to act in the best interests of its clients. This means an RIA must provide investment advice that best meets the client’s needs, even if it’s not in the RIA’s own best interest. This is important as it ensures that the advice provided to clients is based only on their needs, goals, and risk tolerance, which helps to build trust and confidence in the relationship.
The Bottom Line
Registered Investment advisors enjoy greater freedom than their counterparts in the industry who work on commission. They are also required to adhere to a much higher standard of conduct, and most advisors feel strongly that this should not change.
Of course, those who register to become RIAs must also contend with the normal startup issues that most new business owners face, such as marketing, branding, and location, in addition to the registration process.
