What exactly does this title or designation mean, and should you turn to an RIA for your investments? Here we break down the basics.
A Registered Investment Advisor was formally defined as part of The Investment Advisers Act of 1940 as a “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications.”
Ok, so what does this mean for you?
If you’re a high net-worth individual, you may already engage an RIA to provide you with investment advice and to manage your portfolio. Whether your RIA is a firm (like Ironwood Wealth Management) or an individual, their primary obligation is to act in a fiduciary capacity.
What does the fiduciary standard have to do with being an RIA?
Fiduciary duty is one of the things that differentiate RIAs from some other types of financial and investment professionals. RIAs are bound by a fiduciary duty, which means they must always act in their clients’ best interests. The fiduciary standard requires this unconditionally, regardless of circumstances.
RIAs must also disclose any conflicts of interest to clients, ensure that clients truly understand those conflicts, and act in an ethical manner. These standards are regulated by the Securities and Exchange Commission (SEC).
What does it mean that they are registered?
This means that they are registered with the SEC or they will have registered with their state securities authorities.
Being registered doesn’t mean the SEC and state recommend or endorse a particular RIA. It just means the RIA follows certain requirements and has provided certain information, including their investment style, how much in assets they are managing, who the key officers are within the firm, and whether or not conflicts of interest have arisen in their work (or whether they anticipate them in the future).
How are RIAs compensated?
RIAs typically earn revenue through management fees that are based on assets under management (AUM). The average fee is around 1%, but can sometimes be lower if a given client has a high number of assets under management. This provides a win-win situation for investors and RIAs, because when an investor succeeds, the RIA succeeds. Some RIAs charge an hourly or flat fee.
What should you look for when seeking an RIA?
For starters, ask how they approach client relationships. Select an RIA that focuses on getting to know you as a person (so as better to help you meet your financial goals), that keeps the flow of communication strong, and that works hard to establish trust and transparency.
Second, look for an RIA with a transparent fee structure that is easy to understand.
Third, ask where your money will be held. An RIA does not take title to your assets and will give you full access to your accounts.
Finally, request to see their Form ADV. This is another way RIAs exhibit transparency, because the Form ADV discloses all sorts of information about the firm’s business practices and experience (both educational and professional) of its decision makers. It will also inform you whether or not there’s a history of fraud or bankruptcy on the part of the firm’s representatives, and will include detailed explanations of fees and terms.
Learn more about what it means for you that Ironwood Wealth Management is an RIA, and schedule some time to get to know us and what we offer today.