Registered Investment Adviser

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

Fiduciary standard

An IA must adhere to a fiduciary 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.[2]

To "promote compliance with fiduciary standards by advisers and their personnel," on August 31, 2004, the SEC adopted Rule 204A-1 under the Investment Advisers Act of 1940 requiring investment advisers to adopt a code of ethics setting forth "standards of conduct expected of advisory personnel and to address conflicts that arise from personal trading by advisory personnel. Among other things, the rule requires advisers' supervised persons to report their personal securities transactions."[3]

Rule 204A-1 treats all securities[4] as reportable securities, with five exceptions (i.e., direct obligations of the US Government, certain money market instruments and funds, certain mutual funds, and certain unit investment trusts) "designed to exclude securities that appear to present little opportunity for the type of improper trading that the access person reports are designed to uncover".[5] However, transactions in exchange traded funds are reportable securities according to an SEC response to National Compliance Services, Inc.’s 2005 request for no action guidance.[6]

While "the rule does not require the adviser to adopt a particular standard, the standard chosen must reflect the adviser's fiduciary obligations and those of its supervised persons, and must require compliance with [sic] securities laws." Although the rule contains certain minimum provisions, advisers have "substantial flexibility to design individualized codes that would best fit the structure, size and nature of their advisory businesses." [7] Most state regulators require or recommend advisers establish similar ethical requirements and supervisory procedures.

Investment Adviser Fiduciary Standard vs. Broker-Dealer Suitability

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[8] 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;[9] 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:[10]

  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.[11] It should be noted that some "dually registered" advisors are limited in the scope of their recommendations by their affiliation with their broker dealers and therefore do not have unfettered access to all product/service solutions for their clients. This is known as a "Captive Platform" of which many dually registered or "Hybrid" advisors are affiliated with. Only "Independent RIAs" (those not affiliated with (or restricted by) a broker dealer) can be considered true fiduciaries.

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.[12] "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 :

Uniform Fiduciary Standard

Section 913 of the Dodd-Frank Act[14] 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 2011[15] 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 1, 2013, the SEC issued Release No. 34-69013[16] to request information for a cost-benefit analysis to determine the anticipated economic impacts of moving forward with uniform fiduciary standard rulemaking.

Registration

State Registered Investment Advisers

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.[17]

Federally Registered Investment Advisers

In general, RIAs who manage $100 million or more in client assets must register with the U.S. Securities and Exchange Commission (SEC).[18] While the process is not as involved as registration as a broker-dealer, it can be complex.[19]

Registering requirements

Representatives 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).[20][21] However, these requirements differ by states. For example, New York has no exam requirements for representatives of SEC-registered RIA firms.[22]

See also

References

  1. ↑ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  2. ↑ WEBCPA Financial Planners Push to Extend Fiduciary Standard
  3. ↑ Investment Adviser Code of Ethics, SEC Release No. IA-2256 (July 2, 2004)
  4. ↑ The term "security" is defined in section 2(a)(18) of the Securities Act of 1933. [15 US 80b-2(a)(18)]
  5. ↑ Investment Adviser Code of Ethics, SEC Release No. IA-2256 (July 2, 2004).
  6. ↑ SEC response to National Compliance Services, Inc.’s 2005 request for no action guidance.
  7. ↑ Investment Adviser Code of Ethics, SEC Release No. IA-2256 (July 2, 2004)
  8. ↑ SEC.gov
  9. ↑ SEC.gov
  10. ↑ FINRA Manual Online Recommendations to Customers (Suitability)
  11. ↑ NASD First Allied
  12. ↑
  13. ↑ Greenberg Traurig (July 13, 2012). "FINRA's New Know Your Customer and Suitability Rules". The National Law Review. Retrieved September 17, 2012.
  14. ↑ http://www.dodd-frank-act.us/Dodd_Frank_Act_Text_Section_913.html
  15. ↑ http://www.sec.gov/news/studies/2011/913studyfinal.pdf
  16. ↑ http://www.sec.gov/rules/other/2013/34-69013.pdf
  17. ↑ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  18. ↑ U.S. Securities and Exchange Commission: Investment Advisers: What You Need to Know Before Choosing One
  19. ↑ SECLaw.com: Registration and Regulation of Investment Advisers
  20. ↑ Investmentadviser.org
  21. ↑ North American Securities Administrators Association (NASAA)
  22. ↑
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