What is a Registered Investment Advisor?

A Registered Investment Advisor (RIA) is an individual or a firm engaged in the business of giving investment advice and managing the investments of investors. The Investment Advisers Act of 1940 says a registered investment advisor is 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. A registered investment advisor is obligated to provide sound investment advice and act in the best interest of his or clients.

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What is Required to be a Registered Investment Advisor?

An investment advisor has to file Form ADV to register with the Securities and Exchange Commission (SEC). Filing the form needs to be amended periodically to update it with current information. The investment advisors who provides advice to an investment company (as a client) or advisors managing assets of more than $25 million need to register themselves with the SEC. Smaller advisors may register themselves with state securities authorities. 

Registration ensures the advisor has fulfilled all the requirement for the registration (which generally point to some level of training or competency in the field). The registration process requires the advisor to disclose certain material information about the firm or individual so that the clients can make an informed decision while appointing them as a financial advisor. 

They are required to state whether there is any instance in which a conflict of interest may exist; past, present or future. They also need to disclose whether there are any material risks involved with the strategy used for analyzing the suitability. They also must state if he or she has any relationship or arrangement that may lead to a conflict of interest including an interest in any client transaction. 

A client brochure must have this detailed information written clearly in a prescribed format. That helps the clients to compare the brochures of different advisors to select the most suitable one. It is the duty of the advisor to convince the client about the suitability of an investment and disclose all the risks attached to it. 

Everything needs to be well documented. If an investor lodges a complaint with the SEC, during the investigation, the advisor has to provide detailed documentation on the investment strategy they have used. They also need to prove the client had clear knowledge about the investment policy and risk factors.

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