What is a Registered Investment Advisor (RIA)?
U.S. News & World Report, 5/17/17 - Many investors assume their financial advisor makes recommendations based on their best interests. Unfortunately, that's not always the case. Many advisors are only required to recommend what is suitable, not what is best.
According to a survey conducted by the Certified Financial Planner Board in 2015, 76 percent of Americans "strongly agreed that when they receive investment advice from a financial advisor, the person providing the advice should put the consumers' interests ahead of theirs and should have to tell consumers up front about any conflicts of interest that could potentially influence that advice."
At the request of President Donald Trump, the U.S. Department of Labor recently enacted a 60-day delay on the fiduciary rule – a law requiring retirement financial advisors to put the interests of investors above their own profits and commissions – that was supposed to be effective April 10.
Unlike some other financial professionals, a registered investment advisor, a type of business, firm or individual, is already held to a fiduciary standard – meaning they must always place their clients' best interests ahead of their own, disclose any potential conflicts of interests and maximize an investor's welfare rather than their compensation.
"Most investors have no idea the difference between an RIA and an advisor at a bank or broker-dealer," says John Nowicki president of LCM Capital Management in Chicago.
Registered investment advisors must be registered with the SEC if they are larger, or with the state securities authorities if they are smaller, and legally required to put investors' interests before their own. An individual who works in this capacity is a called an investment advisor representative, or IAR. The concept is based on a law created by the Investment Advisors Act of 1940 after the stock market crash caused the Great Depression.
"Having a transparent business model, like RIAs have, is important to people," says Jake Norton, co-founder of Stewardship Financial in Gilbert, Arizona. "Often times in the broker model, high fees are hidden. The new fiduciary rule is attempting to make brokers that give advice on retirement accounts to be held to a fiduciary standard."
The lines between who is a broker-dealer or registered representative and RIAs have gotten entangled since a broker can also be registered as an investment advisor representative. This means an investor can be sitting with a financial advisor who has the ability to be both a salesperson and a fiduciary advisor, Norton says.
"The advisor must disclose to the client when he is giving recommendations that fall under the suitability standard and when he is giving advice under the fiduciary standard," Norton says. "Because I started my career as a broker, I can tell you that this type of disclosure is not happening."
Know the differences. There's a significant difference between how RIAs make their money versus those who work on commissions.
With offices in Williston and Rutland Vermont, Copper Leaf Financial is a Registered Investment Advisor (RIA) dedicated to holistic, transparent, evidence-based advice. We are a fiduciary, fee-only firm serving clients with objectivity and integrity for more than 25 years. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.