What is a Registered Investment Advisor (RIA) and why does it matter?

November 6, 2017 Greg Caramanica

Arlington Wealth Planning is a Registered Investment Advisor (RIA) and I am an Investment Advisor Representative (IAR).  Many people may be wondering what that means and why it matters.  Well, it’s a long story, but I will shed some light on the meaning here.

My understanding is that there are two main ways one can register themselves as a financial planner.  He or she can either be a Registered Representative (RR) or an Investment Advisor Representative (IAR).  Here are the big differences:

Registered Representatives:

  • Work for a “Broker/Dealer” that is a FINRA member firm. The Broker/Dealer provides compliance and access to the investment marketplace.
  • Are required to pass FINRA exams, such as the Series 7 (General Securities Representative) and the Series 63 (Uniform State Securities Law), and maintain them through continuing education and further examination
  • Are usually paid through commissions.  For example, Registered Representatives would only get paid if you invest through them and typically they would receive commissions from the investment company.
  • Typically are held to a standard of “suitability,” which means that they must provide investment advise that is suitable to the client’s needs

Investment Advisor Representatives

  • Work for a Registered Investment Advisor (RIA) that provides compliance and access to the investment marketplace. In our case, Arlington Wealth Planning is the RIA and I am the IAR.
  • Are required to pass FINRA exams, such as the Series 65 (Uniform Investment Advisor Law), and maintain them through continuing education and, possibly, further examination
  • Are usually paid through fees.  For example, the customer would pay the advisor for services provided, at a pre-agreed upon price.  This payment is usually paid directly to the RIA and is not commission related (e.g. not paid as a result of selling an investment, but rather as a result of providing a service).
  • Are typically held to a standard as a “fiduciary,” which means that they must have the client’s best interest mind, given their entire financial situation, when making recommendations.

Those two definitions may sound similar, but the last two bullets are significant – how we get paid and the standard to which we are held.  There is a trend in the financial planning industry toward fee-based compensation (the RIA/IAR model).  For instance, recently, the Department of Labor (DOL) published it’s Fiduciary Rule (currently on hold), which attempts to prevent retirement investments from being provided through the commission model (without a special contract).  The justification is that there is a perceived conflict of interest for financial planners who earn a commission on the sale of investments, in that they may be drawn to recommend investment products that pay them more commission.  While suitable, the product might not be the “best” product for the customer when you consider the rest of their financial picture.

This is where the standard is important.  The suitability standard simply means that the investment recommendation must fit the client’s need.  For instance, the client could ask the financial planner to invest $10,000 into a mutual fund.  The planner’s job, under the suitability standard is to find the mutual fund that best suits the client’s investment horizon, risk tolerance, objective, etc.  However, the fiduciary standard is different.  Under the fiduciary standard, the planner would collect information about the client’s entire financial situation to determine whether a mutual fund is what should be recommended in the first place.

This example is fairly simple, but the situation can become quite complex.  In our experience, the general sentiment of the people we serve is that they would rather pay a fee than a commission for financial planning.   We at AWP agree.   The fee-based business model makes more sense to us, as fees correspond to services rendered, and not to products sold.   Tying compensation to services means that there is more of an incentive for planners to provide quality service, not just to push more product.  We hope this means that customer service in the financial industry will be more important – like it is for us.