In the United States, Registered Investment Advisors (RIAs) are a category of wealth management professionals that work under a license that differs from the one used by stockbrokers, private bankers, and the advisors affiliated with large financial institutions. The different regulations lead to different approaches, different compensation structures, and very different cultures.
While all providers of wealth management services have gravitated toward titles like “advisor” and “client representative,” the way stockbrokers work hasn’t changed in years. The license they work under, the FINRA Series 7, is a license to sell securities. In contrast, RIAs operate under the Series 65 which is a license to offer investment advice for a fee.
This is why, in the United States, over 25% of all wealth assets have moved to independent RIAs, a trend that has been led by families with significant wealth.
What are the differences between broker-dealers and RIAs?
RIAs have a fiduciary duty to act in their client’s best interest. A fiduciary duty is a legal obligation for the RIA and their representatives to act on their client’s best interest in the investment recommendations they make. It is the foundation for the advice and guidance they offer. If even the potential for a conflict of interest exists, it must be fully disclosed.
In contrast, stock brokers work to a suitability standard.
Under a suitability standard, a broker must recommend investment products that are “suitable” for a client —this means it is regarded as appropriate for the client’s objectives. This could be an investment offered by the institution the broker works for that is offered with little or no evaluation of other options. It can also be one with higher fees for the client and that brings the broker a commission. There is no requirement to disclose these fees.
For brokers, compensation typically depends on a commission from product sales. These fees may be paid by the investment company involved or billed to the client. Often they are not even mentioned until after the product sale is made.
In contrast, many RIAs manage assets for a management fee that is typically around 1% to 2% of the assets invested by the client. The client typically covers these fees in the growth of their portfolio or in the tax savings by active rebalancing of each account based on the client’s needs.
Hourly or per-project fees may be charged for other services but, by US law, all fees must be disclosed up front.
Most brokers work for large firms such as UBS, Morgan Stanley, or TD Ameritrade. These large institutions have defined sales approaches and teams dedicated to creating financial products for the firm.
Since most RIAs are independent businesses, they are not expected to move clients to institutional technical platforms or move clients to their parent companies’ funds. The focus of an RIA is not internal toward the organization, but external toward the client. All decisions are made by working together to find the best solution to meet the client’s goals.
Online Tools Matter
Since most broker-dealers are large organizations, they have their own platforms for managing online access to their clients’ portfolios. This means they choose how they report financial statements, including how they report performance and fees. Typically this means they limit what is clearly seen to year-to-date reporting or total gain over the cost of purchase.
With an RIA, the assets are held by a custodian bank, typically Charles Schwab or Fidelity, and financial reports are created by third-party tools, like Envestnet, made for the RIA market. These tools are focused on transparency. Full performance measures are presented like performance versus the benchmark and year-over-year performance.
Demand for RIAs Continues to Grow
Individuals, couples, families, and institutions with sizable wealth management concerns are increasingly turning to RIAs.
Over the past decade, US-based RIAs have increased in number by over 20%. Total assets managed by RIAs have grown at an even steeper rate, more than doubling over the same period. Assets managed by Securities and Exchange Commission (SEC) RIAs rose from $44 trillion in 2010 to more than $110 trillion in 2020, according to the Investment Adviser Association.
Why RIAs Are Growing
The trend is based on an emerging truth: high-net-worth households want unbiased investment consulting and see value in working with RIAs that are fee-based or even fee-only.
Standards matter in life, and they especially matter in wealth management. In the United States the shift shows that smart families have come to understand the differences and are choosing their advisors accordingly.
Global families frequently are not very familiar with the US financial system, which is why global families have a particular need for a partner that is looking after their own interests. RIAs are a partner that are required by US law to put clients’ interests first.