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Registered Investment Advisor – Definition

Registered Investment Advisor Definition

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.

A Little More on What is 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.

References for Registered Investment Advisor

Academic Research on Registered Investment Advisor

Designations Held:• CPA/PFS–Certified Public Accountant/Personal Financial Planning Specialist• Registered Investment Advisor• Investment Advisor Representative …, Business, M. C. (1988).  (Doctoral dissertation, University of Texas at Austin).  This article presents the bio of Charles Geraci who is a Certified Public Accountant and also a Registered Investment Advisor. He tries to solve various financial challenges that face clients and ensure that their requirements are reflected in the plan. He structures the personal and business finances of clients intending to minimize tax exposure, secure retirement income and also effectively managing risks.

Who’s the fairest of them all? A comparative analysis of financial advisor compensation models, Robinson, J. H. (2007). JOURNAL OF FINANCIAL PLANNING-DENVER-20(5), 56.  This paper investigates the economic incentives at work in each of the modes used by investors to pay for financial advice and states that the debate over the best one is flawed since all the models have incentives that can cause conflicts of interest and each one may also provide an optimal choice for particular investor circumstances.

Protecting investors through hedge fund advisor registration: long on costs, short on returns, Atkins, P. S. (2006). Ann. Rev. Banking & Fin. L.25, 537.  This article discusses mutual funds which have a unique corporate structure. They usually contract the principal management functions to a separate company known as an investment adviser which is paid an advisory fee that is mostly a percentage of the net assets of the fund. The investment advisor has a primary function of portfolio management.

Finding Bernie Madoff: Detecting fraud by investment managers, Dimmock, S. G., & Gerken, W. C. (2011). The study uses a panel of mandatory SEC disclosure findings to test the predictability of investment fraud. It finds that past regulatory and legal violations, conflicts of interest as well as monitoring are essentially associated with future fraud. The results also suggest that the presently required disclosures have relevant information, but investors do not fully utilize it.

The Relationship Between the Investment Advisor and the Mutual Fund: Too Close for Comfort, Schiffman, H. (1976). Fordham L. Rev.45, 183. This paper explains that the people who organize mutual funds also act as the investment adviser. It states that although the fund and its adviser are two separate entities where the fund contracts the adviser for various services, it is the adviser that dominates the fund. The conflicts of interest in this relationship are apparent and include blending the duties of corporate directors, independent money managers as well as investment advisers.

Predicting fraud by investment managers, Dimmock, S. G., & Gerken, W. C. (2012). Journal of Financial Economics105(1), 153-173.  The article investigates the predictability of investment fraud using a panel of mandatory disclosures filed with the SEC. The article finds no evidence that investors receive compensation for fraud risk through superior performance or reduced fees. It also examines the barriers to implementing the fraud prediction models and suggests changes to the SEC’s data access policies that could benefit investors.

Fund advisor compensation in closed‐end funds, Coles, J. L., Suay, J., & Woodbury, D. (2000). The Journal of Finance55(3), 1385-1414.  This study examines the relationship between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. The results indicate that the fund premium is more significant when the advisor’s compensation is more sensitive to fund performance and when the assets managed by the advisor are concentrated in the fund in question.

Investment intermediaries in economic development, Hagerman, L. A., Clark, G. L., & Hebb, T. (2007).   This research explores how large institutional investors invest in affordable housing, mixed-income, and mixed-use real estate and also emerging growth companies under the concept of urban revitalization or economic development. Investment intermediaries link institutional investors to urban revitalization. These intermediaries can take vast amounts of money and channel them into attractive urban investments.

Direct not Derivative: Recovering Excessive Investment Advisor Fees in Mutual Funds, Kahn, C. L. (1982). Geo. LJ71, 1595. This paper states that the special structure of the mutual fund industry separates it from the other investment institutions. In distinction to the ordinary industrial corporation, where the management is internally organized, the usual mutual fund is controlled by an outside entity known as the investment advisor. The advisor creates the fund and manages its operations.

ADVISOR, PERCENT, Z. (2009). This article explains that according to recent economic data, the worst part of the recession has passed. The stock markets have been steadily rising in anticipation of a recovery, and this indicates that there is likely to be increased economic activity in the next few months. The recession caused an abnormal loss in value across various types of asset classes.

Confidence mediates how investment knowledge influences investing self-efficacy, Forbes, J., & Kara, S. M. (2010). Journal of economic psychology31(3), 435-443. This study presents a comprehensive investment literacy questionnaire that surveys potential sources of investing self-efficacy in a significant sample of working adults. The effect of investment knowledge on belief in one’s future capacity to develop a plan to achieve investment goals was mediated by confidence. However, the accuracy of the applied investment knowledge of employees was low.

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