Why Work With a Registered Investment Advisor?

Financial Planners

Whether it is budget creation, retirement planning, tax optimization, debt minimization, estate planning, or another specific financial area, it is important to hire a financial advisor who truly understands you in terms of your goals, life stage, and financial objectives. Searching for the ideal advisor can be slightly daunting. However, it is critical for your holistic financial well-being. Several reports have stated that people who work with a financial advisor are more confident about their financial future. They are also more likely to receive monetary benefits, along with non-monetary advantages like a feeling of security, confidence, and more.

According to recent reports, working with a financial advisor can ideally improve the average returns of a portfolio by over 3.75% annually. In terms of non-monetary benefits, a study reports that 67% of people who work with a financial advisor have clarity about spending their money wisely and saving for their future. The study also specifies that nearly 59% of the people who engage with a professional advisor score higher on their retirement readiness. People working with investment advisors are also less stressed. Alternatively, the National Financial Education Council’s report says that lack of adequate personal financial planning can averagely cost you $1,200 per year. In all, working with a financial advisor can help you improve your investment returns, minimize taxes, prepare better for retirement, and more while also assuring you regarding your future financial security.

However, it is critical to hire the right person to get all these benefits. Not all financial advisors are equal. More than 300,000 professionals offer services under the title ‘personal financial advisor’ in the U.S. Finding the perfect advisor for your needs from such a wide pool can be challenging. Some experts are more qualified than others, while some may have the necessary licenses and registrations and others may not. You may avoid making the mistake of hiring the wrong professional by finding a registered investment advisor (RIA).

An RIA is an individual or a firm that manages assets on your behalf and offers sound investment advice. These advisors can have different designations, such as a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC), The titles depend on the training and certifications of the professional. Working with an RIA gives you the confidence that your money is in the right hands. RIAs are governed by a fiduciary duty, which means these professionals place your interest before theirs and work to minimize all conflict areas.

Here is why working with a registered investment advisor is beneficial for your financial well-being:

What is a registered investment advisor?

A registered investment advisor or RIA is an individual or firm that offers financial advice to their clients and may manage their portfolios. RIAs are registered with the state securities administrators or the U.S Securities and Exchange Commission (SEC). These experts are governed by a fiduciary duty, implying they have the freedom and independence to find the best financial solution that fits your unique requirements. These professionals are legally obligated to put your needs and interests before their own. They follow an ethical code of conduct and must disclose all possible areas of conflict, with an aim to minimize any potential conflicts of interest.

An RIA takes time to understand your financial requirements, know your personal and financial goals, and build a relationship that focuses on enhancing your financial status and achieving your investment objectives.

RIAs typically use a flat fee or one of the fee-based methods, like Assets under Management (AUM), to charge for their services. Flat-fee and fee-based methods ensure the advisor earns remuneration directly from you and does not receive any income in the form of commission or bonus by selling you financial products. These compensation arrangements of registered investment advisors ensure your compensation is aligned with your goals, and you receive unbiased and ideal advice. Advisors who earn through commissions can offer biased advice and sell you financial products that might be suitable for your needs but not necessarily ideal for your investment objectives.

What are the fiduciary duties of RIAs?

As fiduciary agents, RIAs have three primary duties towards you:

  1. Disclosure: As independent registered investment advisors, these professionals are mandated by the law to disclose all possible areas of clash of interest, whether about specific financial transactions or broader financial transactions. RIAs also make you aware of any potential risks in a transaction, investment avenue, etc., allowing you to make informed financial decisions.
  2. Burden of proof: RIAs are governed by a fiduciary duty, which means they have to offer the best (not just suitable) financial advice to their clients. As a client, you can also ask your RIA to prove that the advice they offered was to promote your best interest and that they disclosed all potential risks.
  3. Documentation: RIAs are required to fully comply with the extensive documentation compliance of the SEC record-keeping rules. Any lapse in the documentation could result in legal action against the professional.

In all, following these duties, the SEC registered investment advisor places your needs before their own, serves in good faith with honesty and transparency, and unveils all possible disputes. These professionals are more likely to deploy sincere efforts to provide precise and profitable financial advice. Registered investment advisors do not use your assets for their profit and obtain direct payment from you.

What are the benefits of working with a registered investment advisor?

If you want to increase your chances of working with the best financial advisor, you can consider engaging with an RIA registered investment advisor. Here are some reasons why working with an RIA is beneficial for you:

  • An RIA is legally bound to act in your best interest: According to the Investment Advisors Act of 1940, an SEC registered investment advisor is obliged to follow a fiduciary standard of care for their clients. According to law, these advisors must ensure that the investment counsel they offer you is best for your financial situation and preferences. They also have to disclose all possible disagreements. In case a difference in opinion arises, RIAs will inform you in advance and work to minimize the clash. Apart from this, RIAs follow a written code of conduct while offering professional services to their clients. An RIA registered investment advisor is also supposed to fully disclose their compensation structure. As a client, you should fully understand how your advisor earns money for the services they provide their clients, such as understanding their fee structure like fixed-based method, retainer fee, hourly charges, and Asset under Management (AUM).
  • RIAs usually use fee-only compensation methods: RIAs adapt fee-based compensation method to charge for their services. Fee-based compensation structures work best for you because this means your advisor only gets remuneration from you and does not get any commissions. Most independent registered investment advisors use a flat-fee, hourly, or AUM method, which is more transparent than other fee-based compensation structures. In the flat-fee structure, you pay a fixed sum for a particular length of services. In the hourly method, you pay a fixed sum per hour to the advisor for their services. In the AUM method, the advisor charges you according to the assets they manage on your behalf. So, if your AUM value is approximately $200,000, you can expect to pay around 1-2% of this, which is anywhere between $2,000 and $4,000. In the AUM method, the percentage charge reduces after an asset level. So, your advisor might charge 1.25% for up to $2 million AUM and reduce this to 1.00% for $3 million AUM.
  • Information about RIAs is publically available: RIAs have to register with the SEC and also file their Form ADV with the SEC. Form ADV mentions details, like the operational method, background, educational qualifications, conduct, past record, fee structure, etc., about the professional. The State Securities Act of 1933 also requires all financial advisors to submit the Form ADV and update it annually to ensure it captures the relevant information. The forms also specify details about the legal and disciplinary actions, if any, taken against the concerned registered investment advisor. Part 2B of the Form ADV contains personal information about the RIA, such as their licenses, professional experience, and more. RIAs will present the Form ADV to you before they proceed with the contract. You can also access all these details about the RIA through public forums like the FINRA or SEC Action Lookup website. You can simply get the details about the person by searching for your advisor’s name or entering the identification number.
  • RIAs usually work as independent financial advisors: RIAs usually work as independent advisors, which means they can forge deep, personal relationships. These advisors adopt ethical practices and hold a sense of accountability towards you. If you have complex financial needs, engaging with an RIA might be the right fit for you since you get access to more personalized advice. Apart from these, independent RIAs are responsive and attentive towards your financial preferences and goals.
  • RIAs are generally more competent to solve complex financial issues: Most RIAs specialize in offering advisor services for complex financial matters, like extensive estate planning, foreign portfolio of securities, foreign real estate assets, tax minimization, inheritance planning, and more. RIAs are also suitable for people with a high net worth.
  • RIAs work with a third-party custodian: Registered investment advisors rely on third-party custodians to hold your assets. This means that these professionals do not have any direct custody of your assets. A third-party custodian is usually a large, well-established firm, and the advisor can only trade or place an order for the assets through your account after authorizations. The third-party custodian reports and verifies all transactions, minimizing the chances of fraud.

How much do RIAs charge for their services?

As specified, an RIA can use a flat, hourly, or AUM fee structure to receive compensation for their services. However, AUM is the most commonly used remuneration model adopted by RIAs. In 2019, the average RIA fee per AUM model was 1.17% of the assets under management. This implies that if you have $100,000 in assets that the investment advisor is managing on your behalf, you would likely pay $1,170 per year to the RIA for their services. In contrast, studies report that investment advisors can likely improve portfolio returns by over 3.75% per year. Even if you subtract the fee of the advisor, you still get a significant boost in returns. Hence, hiring an RIA is an investment for the future.

What to evaluate when hiring an RIA

When deciding which RIA to hire, there are multiple factors you should consider. The primary thing is to check the fee structure of the professional and consider engaging with a fee-only advisor. Secondly, check the disclosures and relevant forms of the person, including Form ADV, U4, Form CRS, and others. Visit the FINRA website to find relevant details about the investment professional. Try to avoid engaging with someone who does not outsource your asset management to a custodian and aims to keep their direct holding; this could result in fraud.

Further, the RIA should work with you to understand your financial goals and preferences and accordingly create strategies. The RIA should communicate with you often and provide quarterly updates about their strategies, investment portfolio performance, risks, etc.

If you want to start the process of hiring an RIA, seek suggestions from your friends, family, and peers. Alternatively, you can consider conducting a registered investment advisor search on advanced platforms like the WiserAdvisor’s Advisor Match Tool. Answer a few questions and the match service will connect you to 1-3 pre-screened and qualified financial advisors suited to assist you. You can also get relevant details about their fee structures, employment, educational qualifications, and more. For further information, you may also check an advisor’s financial disclosures on the FINRA and SEC websites.

To summarize

Managing money matters, especially if you have a complex financial situation, can be overwhelming. And, even though achieving your financial goals may be your priority, other responsibilities can often divert your attention. However, you do not have to do everything alone. You can find the right professional financial advisor and work efficiently towards your holistic financial well-being. Consider engaging an SEC Registered Investment Advisor and make a smart investment for your financial future.