A Registered Investment Advisor (RIA) is a government-regulated professional who actively manages your portfolio

• A Registered Investment Advisor (RIA) is a professional firm that manages the assets of clients and offers investment advice.
• RIAs are registered with either federal or state authorities, are bound by SEC regulations, and are held to a fiduciary standard.
• While RIAs traditionally have handled high-net-worth people's portfolios, they are now offering services and general financial counsel to the less-wealthy too.

So, you've been looking for a financial professional who can help you invest and manage your money. And you've heard a lot about, or often seen, the initials "RIA" — short for Registered Investment Advisor — after certain names. But finance pros seem to bat around a great many monikers. How do you know whether choosing one of the 13,000-plus RIAs in the US is the way to go? And how does a Registered Investment Advisor differ from all those other folks offering financial advice? Here's what you need to know.

What is a Registered Investment Advisor (RIA)?

Regulated under the Investment Advisers Act of 1940, Registered Investment Advisors (RIAs) are defined as professionals that manage the assets of clients — usually individuals, but sometimes institutional investors, too — and offer investment counsel. So officially they're firms, not people, though an RIA firm could in fact be a one-person operation.

The financial professionals who work for RIAs are technically known as investment advisor representatives (IAR). And those firms can employ one IRA or dozens of them. There are more than 451,000 IARs in the US, according to the Investment Adviser Association.

There's no uniform qualification exam for IARs, but they typically must pass at least one of these financial industry exams: the Series 65, which qualifies individuals to provide investing and general financial advice to clients, the Series 7, which allows individuals to sell securities, or the Series 66, which allows individuals to act as wealth or asset managers.

There's a bewildering array of advisors out there, and admittedly, a lot of overlap between them. Some ways RIAs (and their employees) stand out:

• They are always fiduciaries. As mandated by the Investment Adviser Act, RIAs have a fiduciary obligation to their clients, meaning they must act in the client's best financial interests — making recommendations that's most beneficial to you, not what could make the most money for them. That involves making decisions aligned with previously agreed-upon objectives and restrictions, disclosing conflicts of interest, and having a reasonable basis for advice.
  
  While the SEC's Standards of Conduct package also requires stock brokers to disclose conflicts and act responsibly, "it only pertains to that single transaction at one moment in time," says Laura Grossman, associate general counsel of the Investment Adviser Association. "If two years from now, the investment is not in a client's best interest, they don't have to come back and recommend a change."

• They are compensated by portfolio growth. Although this is changing somewhat, RIAs still mainly make money by charging a percentage of assets under management — not by commissions (like stockbrokers) or fees (like financial planners). So if you don't prosper, they don't prosper.
• They mainly manage money. RIAs aren't interested in every aspect of your (financial) life. Of course, they don't operate in a vacuum: In devising your portfolio, they ascertain your long-term economic goals, needs, and dreams — retirement plans, kids' college tuition, etc. — and ask about your risk tolerance and ethical investment standards.
  
  But they tend not to advise on other personal finance matters like life insurance, taxes, or homeownership, as financial planners do. Their focus is on your investments — how to grow them in good times or protect them in bad times.

That said, the boundaries among wealth management pros are getting increasingly blurry. Many broker-dealers now in fact own RIA outfits (though SEC rules prohibit anyone except for IARs from calling themselves "advisors"). And many RIA outfits now employ Chartered Financial Analysts (CFA) and Certified Financial Planners (CFP), to advise on your overall financial picture before passing you on to the portfolio managers.

Where do RIAs register?

What does the "registered" in Registered Investment Advisor mean? While not exactly an official license to practice, it does indicate that the firm is on record with — and thus operating under the rules of — a government regulatory body.

RIAs managing $100 million or more in assets or that do business in 15 or more states have to register with the Securities and Exchange Commission (SEC). Otherwise, they register with the appropriate state agency for the locality they're headquartered in.

Each state has its own rules about such matters as how many clients an RIA must have to be able to register, though the minimum tends to be five or six, according to Charles Reiling, president of CoastalOne, an independent broker-dealer and RIA platform.

The SEC or relevant state agency also regularly conducts examinations of RIAs to make sure everything is kosher. SEC-registered advisors also are required to have written policies about a host of areas, from insider trading to a code of ethics. They also must appoint a Chief Compliance Officer.

What does an RIA do?

At a minimum, RIAs — or the financial advisors they employ — manage money. They create investment portfolios using stocks, bonds, mutual funds, and other assets out of their clients' money, operating according to their investment strategy and their clients' needs and goals.

In some cases, you can give them discretionary authority over your investments, meaning they can make buy and sell decisions without getting your approval for every transaction. In others, they provide recommendations, but you make the decisions.

Though they can trade on your behalf, RIAs don't literally have access to your portfolio. Instead, they maintain their managed assets at a custodian — a brokerage or financial services firm like Charles Schwab or Fidelity, which also does the actual transactions. That's mandated by the Investment Advisers Act, aimed at protecting clients from embezzlement or misuse of their money.

How is an RIA compensated?

Usually, RIAs charge a fee that's a percentage of the client's assets under management (AUM) — typically, around 1% to 1.5%. Generally, the more money you have, the lower the fee you can negotiate.

That compensation method is meant to put the advisor on the same side of the table as the client. Because they don't charge a commission — meaning they don't get a percentage of the financial or insurance instruments you buy — they make money primarily when client assets increase, not by pushing a product or doing lots of transactions.

The downside, of course, is there also might be less incentive to make recommendations that could result in a smaller AUM pot — that is, result in money being removed from the client's portfolio, to start a family foundation or invest in property, for example — thereby resulting in less money for the advisor, according to Reiling.

It's worth noting that Registered Investment Advisors have started to different ways of being paid, however. Some alternatives include charging fixed fees for certain services, or per hour, or annually (like a retainer).

Who do RIAs work with?

The typical Registered Investment Advisor works with high-net-worth individuals, small businesses, or other institutional clients, in part because they have enough money to make that AUM fee worth it. Also, such investors often have more complicated financial affairs, so advisors tend to create personalized, diversified portfolios for them.

Traditionally, $100,000 has been the minimum portfolio an RIA would take on.

Increasingly, though, Registered Investment Advisors are targeting less-affluent folks by adopting the aforementioned alternative pricing models. Instead of full-out customized management, they might pool smaller amounts into mutual funds or ETFs, or into a model portfolio that's managed by a robo-advisor.

How to choose an RIA

As with other professional services professionals, the best way to find RIAs is through the recommendations of friends, family members, and work colleagues.

A more formal source is the SEC's Investment Adviser Public Disclosure website, which allows you to search for every RIA and IAR in the country.

Some additional tips:

• Look for the right level of services. Since the type of advice RIAs offer can run the gamut, from investment counsel only to sophisticated estate planning, make sure the firm provides the type of services you need.
• Read the Form ADV. That's a key disclosure document RIAs must file with the SEC or appropriate state agency. It includes everything from disciplinary history to sources of additional compensation, as well as information about certain individual IARs. Advisors should offer you a copy when you're getting to know one another. If they don't, that's a red flag. Also, existing clients should get an updated version every year.
• Make sure you're in their sweet spot. Investigate whether your assets are on the low or high side for the firm. You can do that by visiting the Investment Adviser Public Disclosure site, searching for a firm's total AUM and the number of accounts, and doing the math. "The bigger the client, the greater the amount of attention you're going to get," says Reiling. "That's true in any industry."

The financial takeaway

For the investor who wants personalized, comprehensive financial advice and management, a Registered Investment Advisor can be the right choice. As fiduciaries, RIAs must make recommendations based on the client's best interest first and foremost, so there's less concern about conflicts of interest or an advisor trying to sell you something just to make a commission.

While RIAs traditionally have served as personal money managers for the rich — individuals with six figures' worth of assets — they are morphing into more general financial advisors and planners and broadening their client base. Nowadays, people with portfolios of just about any size can benefit from an RIA's services.

Ultimately, these are long-term relationships. What matters most to many investors is just how well and how often their financial pro communicates with them, whatever the initials after their name.

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