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Also available as podcast (Episode #158)
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What Is An RIA?
TL;DR – RIA stands for Registered Investment Advisor. This is an entity that is created so that financial advisors underneath the RIA, formally called Investment Advisors Representatives, can provide advisory services to clients in return for a fee. It’s important to understand how an RIA differs from a broker-dealer with respect to the types of services each provides.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
What is an RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #158.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
Today’s episode is… “What is an RIA? It occurred to me as I was making my episodes that it took me to episode #158 before I realized I probably should do at least one episode simply answering… “What is an RIA?”
Arguably this should have been episode #1. But I’ve just got into all different aspects of the RIA model with all these episodes, and it dawned on me, I probably should do at least one on… “What is an RIA?”
A good reminder of why this is needed, perhaps in your role as a financial advisor working with clients, sometimes you might use terminology like basis points or ETFs. And while that’s a common language used for those of us in the industry, your average client might not necessarily know what a basis point is, or if you called it bps. Or even what an ETF entails.
And so we always need to remind ourselves, not everyone necessarily understands some of this jargon and terminology.
The same thing applies within our industry with the RIA model.
There are many advisors that are have only ever been at one affiliation model their entire career, or perhaps even one firm their entire career. Let’s say they’re at a wirehouse, and that is literally the only thing they have ever been exposed to.
Well, they’ve likely heard of an RIA, but don’t necessarily know exactly what it is or how it compares to what they have now. So, I wanted to make an episode on what is an RIA?
At a high level, RIA stands for Registered Investment Advisor. An RIA is an entity.
What I mean by that is, to use a non-industry analogy, you might own a McDonald’s, you might manage a McDonald’s, but you would never say… “I am a McDonald’s.”
It’s the same thing in our industry that a Registered Investment Advisor is an entity.
Now, you will hear financial advisors sometimes say… “I am an RIA.” Again, that’s technically not correct. To use my McDonald’s analogy, that’s like saying… “I am a McDonald’s.”
And so in the case of an RIA, you might own an RIA, you might manage an RIA, but you yourself, the person, are not an RIA.
So, the RIA is the entity.
The individual advisors underneath the RIA are called Investment Advisor Representatives, IARs.
Now, as a financial advisor, you typically don’t go around telling clients… “I’m an IAR, I’m an Investment Advisor Representative.” That’s just not the terminology we typically use. But IAR is the regulatory definition of the advisors underneath the RIA.
So, as a starting point, just know an RIA is an entity that you register, that you create. But the financial advisors working for it are not themselves called RIAs.
But I hear that misused all the time. Again, whether an advisor says… “I’m an RIA,” or some solution providers will describe themselves as an “RIA” solution, when really they cater to the individual advisor.
So, just careful with how the term is being used, but at a high level, just know again, it’s an entity.
Next up is to understand the difference between an RIA and a broker-dealer, which most of all of you are at least probably familiar with a broker-dealer.
For many of you, you’re perhaps wearing both hats. To break them down into two, we’ll start with broker-dealers.
A broker-dealer is what allows a financial advisor to provide investment solutions for their clients and they are compensated for doing so on a transactional basis where they are paid a commission.
Historically, decades ago, this was literally transacting trades. Equity trades would generate a commission and that’s how the advisor was compensated. Then there were perhaps loaded mutual funds, which still exist, where you’re paid a load. Or a commission-based variable annuity where you’re paid a load.
The advisors acting in that capacity, from a jargon standpoint, they are a Registered Representative of the broker-dealer. It is the Series 7, or for some folks the Series 6, but in most cases, it’s the Series 7 exam that you must pass, that enables you to become a Registered Representative, or more informally called a “broker,” of a broker-dealer.
Again, that allows you to do things on a transactional basis where you’re paid on a commission.
The RIA side of the house is where you are providing advisory services, advice, maybe asset management to the client, and you are doing so in return for a fee that you are being paid.
You are not compensated every time there’s a transaction in an account, perhaps buying or selling stocks or buying ETFs or mutual funds or whatnot. You are paid a fee by the client to do so.
There are several different fee models in the marketplace. The most predominant one is an AUM fee where the client is paying the advisor, typically a 1% fee, to provide them advisory services.
Those are two entirely different approaches.
A broker-dealer, for instance, is regulated by FINRA. An RIA, in most cases, is regulated by the SEC. Though some RIAs due to their size are regulated by their state.
It’s two different regulatory bodies and two different services and value being provided to clients.
Now, I would point out that the term “financial advisor” doesn’t have a regulatorily defined definition. We just commonly refer to folks as financial advisors.
Many “financial advisors” that are at large wirehouses, that are at large independent broker-dealers are usually wearing both these hats. They are both a Registered Rep of the firm’s broker-dealer arm, and they are also an Investment Advisor Representative of the firm’s RIA arm. They’re essentially operating under both.
Decades ago, it was common to solely be a Registered Rep, to solely be a broker, and 100% of your business was done on this transactional basis.
But over the decades, it is now predominantly more and more done on the fee-based side, where if you look at large independent broker-dealers or large wirehouses, typically more client assets are now done under the fee-based side, than they are done on the broker-dealer side.
So, just know on that fee-based side, that is what is being done under the RIA.
Next, where did this RIA thing come from?
It stems back to the 1929 market crash and the depression that followed it.
With all the turmoil, and all the fallout over many, many years, Congress came together and said… “What can we learn from that? What can we do to try to prevent a reoccurrence of some of the issues that happened that led to that?”
There was various legislation passed as a result, and one of those pieces of legislation is called the Investment Advisors Act of 1940. It is that Investment Advisors Act that created what is now an RIA.
So, an RIA today, at its core, is the same as the RIA that was enacted after the 1940 legislation came along.
Now, along the way, there’s been some tweaks to different rules and the industry has had to adapt. In 1940, for example, ETFs didn’t exist. The industry has had to adapt, rulemaking had to adapt.
But the main core, the main idea of an RIA, the main idea of what it’s providing for clients, how you’re compensated, stems back to that Investment Advisors Act of 1940. Which if you do the math, we’re slowly coming up on almost a century from the time it was first enacted.
Needless to say, RIAs have been around for a very long time. It has only been arguably more so in the last 10, 15, 20 years though that it has rapidly picked up steam as it has. While it’s existed for many, many decades, the predominance of the model has really picked up speed as of say 10, 15, 20 years ago, and now up to present and going forward.
That’s how RIAs came to be.
Now, a couple additional items to end on here with respect to RIAs.
As I alluded to earlier with the wirehouse example, keep in mind you’re probably at some form of an RIA now. Wherever you are, whatever affiliation model you’re in , if you’re offering fee-based accounts to clients, you are under an RIA of some sort.
Now, you might refer to the firm that you’re affiliated with as a “broker-dealer,” and that’s because they’re likely, as I gave in the example, also a broker-dealer. And because we’ve called these firms broker-dealers for so long, that’s why we typically call a wirehouse a broker-dealer. But again, it’s a broker-dealer and an RIA.
We’ve just for so long focused on calling them broker-dealers, because again at one point they were primarily, if not entirely, solely a broker-dealer. But if you are offering fee-based accounts, that’s under an RIA as well.
Next, to give you perspective of the size of the RIA market, there’s about 30,000 RIAs out there.
That’s RIAs. That’s entities. Underneath those 30,000 RIAs are a couple hundred thousand Investment Advisor Representatives. But as far as the entities alone, to give you an idea, it’s roughly 30,000.
About half of them are registered with the SEC and about half registered with their state. It goes beyond the scope of this episode, but I’ve done an episode on why an RIA might be SEC or state registered, so you can check that out if you’d like.
Another thing to keep in mind if you’re first learning more about the RIA model, there are multiple pathways that you could transition your practice into it.
I’ve done several episodes on this. But at a very high level, one option is you start your own RIA, and there’s pros and cons to why that might make sense for you.
On the other end of the spectrum is you might join an RIA. And there are a wide array of, as I call them, flavors of RIAs that you could join. So if you’ve only ever heard about one RIA or been pitched only one RIA, well, that’s that RIA’s value proposition, and that’s their business model.
Just know that there are a wide array of value propositions out there, some of which won’t at all be attractive to you, depending on where you are in your career. And then there’s others that you might find very attractive. I’ve done episodes on how to evaluate an RIA to potentially join.
And then in the middle of that spectrum is the third potential pathway, which is where you have your own RIA, but you’re leaning on what’s often referred to as a supported independence type platform to help you piece together many of the solutions that are needed to run an RIA on your own.
So, at a high level, just know there are three main ways into the model.
But within each of those pathways, there are lots of different service providers, lots of different value propositions, lots of different pieces that go into it.
That’s a big part of what I help advisors and teams with is understanding… Should you even be digging into the RIA model? Is it a potential fit for your practice? Whatever you’re trying to accomplish with your practice going forward, is that going to be doable in the RIA space? Is it going to solve or achieve what you’re hoping to achieve?
And then to the degree it does make sense, it’s understanding these different pathways and all the different solution providers and all the different value propositions.
I’m happy to have that conversation with you as well.
I would also note, there are a lot of misconceptions about the RIA model.
It’s tough to determine why these misconceptions exist, but a couple examples.
First, sometimes the voices in the industry that are saying how the RIA model does or does not work, simply do not know themselves.
If you are an advisor or branch manager or home office employee and you’ve only ever worked in one channel your whole career, and maybe only one firm – let’s pick on wirehouses – if you’ve only ever been at the wirehouse model or one firm of the wirehouse model, you’re probably pretty knowledgeable on that model. Perhaps you’ve been there a long time and you’re now a branch manager.
If that’s the path your career took, that hasn’t educated you per se, or prepared you to understand how the RIA model works. It’s a very different model.
Sometimes you’ll hear, particularly branch managers because they don’t want any advisors in their branch to leave, they’ll say things about the RIA model that are simply incorrect in part because that branch manager themselves simply doesn’t know and doesn’t realize they don’t know exactly how it works.
Now, unfortunately there are some people, and not all, and we’ll just pick on the branch manager example, but there are some people where because they have a motivation to try to keep advisors in their branch, they’ll essentially maliciously say stuff about the RIA model.
Either because again they don’t realize it’s not true, or they realize it, but they’re just saying it because again they’re trying to scare the advisors underneath them from ever considering perhaps an RIA path. So they will say things about the RIA model that are at times just 100% factually incorrect.
That’s just two examples of what drives misconceptions. I would just say, whatever you think about the RIA model, or you believe you understand about the RIA model, is to take time to fully understand it. It may or may not be something that’s going to be a good path for your practice. Again, I can help you understand all of that. But careful coming in based on things you’ve heard, because it depends on who you’ve heard it from. Those misconceptions can be planted again nefariously or accidentally or whatnot.
The key is to take the time, talk to someone that knows what they’re doing, like myself, help you understand how it works and whether it’d be a fit for your practice.
Finally, I would point out that the RIA model has been for many years now, and continues to be, the fastest growing channel in the wealth management industry.
You must ask yourself, why is that? Of all the different channels, the W2 channels, the wirehouse channels, the independent broker-dealer channels, why is it the RIA model is growing at the fastest pace and has been for many years now?
It’s generally because advisors when they take the time to learn more about it, and when it’s a fit for their practice – it’s not a fit for everyone – but when it’s a fit, it can be very advantageous to transition your practice to it. Hence why we see this migration of advisors doing so.
And it’s not just the fact it’s the fastest growing. If you look at the movement of advisors and you map out, if they left one firm, where did they go?
Now, there’s many advisors that will leave one firm and just go to another firm within that same channel. There are a lot of advisors that never leave, or at least for now, have not left their current channel. They might leave one wirehouse, but they go to another wirehouse. Or leave one IBD and go to another independent broker-dealer.
But if you look at when there’s a change made to the affiliation model, that river only goes in one direction. The flow of advisors overwhelmingly goes from that more captive W2 environment to more independent environments, with the most independent being the RIA model.
That river does not go in the other direction. The only time I’ve ever seen that occur generally is for some sort of succession event where an advisor is already independent, they’re in the RIA space – whether their own RIA or maybe they’re 1099 at an RIA they joined – the only time I’ve ever seen advisors go back to a W2 model was due to a succession event where they’re selling their practice. Where this is part of their eventual succession.
Other than that, you typically never see advisors go independent, an RIA path, and say… “wow, I actually think it was better back at that W2 wirehouse, let me go back.”
Ask yourself, why is that? Why are the stats showing that? Why does that river only go one direction? Why is the RIA model the fastest growing?
There’s a reason it makes sense to at least spend some time seeing if it might be a fit for your practice.
As I said at the top, my name is Brad Wales with Transition To RIA. This is what I help advisors and teams with is understand, should you be looking at this, would it be a fit for your practice? Will it accomplish what you hope to accomplish with making a transition? What are all the ways you could go about doing it? Who are all the solution providers? How do you put all the pieces in place?
I help you navigate from the very beginning of due diligence all the way to the time you’re launching the practice. I’m happy to have that conversation with you as well.
First things first though, head to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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