Also available as podcast (Episode #3)
What is the difference between an RIA and an IAR?
A Registered Investment Advisor (“RIA”) and an Investment Advisor Representative (“IAR”) are distinctly different. A RIA is the legal entity that is formed to provide advisory services for a fee to clients. The IAR is the individual advisor(s) underneath the RIA that formally deliver the advice. There are specific regulatory processes associated with the creation and ongoing maintenance of each.
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What is the difference between an RIA and IAR? That is the subject of today’s video which is question #3 on the Transition to RIA video series.
Hi, I’m Brad Wales from Transition to RIA. I help advisors like you learn about the RIA model. How the economics work, how the flexibility works, the pros, the cons, the different ways to go about transitioning into the model. And if you were to decide to do it what are the steps of actually making that transition?
Head on over to TransitionToRIA.com if you’re not already there, to learn all kinds of additional things.
On today’s video we’re going to talk again about the difference between an RIA and an IAR. And just to complicate things of course in our industry, we also have the IRA, the Individual Retirement Account. Which we all know what that is.
But the question is what is the difference between an RIA and an IAR?
At its core, an RIA, Registered Investment Advisor is an entity. So a common thing I hear the owners/principals of an existing RIA say is “I am an RIA.” And that’s a commonly accepted or commonly used phrase and everyone understands what it means. But technically, an RIA is an entity. So as that owner or advisor yourself, you’re not really the RIA. That’s like owning a McDonald’s and saying “I’m a McDonald’s”. You might own a McDonald’s, you might run a McDonald’s, but you yourself are not a McDonald’s. So technically the RIA, Registered Investment Advisor is an entity. A legal entity that has to be setup and established from a regulatory standpoint.
Underneath the RIA, the individuals that are providing the advice are IARs, Investment Advisor Representatives. You more than likely right now are already an IAR at your existing firm. So if you’re at one of the traditional firms, if you’re providing fee-based accounts, you are an IAR under, as they say, the corporate RIA of that firm.
Now, you’re most likely wearing two hats if you’re at one of the more traditional firms out there. You’re probably wearing the hat of an IAR under the corporate RIA and you’re wearing your Series 7 registered rep hat under the corporate broker-dealer. So you’re kind of wearing both of those hats.
The reason I point this out is you’re already an IAR, you’re already working underneath an RIA, so that is nothing new. This is all assuming you’re providing fee-based accounts currently. The only difference would be if you were to start your own RIA…..again, you would set that up as a legal entity, there’s absolutely steps involved with how that gets set up, I’ll do future videos on it as well or you can jump over to my website, reach out to me, I’m happy to explain it whenever you’d like……but you set up that RIA and then underneath it you have to be registered as an IAR and there is a process to register.
It is the same process you go through generally at the end of every year. Your firm does this for you to make sure your IAR license carries over to that following year. Same thing would happen under your own RIA, again, it’s just it would be your RIA that you own at that point.
Final two things I’ll talk about are again it’s just different tasks. Keep in mind you will be using what’s called a compliance consultant to do these tasks. I’ll walk you through all that again in a future video. But setting up the RIA is one task and setting up each individual that’s going to be providing advisory services under that RIA is a separate task onto itself. Neither one is overly complicated by any stretch of the imagination but just to point out it is two steps that must be performed separately.
The last point I’ll make is keep in mind none of this has anything to do with the custodian you use to hold your assets. So as an RIA, you need a custodian to actually custody your client’s assets. Your RIA is completely arm’s length from that custodian. The custodian does not have any ownership of your RIA, the custodian is not “affiliated” with your RIA in any regards. They’re essentially just a vendor of your RIA that provides custody and clearing services for your clients and their assets.
The reason I point this out is because of that, your custodian will have nothing to do with these licenses. They will not be your RIA and likewise, you will not have your 65 or your 66 with the custodian. Again, your IAR registration, which is what takes those licenses or those exams, that will be held with the RIA. The custodian has absolutely nothing to do it. So just just something to be said to point out there.
And again, do not fret over any of this. This is all table stakes services that a compliance consultant provides for you. Having a compliance consultant, you hire these folks to help you with all of your ongoing compliance support. This is the sort of thing they handle for you so no need to worry about writing all kinds of details down. But I think it is helpful to appreciate the difference between an RIA and an IAR and what that would look like under your own firm.
So with that, like I said I’m Brad Wales with Transition to RIA. Feel free to jump over to the website TransitionToRIA.com. To reach out and contact me, there’s a contact link at the top of the page where you can instantly schedule a chance to reach out and chat. Again, this is what I do. I help advisors understand everything they want to learn about the RIA model. Why it might be a benefit to them, the different ways to go about entering into the model, and if so, what does that transition look like. So I’d be happy to have that conversation with you as well.
I hope you’ve enjoyed this video and I’ll see you on the next one.
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