What exactly is an RIA?

Nice piece Brooke! Well defined.

My elevator speech for what an RIA is: A small business focused on providing objective, independent advice to investors for a fee.

Brooke, I really like the question that you ask and I believe that your definition of an RIA is correct. An even shorter and succinct version would be that an RIA is “a firm that is registered with the SEC to provide investment advice for a fee”. Most people understand this simple description. The enlightened consumer would also be wise to understand that the RIA has a fiduciary duty to act in the best interests of the client. Not all sources of investment advice are required to live up to this high fiduciary standard of care. More education on the registration of investment advisors would be good for the general public as the individual consumer has to make choices about where to get investment advice.

My only addition to the elevator pitches above is to substitutute investment advice with wealth management advice. Below is a url from HBR that is a good tool for building your elevator pitch.

http://www.alumni.hbs.edu/careers/pitch/

Key information in this article? That “What is an RIA?” is googled 1.2 million times a month. That’s 1.2 million opportunities a month to get your practice in front of someone interested enough in learning about an RIA to search for it in google.

How do you make this work for you? Answer this question with a post to your blog or a new page on your website. 1.2 million people are waitting…

Technically an RIA (a) provides personalized client specific advice for a fee, (b) is accountable for every recommendation they have ever made resulting in continuous comprehensive counsel, (c) has an ongoing fiduciary duty of care and loyalty to the consumer which requires the adviser to act on behalf of the consumer in the consumer’s best interest.

Brokers (a) are not accountable for their investment recommendations after a sale is executed , (b) have no ongoing fiduciary duties as it is a violation of the internal compliance protocol of their supporting broker/dealer to either acknowledge fiduciary responsibility to act in the consumer’s best interest or that they render personalized advice, and© have preagreed upon arbitration proceedings to manage client disputes that absolves the broker for any responsibility for their recommendations.

Essentially brokers do not render advice, they simply make the consumer aware of their investment alternatives. It is solely up to the consumer to determine investment merit on their own, regardless how limited the consumers investment knowledge and experience may be. Brokers only offer generalized advice such as buy gold, but can not tell you how the recommendation improved return, reduced risk or enhanced the tax efficiency, liquidity, cost structure, etc. of your client’s holdings as a whole—as those are services required of advisers.

The brokers services are limited to the clerical function of trade execution as by being personally client specific as to how a recommendation affects the client’s portfolio—they are rendering advice and trigger fiduciary responsibility for which their supporting broker/dealer is responsible. The brokerage industry’s defense to having tens of thousands of brokers independently providing advice for which it is responsible is to simply maintain that brokers do not render advice and make it a violation of its internal compliance protocol for brokers to (a) acknowledge that advice is provided and (b) there is a fiduciary obligation requiring brokers to act in the consumers best interest, based on 800 years of common law.

This inability of the broker to act in the consumers best interest has resulted in the loss of trust and confidence of the investing public and has required an act of Congress (Dodd-Frank) to extend the same consumer protections afforded by advisers to consumers to brokers.

This is why the DOL can not retreat from holding brokers to the fiduciary standard of care in dealing with IRAs. Eighty percent of IRA assets are roll overs from retirement plans afforded the fiduciary protection of ERISA. When ERISA assets are rolled over into an IRA, those assets should be afforded the same fiduciary protection they once enjoyed. Anything less would neither be in the best interest of the consumer nor would be sound public policy protecting the public trust.

It should be noted that the SEC has established that it is the broker/dealer’s responsibility to properly support the broker as there are fiduciary duties beyond the control of the individual broker that can only be managed by the b/d such as treating trade execution as a cost center on behalf of the consumer in their best interest rather than being managed as a profit center—thus creating a fee for ongoing service business model. Continuous comprehensive counsel also requires the real time management of information which changes how one approaches portfolio construction. Real time data access and the electronic management of complex values like tax efficiency, cost structure and trade execution cost is accomplished through the use of real time buy/sell research and overlay management take the industry in a different direction. Retail mutual funds, which can neither be client specific as they are governed by prospectus nor afford holding transparency, are not well suited for personalized continuous comprehensive counsel.

The question of is the best interests of the consumer being well served in a brokerage business model has a very clear answer. No. So, what will Congress do about it? It passed Dodd-Frank. Will the brokerage industry comply? Absolutely not, as the FSI has engaged hundreds of lobbiest to advocate on behalf of the industry’s best interest. So even when literally the best interest of the consumer are so clear—the brokerage industry advances its own interest.

What is so sad is top industry executives know exactly how to make large scale institutionalized support for fiduciaey standing safe to acknowledge, highly scalable and easy to execute. Advisor productivity would go up by as much as 5X, earnings will dramatically, cost are streamlined around prudent process and the industry achieves three times the earnings multiple.
Harvards’s Clayton Christensen (Innovators Dilemma) observes the biggest mistake established industry’s make when faced with industry redefining innovation is to look at innovation in the context of the existing business model when a new business model is in order.

There is a lot of work to be done, which should take no more than 12 months which would greatly elevate the role and counsel of the advisor, provide an unprecedented level of investment and administrative counsel to the consumer and greatly enhance the economic metrics of the industry. If the criteria is what is the best interest of the consumer—hands down fiduciary standing trumps commissions sales.

So why is there even a question. For the good of the industry and modernity—Dodd-Frank must prevail.

SCW

An elevator pitch or better, the “30 Second Commercial” should entice the listener to query “Please tell me more.” Anything longer than about 10 words won’t work. Focus on your core business and what separates you from your local competetion. Mine is this:

“My firm seeks to eliminate client conflict of interest in investment and planning.”

When asked for more information, I ask to exchange business cards and for an opportunity to meet.

Kevin,

Couldn’t agree more.

How about, I provide patented and proven institutional services and am accountable for expert personalized advice rendered in the consumer’s best interest, not presently possible within a commission brokerage format.

SCW

Thanks for this useful information! I worked in Investment Management for the last 2 years and am thinking about switching to an RIA. It seems that going forward RIA’s are only going to become more valuable, important, and essential for clients’ well-being.

I understand the Registered Investment Adviser is required to be a fiduciary…. a lot of brokers are using the designation of Registered Investment Advisor, implying a fiduciary duty, but since the spelling of “Advisor” differs from “Adviser,” they are getting away with it.