From time to time, we are asked about differences in standards of practice among various types of investment practitioners. Registered Investment Advisors (RIAs) that meet a threshold of assets under management are regulated by the SEC under the Investment Advisors Act of 1940 (the 1940 Act).
“Financial advisors who work under the auspices of an RIA are fiduciaries, and are obliged by law to put the interests of clients ahead of all others. But not all financial advisors work at RIAs.”
Smaller RIAs are regulated by state securities regulators. Generally, the 1940 Act provides that an RIA must act as a fiduciary which, according to the SEC, means that the RIA must seek to avoid conflicts of interest with clients, and disclose any such conflicts that remain. It is a short—but unwarranted—leap of logic to assume that any person offering investment advisory services to a client will, in fact, provide conflict-free services, at the level of care, skill, and caution demanded from a fiduciary. First, it is almost impossible to eliminate every conceivable conflict of interest. Further, many advisory firms do not try very hard to eliminate conflicts. This sometimes surprises investors, who assume that designations such as “registered investment advisor” are synonymous with a strict adherence to fiduciary principles. Investors should look beyond the RIA designation to determine the extent to which their advisor is acting in a fiduciary capacity.