Which of the following entities would be required to register as an investment advisor under the Uniform Securities Act?

Those who wish to work as independent financial advisors to individual investors, to manage assets or provide financial counsel, generally need to become a registered investment advisor (RIA). Unlike that of a financial planner—a broader profession, with no legal mandates for training or licensing—the road to becoming an RIA has specific requirements.

Key Takeaways

• Registered Investment Advisor (RIA)s—financial professionals who counsel individuals on financial affairs and manage their portfolios—must meet certain legal and professional qualifications.
• RIAs must pass the Series 65 exam.
• RIAs must register with the SEC or state authorities, depending on the amount of money they manage.
• Applying to become an RIA includes filing a Form ADV, which includes a disclosure document that is also distributed to all clients.
• Usually compensated by a percentage of assets under management, RIAs are legally required to act in a fiduciary capacity for their clients at all times.

RIA Licensing and Qualifications

The first step to becoming a Registered Investment Advisor (RIA) is to pass the Series 65 (Uniform Investment Advisor Law) exam. This test is administered by the Financial Industry Regulatory Authority (FINRA), a self-regulating, private organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States.

However, test-takers are not required to be sponsored by a broker-dealer, as they are for most other securities-related exams administered by FINRA.

The test itself covers federal securities laws and other topics related to investment advice. It has 140 multiple choice questions, of which 10 are pretest questions that will not count towards the final grade. Of the 130 scored questions, a candidate must correctly answer 94 to pass the three-hour exam.

It is important to note that while no other licensure or designations are required in order to become an RIA, most advisors will find it rather difficult to bring in business without additional qualifications, such as the CFP® or CFA designation. In fact, many states will actually allow advisors who carry the following designations in good standing to waive the Series 65. These designations include:

• Certified Financial Planner® (CFP®)
• Chartered Financial Analyst (CFA)
• Chartered Investment Counselor (CIC)
• Chartered Financial Consultant (ChFC)
• Personal Financial Specialist (PFS)

Federal and State Registration for RIAs

If providing investment advice or asset management services is going to be key to the services you offer, the next step to becoming an RIA is to register with either the SEC or the state(s) in which you intend to do business. However, you will not have to do this if providing investment services or advice is purely incidental to your practice. A list of professionals who may qualify under this exception includes:

• Accountants
• Attorneys
• Engineers
• Teachers
• Bankers
• Broker-dealers
• Publishers
• Advisors who work exclusively with U.S. government securities
• Advisors who are registered with the Commodity Futures Trading Commission and for whom providing investment advice is not a primary line of business
• Employees of charitable organizations

SEC Registration Eligibility

Regulations passed in the Dodd-Frank Act in 2010 set certain limits for SEC registration:

• A small adviser with less than $25 million of AUM is prohibited from SEC registration if its principal office and place of business are in a state that regulates advisers (currently all states except Wyoming).
• A mid-sized adviser with AUM between $25 million and $100 million of AUM:
  Is required to register with the SEC if its principal office and place of business is in New York or Wyoming, unless a registration exemption is available (e.g., exemption for certain advisers to private funds).
• Is prohibited from SEC registration if its principal office and place of business are in any state except New York or Wyoming, and the mid-sized adviser is required to be registered in that state. If the mid-sized adviser is not required to be registered in that state, then the adviser must register with the SEC, unless a registration exemption is available.
• An adviser approaching $100 million of AUM may rely on a registration “buffer” that ranges from $90 million to $110 million of AUM. The adviser:
  May register with the SEC when it acquires $100 million of AUM
• Must register with the SEC once it reaches $110 million of AUM, unless a registration exemption is available
• Once registered with the SEC, is not required to withdraw from SEC registration and register with the states until the adviser has less than $90 million of AUM.
• A large adviser with at least $110 million of AUM is required to register with the SEC, unless a registration exemption is available.

Any firm or individual who acts as an investment advisor on behalf of an investment company is also required to file with the SEC, regardless of the number of assets under management.

Firms that register with the SEC are never required to file with states as well, but they must file a notice of SEC registration with each state in which they do business. The majority of states do not require registration or filing of notice if the advisor has less than five clients in the state and does not have a place of business there.

Most firms register with these entities as a corporation, with each employee acting as an investment advisor representative (IAR). It should be noted that while corporate registration may limit an advisor's financial liability, it will not allow one to escape legal or regulatory action if the RIA violates rules.

RIAs and the Form ADV

The next step in the registration process is to create an account with the Investment Adviser Registration Depository (IARD), which is managed by FINRA on behalf of the SEC and states. (A few states that do not require this, so advisors who only do business in those localities do not have to go through this process.)

Once the account is open, FINRA will supply the advisor or firm with a CRD number and account ID information. Then the RIA can file Form ADV and the U4 forms with either the SEC or states.

The Form ADV is the official application document used by the government to apply to become an RIA. It has multiple sections that all must be completed, although only the first section is electronically submitted to the SEC or state government for approval. Part II of the form serves as a disclosure document that is distributed to all clients. It must clearly list all services that are provided to clients, as well as a breakdown of compensation and fees, possible conflicts of interest, the firm's code of ethics, the advisor's financial condition, educational background and credentials, and any affiliated parties.

This form must also be uploaded electronically into the IARD and given to all new and prospective clients. Preparing and submitting these forms typically takes most firms a few weeks, and then the SEC must respond to the application within 45 days.

Some states may respond as soon as 30 days but the process, in either case, is often delayed by requests for additional information and questions that need clarification. All firms that register with the SEC must also create a comprehensive written compliance program that covers all aspects of their practice, from trading and account administration to sales and marketing and internal disciplinary procedures.

Once the SEC approves an application, the firm may engage in business as an RIA and is required to file an annual amendment to Schedule 1 of the ADV, which updates all of the firm's relevant information (such as the number of assets currently under management). Also, while the SEC has no specific financial or bonding requirements for advisors, such as a minimum net worth or cash flow, it does examine the advisor's financial condition closely during the application process.

Most states require RIAs to have a net worth of at least $35,000 if they have actual custody of client funds and $10,000 if they do not; RIAs who fail to meet this requirement must post a surety bond. (The rules for this requirement, as well as several other aspects of registration, vary from state to state.)

RIAs vs RRs

Financial professionals choose to become RIAs because it allows them greater freedom to structure their practices—more so than that allowed registered representatives who also advise, buy and sell securities for individual investors, usually as employees of brokerage firms.

Despite the similar-sounding names, registered representatives (RRs) are not the same as registered investment advisors. RRs work for a brokerage, serving as its rep for clients trading investment products. Brokers are RRs.

Registered representatives who work for broker-dealers—aka stockbrokers—must always pay a percentage of their earnings as compensation for their back-office support and compliance oversight, which most will readily concede can be very overbearing at times.

Brokers also usually work on commission, while the majority of RIAs charge their customers either a percentage of assets under management or a flat or hourly fee for their services. Many RIAs also use another firm, such as a discount broker, to house their clients' assets instead of holding the accounts in-house, in order to simplify their recordkeeping and administration.

Battle for Regulatory Oversight

Although the SEC and the states have the responsibility of overseeing RIAs, FINRA has spent the past several years lobbying Congress to let it take on the task, even attempting to get a bill passed to that effect in 2012. FINRA claims that research shows that the SEC cannot adequately oversee the RIA industry by itself, and either needs more resources to do so or else needs to cede oversight of RIAs to a self-regulatory organization (SRO) such as FINRA.

Indeed, a study done by the SEC itself in 2011 showed that the government only had the capacity to review less than 10% of all RIAs under its jurisdiction in 2010. FINRA has maintained that it has the resources to effectively oversee and review all RIAs on a regular basis.

However, the RIA community has fought to stop FINRA from intruding upon its territory. The cost of administrating this additional regulation would place a heavy financial burden on advisors, and many smaller firms would likely be put out of business.

Many RIAs also view FINRA as an ineffective organization that is heavily biased toward the broker-dealer community, and some statistics indicate that FINRA has ruled substantially in favor of the major wirehouses in arbitration cases where clients sought large amounts of money in transactional disputes.

Advisors also see FINRA substantially lowering the protection given to RIA clients now, as RIAs are legally required to act in a fiduciary capacity for their clients at all times.

Brokers and securities licensed reps only have to meet the suitability standard, a much lower standard of conduct, which only requires that a given transaction performed by a broker must be "suitable" for the client at that time. The fiduciary standard requires that advisors unconditionally put their clients' best interests ahead of their own at all times and in all situations and circumstances. FINRA oversight would likely put an end to this standard for advisors.

The Bottom Line

Registered Investment advisors enjoy greater freedom than their counterparts in the industry who work on commission. They are also required to adhere to a much higher standard of conduct, and most advisors feel strongly that this should not change.

Of course, those who register to become RIAs must also contend with the normal startup issues that most new business owners face, such as marketing, branding, and location, in addition to the registration process.

The SEC website offers additional information on becoming an RIA.

Which of the following are not required to register as investment advisers under the investment Advisers Act of 1940 persons who give advice?

Which of the following must be registered with the SEC as an investment adviser under the investment Advisers Act of 1940?

Which of the following is defined as an investment adviser under the investment Advisers Act of 1940?

Which of the following is not exempt from the definition of an investment advisor?