Steps to becoming a Registered Investment Adviser

What does it take to become an investment advisor and provide people with high-stakes financial advice? According to the U.S Investment Advisers Act of 1940, individuals must first acquire a license or registration before they can charge clients for their services. As the areas of investing and securities trading are considered “complex operations”, professional advisors must meet the criteria set by SEC laws.

In this article, we’ll examine the steps aspiring investment advisers must take to obtain that license, their duties and responsibilities, and the skills needed to be one.

What is a “Registered Investment Adviser”?

Registered Investment Advisers (RIAs) are individuals or businesses that offer investment advice to clients in exchange for certain fees. Their clientele includes high-net-worth individuals and firms that want to manage their investment portfolios. That said, RIAs need to be SEC-registered and well-versed in all regulations covering financial and investment management.

How does an RIA differ from an IAR (investment adviser representative)?

Simply put, RIAs (Registered Investment Advisers) are typically the firms or businesses that Investment Adviser Representatives (IARs) work for, and one RIA can employ multiple IARs. Meeting RIA requirements involves ensuring that both the RIA and its IARs possess the appropriate credentials. A key part of these requirements is obtaining a Series 65 license, administered by the Financial Industry Regulatory Authority (FINRA). To earn this license, individuals must pass the Series 65 exam, or alternatively, pass both the Series 7 and Series 66 exams as co-requisites. Some states may recognize alternative designations, such as the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) exams, in place of the Series 65. Understanding these Series 65 requirements is crucial for anyone looking to become an IAR or to meet RIA requirements for compliance.

How to become a Registered Investment Adviser (RIA)

Becoming a Registered Investment Adviser (RIA) is a multi-step process that can take several months, involve numerous regulatory and registration fees, and require careful attention to federal and state compliance requirements. To start a registered investment advisory firm, you’ll need to register your business with the appropriate state authorities or the SEC, properly form your advisory business entity, and complete other required steps. Below, you’ll find the key stages of becoming an RIA and launching your own advisory business.

1. Pass the Series 65 exam

In order to establish an RIA business, obtaining your Series 65 license is a crucial step needed to prove your investment advisory credentials with regulators. The most common route is to pass the Series 65 exam, which is specifically designed for individuals seeking to become licensed investment adviser representatives. If you already hold an active Series 7 license, you may qualify to take the Series 66 exam instead of the Series 65.

Achievable offers comprehensive courses for the FINRA Series 7, FINRA Series 65, and FINRA Series 66 exams, helping candidates efficiently prepare for their licensing requirements. As we mentioned before, the Series 65 license requirement may be waived in some states if you possess advanced financial planning designations such as the CFP or the CFA

2. Incorporate your RIA business

Next, to continue the process of starting a registered investment advisory firm, you will need to set up and incorporate your business formally. It is recommended that you establish your registered investment advisory firm as either an S-Corporation (S-Corp) or a Limited Liability Company (LLC), with the LLC being more widely chosen for its popularity among RIA owners. Remember, selecting an LLC or S-Corp structure provides general liability protection but does not shield you from regulatory action in the event of legal violations.

After you’ve selected your business entity, the next step in becoming an RIA involves registering your RIA firm at the state or federal level, depending on your firm’s assets under management and geographical reach. This registration process requires registering both your advisory firm and all individual representatives, yourself included, with regulatory authorities. You’ll also need to prepare detailed compliance documents that align with your firm’s state of residence. Most commonly, your RIA registration begins with submitting Form ADV. Once your Form ADV is processed and approved, each advisor must submit Form U4 to register as an Investment Adviser Representative (IAR).

Many entrepreneurs opt to hire an RIA compliance consultant to navigate these requirements, though even with expert help, finalizing registration for your registered investment advisor firm may take 2-3 months.

When your RIA firm is successfully registered, you must pay an initial firm filing fee and an annual renewal fee. Additionally, there are individual IAR registration fees for each representative in your investment advisory firm (note: some states, such as NY, MN, WY, and LA, have exceptions).

To fully complete the steps to start a registered investment advisory firm, you’ll need to establish comprehensive compliance policies, procedures, documentation, and a code of ethics to govern your new RIA business. It’s strongly recommended that you obtain insurance coverage, specifically Errors & Omissions (E&O) insurance, which serves as crucial professional liability protection for your advisory practice. Your state may also require you to secure a surety bond or demonstrate a positive net capital balance before operating as a registered investment adviser.

Finally, running a successful registered investment advisory firm involves equipping your business with key technology tools: secure domain name registration, computers, client billing systems, marketing software, CRM platforms, portfolio reporting tools, and other operational solutions that keep your RIA business running efficiently.

3. Register with the SEC or your state

After successfully passing your FINRA exam or qualifying for a waiver, the next step in becoming a registered investment advisor is to register your firm at either the federal or state level. To start a registered investment advisory firm with the SEC, your business must generally have at least $100 million in assets under management (AUM), or you may be eligible to register under the “internet investment advisers” exception through Rule 203A-2(f).

The “internet investment advisers” exception applies only to investment advisors who deliver advice exclusively through an interactive website. This means your registered investment advisory firm must use computer software-based models or applications that provide tailored investment advice based on information submitted by each client via the website. The SEC emphasizes that this rule does not extend to firms that merely use websites for marketing or general communication; it is strictly reserved for those who invest in developing a fully interactive advisory platform.

Because of the $100 million AUM threshold for SEC registration, most individuals looking to start an advisory firm will initially register within their state of residence. State registration does not require meeting the $100 million AUM minimum or using the internet adviser exception, but you must research your state’s specific process and comply with all local regulatory requirements.

Regardless of whether you register with the SEC or your state regulator, you are required to submit Form ADV as part of the process of becoming a registered investment advisor. Form ADV consists of several sections and must be filed electronically via the Investment Adviser Registration Depository (IARD) system. The SEC typically reviews and responds to your registration application within approximately 45 days.

4. Set up a custodian

Your firm will now need a custodian to hold your client’s assets and securities holdings. This is often a large firm like Bank of New York Mellon or Charles Schwab. When choosing a custodian, consider your firm’s size, the custodian firm’s size, what level of service you’ll receive, what investment platforms and technology they support, and your personal relationship with the firm or your representative.

5. Leave your old job in a legally safe manner

If you are currently employed by another FINRA-registered firm, you must follow Broker Protocol, which dictates which information you can ask of clients, what you can say about your former place of business, and what information or contacts you can take with you when you leave your current role.

It is recommended that you not tell anyone about your new RIA firm before the day you leave your old job, especially your clients. Resign in writing, and be sure to list out what client information you are taking, which cannot include account numbers. Some advisers get a lawyer to prepare them for this step, and to help get clarity on what information they’re legally allowed to take.

RIA duties and responsibilities

Once an RIA completes the required licensing process, it must meet a comprehensive set of RIA requirements to fulfill its ongoing duties and responsibilities:

• Assess and understand clients’ financial objectives, shaping investment strategies in line with critical RIA requirements to recommend ideal portfolio options for reaching those goals
• Stay current with economic trends, regulatory updates, and market fluctuations
• Deliver up-to-date assessments of clients’ investment portfolios, meeting the transparency expectations embedded in RIA requirements
• Regularly meet with clients to report on portfolio performance and suggest improvements
• Manage all necessary paperwork, ensuring strict adherence to documentation standards under RIA standards
• Provide tax-related guidance as needed, an important aspect of comprehensive advisory services

A central element that differentiates RIAs from other financial advisors is their fiduciary duty, which is established by SEC regulations. RIA requirements mandate that registered investment advisers act solely in clients’ best interests, prioritizing the lowest-cost options and actively informing clients about more efficient alternatives, thereby setting a higher standard for investor protection.

Skills needed for being an RIA

Being an RIA isn’t just about merely giving investment advice; they must also possess the qualities and skills needed to be effective growth partners for their clients. Core skills and competencies include:

• Decision-making skills: If there’s one thing that seasoned investors and advisers alike know, it’s that investing can be highly unpredictable. RIAs constantly make decisions about how to best help their clients achieve their investment goals. Their ability to discern strength from weakness and pivot quickly when changes occur is an essential skill.
• Organizational skills: Efficient record-keeping is a must-have skill for RIAs, as they will be handling multiple clients and investment accounts simultaneously. Record-keeping and organization are required by law and reviewed by regulators.
• Analytical skills: RIAs invest in stocks and other investments daily. Their analytical skills are crucial in monitoring market rises and dips so that they can anticipate changes and provide their clients with sound, relevant advice.

Bottom line

Compared to traditional commission-based positions in the investment advisory field, becoming a Registered Investment Advisor (RIA) allows professionals much more flexibility regarding services offered and investment guidance provided to clients. Becoming an RIA also means meeting stricter competency standards: robust skill sets, comprehensive compliance knowledge, and an in-depth understanding of RIA requirements are expected from advisors. As financial regulations and market conditions continuously evolve, finance and investment professionals must adhere to these high standards set for those who wish to pursue becoming an RIA.

Visit the official SEC website on registered investment adviser regulation for detailed information on RIA requirements, registration steps, and regulatory obligations.