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Council Post: What Is A Registered Investment Advisor (RIA) And Why Might A Fintech Startup Need This Status?



Boris Dus is the CEO and Founder of Gainy, a thematic autopilot investing platform for retail investors.

Becoming a registered investment advisor (RIA) allows fintech startups to provide personalized investment advice and be compliant with applicable laws. As a fintech startup in the investment advisory space, you cannot provide services in the U.S. without an RIA status, so you need to apply for this status anyway, but it also helps to build the trust of clients. On the other hand, becoming and staying compliant is a rigorous and costly process that can create some barriers to entry into the industry.

It’s important to note that dealing with offshore financial organizations like brokers and funds can sometimes be associated with risk. An offshore fund or other financial organization is a company that is based in a jurisdiction outside of the investor’s country of residence. These organizations are typically established in countries or territories that offer favorable tax and regulatory environments, such as the Cayman Islands, Bermuda or the British Virgin Islands. It allows offshore brokers to implement compliance and security practices that avoid U.S. regulations and typically act in their own best interests.

Registered investment advisor, on the contrary, is a status for U.S.-based companies that are compliant with U.S. regulations. If a company or a person renders investment advice to clients, obtaining an RIA status will keep them compliant with the securities law in the U.S. These companies provide personalized investment advice to individual investors and typically charge a fee based on a percentage of assets under management. It might include advice on what securities to purchase or be more sophisticated like a limited discretionary power to purchase or sell securities on behalf of their clients.

Based on my experience leading a company with RIA status, here’s what fintech startups should consider:


Why Do Consumers Need To Be Protected And How Can This Status Help?

To stay compliant with the law, U.S. companies have to follow a strict set of rules to keep their license and provide adequate services to their clients. The key obligation of a registered investment advisor is to provide prudent investment advice to clients. Due to fiduciary duties, investment advisors should place clients’ interests above their own.

Advisors are different from mutual or hedge funds. They do not hold clients’ money or securities. Even when we have discretionary power to buy and sell securities, these operations are done directly on the clients’ brokerage accounts, and they have control over their funds all the time. Therefore, RIAs need to work with brokerage firms that provide deal execution and custodial services (record keeping).

There is also a difference between a brokerage company registered, regulated in the U.S., and insured by SIPC (Securities Investor Protection Corporation) and FDIC (Federal Deposit Insurance Corporation), and an off-shore brokerage and fund working out of a country or territory that offers favorable tax policies but lack these insurance and regulation practices.

It’s important to know that brokerage firms are required to provide fair and efficient deal execution when a client buys and sells stocks, but they don’t have to give their client advice that always has their best interests in mind. For brokerage firms, the volume of trading is typically the key factor for profitability, meaning they make money by getting their clients to buy and sell stocks more often.

On the other hand, RIA firms have to give clients advice that’s good for them, even if it means they don’t buy and sell stocks as much. In fact, they’re rewarded for giving clients advice that helps them grow their money over time. Working with an RIA instead of a brokerage firm can be helpful if a consumer is not experienced with investing. They can trust that their advisor is looking out for their long-term interests.

How To Register As An Investment Advisor

To become a registered investment advisor (RIA), you have to go through a rigorous application process with the state securities regulator where you are located and plan to do business. In our case, an app-based RIA, we had to file in all 50 states of the U.S. since we have clients in many different regions. The application is quite detailed and can take months to learn if you’re not familiar with it.

Additionally, as an RIA, you are required to have a number of internal policies in place, such as a cybersecurity policy, business continuation policy, trading error correction policy, compliance manuals for employees, etc. My company also provides rebalancing and automatic trading services for our clients, so we needed to apply for robo-advisory features within our application and create an investment brochure for our clients detailing our portfolio selection and optimization approaches.


Given the complexity of the registration process, we sought the help of experienced legal counsel and compliance professionals to ensure that all regulatory requirements were met. It took us about two months and cost over $50,000 to complete the process with the help of a specialized law firm and compliance consultants. Although the regulatory body approved our application on the first attempt, sometimes additional information may be requested, which can prolong the approval timeline from a few weeks to several months.

However, becoming an RIA can demonstrate your commitment to better service and customer trust. While there are many startups with this status, the process of becoming an RIA is not easy and requires significant effort and resources.

Each year, you’ll need to update and renew your SEC form ADV. It’s a fairly straightforward process if there haven’t been any major changes to your RIA services in the past year. Additionally, you’ll need to pay an annual registration fee for each state where you offer your services, which can add up for all states combined.

Many regulations were created before fintech became widespread, so it’s essential to be mindful of compliance requirements.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

Source: Fox Business


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