What's an RIA and Why Do Retirees Utilize Them?
Registered investment advisers provide trustworthy investment and retirement planning. Learn more about what they do and why retirees hire them.
Investing is a complicated, risky business. There are no certainties. You risk losing money on any kind of investment. Savvy investors know that they cannot do it alone. They cannot possibly know every possible risk or anticipate every possible complication. They often turn to financial professionals for advice and guidance. Registered investment advisers (RIAs) can manage assets for investors and advise them about where to put their money. They owe fiduciary duties to their clients to provide honest, diligent services. Investors can trust that RIAs will put their best interests first. This is especially important to retirees, who often prefer to enjoy their retirements rather than spend all their time managing investments. Read on to learn more about what RIAs do and why retirees use them instead of doing everything themselves.
What is a registered investment adviser?
An RIA is a professional financial firm that provides personalized financial advice to clients. The term “RIA” typically refers to the firm. An individual employee who works directly with clients is an “investment adviser representative” (IAR).
Services that an RIA may provide include the following:
Investment portfolio management
Retirement income planning
Tax planning and strategies
Estate and legacy planning
Note that the spelling of the word is often “adviser,” rather than the more common “advisor.” This is because the federal statute governing RIAs, the Investment Advisers Act of 1940, spells it this way. Precision is important in legal and financial matters, so regulators like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) use the statute’s spelling.
The SEC regulates larger RIAs. Smaller ones may only fall under the jurisdiction of state authorities like the Texas State Securities Board (TSSB).
Why do retirees use RIAs?
The following are only some of the many reasons why retirees may choose to use an RIA’s services.
Trustworthiness
RIAs have a fiduciary duty to act in their clients’ best interests. A fiduciary duty is a legally enforceable duty that requires a professional to put their clients’ interests before their own. Not all financial professionals have this kind of duty under the law.
The SEC’s interpretation of the law ascribes several different fiduciary duties to RIAs. Broadly speaking, RIAs owe their clients a duty of care and a duty of loyalty. The duty of loyalty is fairly easy to understand. RIAs may not act in ways that create conflicts of interest between themselves and their clients.
The SEC breaks the duty of care down into several parts:
Duty to provide advice that is in the client’s best interest: RIAs must consider each client’s individual circumstances, needs, and goals before providing advice.
Duty to seek best execution: RIAs must try to execute trades in ways that produce the most favorable results for their clients.
Duty to act and to provide advice and monitoring throughout the relationship: For as long as they have a professional relationship, RIAs must keep track of their clients’ circumstances and adapt their financial or investment advice to account for any changes.
These duties make RIAs particularly trustworthy among financial professionals. This is not to say that RIAs never make mistakes or violate their fiduciary duties. If they do, though, the clients they harm have clearly defined legal rights and remedies.
Expertise and experience
Financial markets and investments are complicated. Market conditions are constantly changing. Many RIAs have specialized knowledge in retirement planning. They can monitor trends in the market and help retirees navigate issues like volatility and inflation.
Managing time and stress
Most retirees would rather spend their retirement relaxing and engaging in activities they enjoy. For some, this might include monitoring and managing their investments, but that’s not the case for everybody.
RIAs handle the day-to-day tasks that come with managing investments. Retirees can focus on their personal lives, hobbies, and other activities, feeling secure that their investments are in good hands.
Personalized financial planning
RIAs create customized investment strategies to meet each retiree's needs and goals. They may find the best way to ensure a retiree’s funds last through their retirement, and that they have set enough aside for their loved ones. RIAs can also plan for possible life events, such as healthcare needs.
Access to specialized tools and resources
RIAs often have access to advanced financial tools that can help create detailed investment strategies. They may be able to perform research that is out of individual investors’ reach. These tools allow RIAs to offer unique insights on matters like asset allocation, risk management, and tax strategy.
Why not just handle it yourself?
Photo by Jakub Żerdzicki on Unsplash
It might be tempting to think one can handle their investments themselves. After retirement, a person might think this could be their next big project. For many reasons, this is probably not a good idea.
Limited knowledge and experience
Unless one has a background in finance, plus experience handling specific types of investments, most individuals lack the training and knowledge to manage complex portfolios. Different investments require different strategies and management. Investing in stocks, for example, is very different from investing in real estate. Within real estate investing, owning shares in a real estate investment trust (REIT) presents different issues than investing in private debt.
Common pitfalls that may occur when managing one’s own investments include the following:
Emotional investing: An RIA provides a barrier between the investor and the investment, ensuring that any changes in the portfolio are based on investment strategy, not emotion. For example, people often lose money because of “panic selling” during market downturns.
Poor diversification: A portfolio needs diversity. This means not putting too much money into one investment or one investment class. A wide variety of investments reduces risk. If one investment goes south, the others mitigate the losses.
Following investment fads: The market is full of investment opportunities that might look promising on the surface but are either deliberately fraudulent or doomed to failure for other reasons. RIAs can help retirees avoid many types of bad investments. One recent example involves a cryptocurrency launch based on a popular internet meme. Its market capitalization shot up to $490 million soon after it launched, then dropped to $60 million in about twenty minutes. People lost a substantial amount of money.
Neglecting tax implications: Different types of investments have different tax consequences. Some income may be taxable as regular income, while other returns may be taxable as capital gains. Tax strategies may be available to reduce or defer tax liability, such as 1031 exchanges in real estate. RIAs know about all of these implications and strategies and can advise their clients about how to proceed.
Emotional decision-making
Investing requires an objective mind. This can be difficult during market downturns when investors might panic and sell their investments. Selling during a downturn guarantees a loss. The smart move might be to wait for the market to rebound, which requires an objective view. RIAs offer a steady perspective backed by extensive professional experience to keep retirees on track.
RIAs can also help retirees avoid falling for investment scams or investing based on emotions like excitement. Fraudsters may target retirees with investment opportunities that seem too good to be true. Many investors, including retirees, may be tempted by an investment that some celebrity is touting, but which would not pass any due diligence process. The recent cryptocurrency launch mentioned earlier is an example of this.
Hidden costs of do-it-yourself investing
While DIY investing may seem cheaper, you risk making costly mistakes, such as market losses or unexpected tax liability. RIAs often save clients money through efficient tax strategies and strong investment choices.
How do RIAs get paid?
RIAs make money through fees charged to their clients. They typically charge a management fee based on a percentage of the total assets under management for a client. This is often the best possible scenario for everyone. The more assets an RIA is managing, the more money the investor has and the more the RIA gets paid.
How do I choose the right RIA?
The following steps can help you determine if a particular RIA is right for you.
Credentials
The SEC maintains the Investment Adviser Public Disclosure (IAPD) system in collaboration with FINRA and state securities regulators. You may use this tool to search for RIAs and individual IARs. It provides information like disciplinary history for both firms and individuals.
Fee structure
It is important to understand how an RIA’s compensation will work before beginning a professional relationship. Management fees based on a percentage of the total amount of assets under management gives RIAs an incentive to maximize your assets.
Other types of fees, such as flat fees or commissions, are not necessarily based on the overall success of your portfolio. The type of fee structure that will work best for you depends on your individual circumstances.
Reputation
You may ask an RIA for references. Online client reviews and organizations like the Better Business Bureau are often a good source of information, especially if people had a bad experience with a firm. Word of mouth also remains one of the best ways to find a good service provider.
Personal fit
The most successful RIA or IAR in the world won’t be able to help you if you don’t get along with them. They need to understand your needs and goals, and you need to be able to communicate with them efficiently and effectively. You can schedule a consultation with an RIA to see if they will be a good fit with you.
Learn more about Capstone’s investment opportunities
Real estate debt investments offer excellent passive returns with little risk. Capstone Capital Partners’ trust deed and first lien investments target returns of 10% net annual yields. To learn more about our investment opportunities, please contact the Capstone team today through the online contact form.
