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Not an IRA, but a RIA

POSTED: August 22, 2008 5:01 a.m.

Recently we have looked at a lot of different ways to handle your investments. We have reviewed no load mutual funds, discount brokerage firms and full service brokerage firms.

Today we will take a look at how a Registered Investment Advisor (RIA) works. So, what is an RIA? Just to clear up any confusion an RIA is a person or firm that offers investment advice for a fee. Since this is very similar to another well known investment term I will briefly diverge. This is entirely different from an IRA (short for Individual Retirement Arrangement) which is a type of retirement account. So, for starters, an IRA is a retirement account while a RIA is a person or firm that offers investment advice for a fee.

You may be wondering what kind of advice a RIA offers. According to the Securities Exchange Commission (SEC), “Investment advisors are in the business of giving advice about securities to clients.” That is a very general statement and may seem vague. Let me clarify. A RIA may look at your entire financial situation and tell you what investments would be appropriate for you, how much and what type of health, life, disability, accident, or long term care insurance you should purchase, or how to pass your money to your heirs in a tax efficient manner. On the other hand, a RIA may actually manage your investment account for you and buy and sell stocks, bonds, mutual funds and other investments on your behalf. A RIA will do one or more of these things for a fee.

The key point here is that the RIA charges a fee for the advice whereas a stock broker, as we discussed last week, charges a fee (or commission) for the transaction. This may seem irrelevant at first, but it is rather significant. Depending on the number of transactions you are planning on making as well as the level of involvement you want your investment professional to have, one or the other may be better for you. RIAs are, by definition, considered to be acting in a fiduciary capacity on behalf of their clients. This means that they must do what is in the best interest of the client at all times. The relationship between a client and a RIA can work very well for a client who wants to know that their advisor is looking out for them and not just calling with a “hot tip” on a stock to generate a commission.

The most common way that a RIA charges for this advice and/or management of assets is by charging a percentage of the assets under management. It is common for this fee to range from 1-2 percent per year of the assets being managed, though it varies by RIA. Other ways that a RIA may charge are an hourly rate or a flat fee. More often than not a RIA will charge an hourly rate or a flat fee if they are giving financial planning advice (advice on what type of insurance to buy, what type of trust you may need, projections on how long your money should last, etc) as opposed to managing your investment portfolio for you.

These are all general guidelines and each RIA may charge differently and offer different services.  Before you decide to invest with a RIA or a stock broker, make sure that you understand how you will be charged as well as what the investment philosophy and experience of your financial professional is. And remember, if you’re not sure how it works, take the time to ask. If you ask the questions beforehand you can save yourself from some big surprises later.  
Jeff Hupman is a financial advisor with Christian Values Investing (748-9321).

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