How Does an RIA Work? Fiduciary Duty, Fees, and Form ADV

A Registered Investment Adviser, or RIA, is a firm or individual paid to give investment advice that is registered with either the Securities and Exchange Commission or a state securities regulator and operates under a fiduciary duty to its clients. How an RIA works, in practical terms, comes down to four things: the legal standard it owes you, the disclosures it has to make, the way it charges, and the compliance machinery it has to keep running in the background. All of it traces back to the Investment Advisers Act of 1940, which requires anyone compensated for advising others about securities to register, follow a fiduciary standard, and disclose their business practices, fees, and conflicts of interest.¹

Where an RIA Is Registered

Whether an adviser is overseen by the SEC or by a state regulator depends mostly on how much client money the firm manages. Firms with less than $100 million in assets under management generally register with the state where their principal office sits. Between $100 million and $110 million, the firm may choose SEC registration but is not required to switch. At $110 million and above, SEC registration is mandatory.² The split matters because state examiners and SEC examiners run their own programs, and the fees and filing mechanics differ, even though both regulators use the same application form.

The Fiduciary Duty an RIA Owes You

An RIA is a fiduciary. That is the biggest practical difference between an RIA and a broker who only has to recommend a “suitable” investment. The adviser has to act in the client’s best interest for the whole relationship, not just at the moment of a single recommendation.³ The SEC breaks that obligation into two parts.

Duty of Care

Before recommending anything, the adviser has to develop a reasonable understanding of the client’s financial situation, goals, risk tolerance, and investment experience. Advice has to rest on an actual investigation of the investments involved; relying on marketing materials or incomplete data is not enough.³

Duty of Loyalty

The adviser cannot put its own financial interests ahead of the client’s. When a conflict exists, the adviser must either eliminate it or disclose it fully enough that the client can make an informed decision.³ A classic example: if an adviser recommends a mutual fund share class that pays it a 12b-1 trailing commission while a cheaper share class of the same fund is available, that conflict has to be spelled out in the firm’s Form ADV, along with how the adviser addresses it.⁴

What the Law Flatly Prohibits

Federal law bars advisers from any scheme to defraud a client, from deceptive practices, and from trading out of the firm’s own account with a client without written disclosure and the client’s consent.⁵ Violations can lead to civil penalties, censure, cease-and-desist orders, or an industry bar, and willful violations can bring criminal fines and prison time.

How an RIA Charges

Every fee arrangement has to appear in both the client agreement and the Form ADV brochure. The common structures:

A percentage of assets under management, usually 0.50% to 2.00% a year. This is the most widely used model.
Hourly rates, billed much the way an attorney or accountant bills time.
Fixed fees for a defined scope of work, such as a one-time financial plan.
Subscription fees charged monthly or quarterly for ongoing access.
Performance-based fees, which are only available to certain clients.

Why Performance Fees Are Restricted

Federal law generally prohibits an RIA from charging fees tied to investment performance, on the theory that performance fees can push advisers toward excessive risk. The exception is the “qualified client.” As of 2026, a qualified client must have at least $1,100,000 under management with the adviser or a net worth above $2,200,000; knowledgeable employees of the adviser and qualified purchasers under the Investment Company Act also qualify.⁶⁷ The SEC adjusts these thresholds for inflation, with the next scheduled adjustment on or about May 1, 2026.

What the Firm Discloses: Form ADV

Form ADV is the document that makes the registration and disclosure system work. It has three parts, each with a different audience.⁸

Part 1A

Part 1A is a factual census of the firm: ownership, control persons, types of clients, assets under management, business affiliations, and disciplinary history.⁹ Regulators use it; it is public, but it is not written for clients.

Part 2A: The Brochure

Part 2A is a plain-language brochure the firm hands to clients. It has to describe advisory services, the fee schedule, methods of analysis, investment strategies and their risks, whether the firm or its people get paid for selling investment products, the firm’s disciplinary history, and the backgrounds of key personnel. It also has to explain whether fees are deducted directly from client accounts or billed separately, and how refunds work if a client ends the relationship mid-cycle.¹⁰

Part 3: Form CRS

Part 3, the Client Relationship Summary, is a two-page document aimed at retail investors. It summarizes services, costs, conflicts, and any disciplinary history, and it includes conversation-starter questions the SEC wants investors to ask, such as how the adviser is paid and what authority the adviser has over the account.¹¹ It has to be delivered to retail investors before or at the time the advisory relationship begins.

How Your Money Is Held

When an RIA has custody of client funds or securities, meaning it holds them directly or has the authority to access them, strict rules kick in. The assets must sit with a qualified custodian such as a bank or registered broker-dealer, in accounts titled either in the client’s name or in the adviser’s name as agent for the client. Client money cannot be commingled with the firm’s own money.¹²

The custodian has to send account statements to each client at least quarterly. The adviser has to tell clients in writing which custodian holds their assets and how, and has to urge clients to compare the custodian’s statements against any reports the adviser sends. On top of that, an independent public accountant has to conduct a surprise examination of client assets at least once a calendar year, at a time the accountant chooses.¹²

Who Actually Gives You Advice

The firm is registered. The individuals inside it who give advice are Investment Adviser Representatives, or IARs, and they are licensed separately. Most IARs qualify by passing the Series 65, formally the NASAA Investment Advisers Law Examination, a three-hour, 130-question test that requires 92 correct answers to pass and costs $187.¹³ Some professional designations, including CFP and CFA, may qualify an individual for a waiver, though each state sets its own waiver rules.¹⁴

Each IAR registers through Form U4, filed electronically by the firm through FINRA’s gateway. The form discloses the representative’s employment history, disciplinary record, and other background information.¹⁵ IARs in states that have adopted NASAA’s continuing education model rule also have to complete annual CE to keep their qualifications current.

The Ongoing Compliance Program

Registration is not a one-time event. An RIA has to run an active compliance program for as long as the firm exists, and that program is a visible part of how the firm functions day to day.

Chief Compliance Officer

Every registered adviser has to designate a chief compliance officer responsible for the firm’s written compliance policies and procedures, and the firm has to review those policies at least annually to confirm they still work and are being followed.¹⁶ Failing to adopt and implement reasonable compliance procedures is itself a violation of the anti-fraud rules under the Advisers Act.

Recordkeeping

RIAs have to keep detailed records of client communications, financial transactions, advisory contracts, advertisements, and performance calculations. Most records must be preserved for at least five years from the end of the fiscal year in which the last entry was made, with the first two years kept in a readily accessible office location.¹⁷

Annual Form ADV Updates

Each registered adviser has to file an annual updating amendment to its Form ADV within 90 days after the end of the firm’s fiscal year. For a December 31 fiscal year, that deadline falls at the end of March.¹⁸ If the annual update shows the firm has crossed an AUM threshold that requires switching between state and SEC registration, the firm has 90 days to file with the right regulator.⁸ Between annual updates, the firm also has to promptly update its brochure whenever information becomes materially inaccurate.

Data Privacy and Cybersecurity

RIAs are subject to Regulation S-P, which requires written policies and procedures for safeguarding customer financial information. Under amendments finalized in 2024, firms also have to maintain incident response programs that include timely notification to individuals affected by a data breach involving sensitive customer information.¹⁹ The SEC’s examination priorities for 2026 specifically include data loss prevention, access controls, and how firms respond to cyber incidents such as ransomware attacks.²⁰

1
Office of the Law Revision Counsel. 15 U.S. Code 80b-3 – Registration of Investment Advisers
2
eCFR. 17 CFR 275.203A-1 – Eligibility for SEC Registration; Switching to or From SEC Registration
3
Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
4
U.S. Securities and Exchange Commission. Frequently Asked Questions Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation
5
Office of the Law Revision Counsel. 15 U.S. Code 80b-6 – Prohibited Transactions by Investment Advisers
6
SEC.gov. Inflation Adjustments of Qualified Client Thresholds
7
U.S. Securities and Exchange Commission. Exemption To Allow Investment Advisers To Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Clients Account
8
U.S. Securities and Exchange Commission. Form ADV – General Instructions
9
SEC.gov. Form ADV – Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers (Part 1A)
10
U.S. Securities and Exchange Commission. Appendix C Part 2 of Form ADV
11
SEC.gov. Form ADV, Part 3 – Instructions to Form CRS
12
eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers
13
FINRA.org. Series 65 – Uniform Investment Adviser Law Exam
14
FINRA.org. Qualification Exam Waivers and Exemptions
15
FINRA.org. Form U4
16
eCFR. 17 CFR 275.206(4)-7 – Compliance Procedures and Practices
17
eCFR. 17 CFR 275.204-2 – Books and Records to Be Maintained by Investment Advisers
18
U.S. Securities and Exchange Commission. Electronic Filing for Investment Advisers on IARD
19
U.S. Securities and Exchange Commission. Regulation S-P – Privacy of Consumer Financial Information and Safeguarding Customer Information
20
SEC.gov. Cybersecurity