HomeBlogGeneral EducationUnderstanding the difference between a Registered Investment Adviser and brokers

Understanding the difference between a Registered Investment Adviser and brokers

In financial services, there are many companies offering financial advice to the general public. Financial advice is advertised on TV by insurance companies, investment companies, banks, credit unions, trust companies and just about any organization dealing with financial services. The devil is in the details…..let’s dive in.

Let’s discuss two main types of advisers and why I believe you should always seek guidance from a Registered Investment Adviser and a true fiduciary.

Registered Investment Advisors (RIAs) and brokers. The general public does not understand the difference between these 2 types of advisors. Brokers and insurance companies want to look like fiduciaries, but they’re not.

The differences not only include how different advisors are paid, what information they disclose, and whether or not their allegiance is to their client. The basic underlying function of their service is different: RIAs are true advisors, but other financial professionals are product salespersons.

Consider your choice. An RIA who will consult with you to develop a comprehensive financial plan and practices as a fiduciary. Or you can work with brokers, insurance salespersons, or commissioned financial advisor who is primarily engaged in facilitating your purchase of a financial product. What choice would you make?

Registered Investment Advisor (RIA)

RIAs are regulated by the Securities and Exchange Commission (SEC) and state securities administrations.

In either case, federal and state law requires that RIAs are held to a Fiduciary Standard when working with their clients. This law requires that an advisor act solely in the best interest of a client, even if that interest is in conflict with the advisor’s financial interest. RIAs must disclose any conflict or potential conflict to the client prior to and throughout a business engagement. Investment advisors must adopt a Code of Ethics and fully disclose how they are compensated.

Brokers and Insurance companies

Brokers are individuals or firms that charge a commission for executing buy and sell orders as submitted by investors. Brokers are overseen by the SEC and (usually) by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that enforces violations of broker standards in the U.S.

Brokers are not held to a fiduciary standard with customers or clients. Instead, they are held to a Fair Dealing Standard of commerce and are subject to a Suitability Standard of care for their clients. This means that their investment recommendations must only be “suitable” for a client, not necessarily in the client’s best interest.

Some brokers suggest that they are more consumer-focused because they are “independent,” rather than working directly for one of the national brokerage firms. However, there is no genuine distinction. Either way, the broker’s obligation is first to the firm and second to the client. At the large, well-known brokerages, other business interests of the firm might create additional conflicts of interest, such as when a firm trades as a principal with its customers.

The Difference

One way to understand the difference between an RIA and a broker is to think about visiting your doctor. How would you feel if your doctor was working on commission? Would you feel as confident about his or her recommendations if you knew that a pharmaceutical company was paying him/her commission on the drugs that were prescribed?

As nationally syndicated columnist Jane Bryant Quinn wrote, “Financial planners who take commissions have a built-in conflict of interest…even with disclosure, my choice would be a Fee-Only planner.”

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