RIA vs Broker Dealer
A Comparison of RIAs and Broker-Dealers
All planners and advisors who manage assets other than annuities or life insurance fall into one of two categories. They can either be Registered Investment Advisors (RIA’s) or Registered Representatives that work for a broker-dealer (independent or not).
What is an RIA?
RIAs are regulated directly by the Securities and Exchange Commission. This type of financial planner is held to a higher standard of conduct than a registered representative because RIA’s are expected to adhere to a fiduciary standard of conduct. This standard mandates that an RIA must always unconditionally put the client’s best interests ahead of his or her own, regardless of all other circumstances.
They are also required to disclose any possible conflicts of interest to their clients and act in an ethical manner in all of their business dealings. Some RIAs charge clients a percentage of their assets under management while others charge either an hourly or a flat fee to dispense advice.
What is a Broker Dealer?
A broker dealer is someone who facilitates investment transactions. Most broker dealers have representatives acting as financial advisors to help you decide which investments to purchase or sell. A broker dealer or representative receives his or her compensation through commissions or fee based on assets under management.
However, you must be aware that a broker dealer isn’t required to meet fiduciary standards. The broker dealer can recommend investments that give him or her a bigger commission, even if there is a product that might actually be better for your situation. This sets up possible conflicts of interest. The SEC only requires broker dealers to make “suitable” recommendations, as well as let you know if there are any conflicts of interest.
Which Approach is Best for You?
In the end, it's up to you to decide which approach is best for you and consider which investment philosophy best aligns with your financial needs.
- Registered Investment Advisor - Required to be fiduciary and leans toward more comprehensive planning.
- Broker Dealer - Leans toward a suitability standard even if fee based and leans more toward transaction based relationships.
However, if you want a better chance of ensuring that recommendations are free of conflicts of interest, an RIA is bound by law to adhere to your best interests.