Which is Right for Your Financial Future? Broker-Dealer vs. RIA

By: Amy Kennedy – Does your financial advisor work at a Registered Independent Advisor (RIA) or a broker-dealer? Do you know the difference?  If not, you are not alone, but you should be aware.  The differences are important when considering your financial future.  Perhaps the most important factor is one that many people are unaware of, whether the financial professional they work with is legally obligated to make recommendations that are in their best interest (not just suitable recommendations).  This legal obligation is referred to as a fiduciary duty.  Let’s review the differences so you can be confident that your financial future is in the right hands.

Investment professionals typically fall into two broad categories: advisors that work at a Registered Investment Advisory (RIA) firm and broker-dealers representatives that work at a brokerage firm.

Broker-Dealers

Examples of Broker-Dealers are Morgan Stanley, Merrill Lynch, and Wells Fargo. These firms are often referred to as “full-service brokerages”.  They generally offer a wide range of financial products and their brokers are usually incentivized to cross-sell these products. For the consumer, one advantage of this is they have access to a wide range of products through one broker.  The downside for the consumer is that many of the products come from the broker-dealer and may not be the best fit for them. Broker-dealers are held to what is referred to as a suitability standard when offering financial and investment advice. In this case, the broker only must provide recommendations that they believe are appropriate given a client’s situation; they do not have to recommend what they believe is the best option. Most investment professionals operating under the suitability standard are known as registered representatives and their oversight is through a self-regulatory organization called the Financial Industry Regulatory Authority (FINRA).

Independent Registered Advisors (RIAs)

A registered investment advisory (RIA) firm is usually comprised of a small number of financial advisors that offer clients investment advice and often other services such as financial planning and estate planning. An investment advisor representative working within a registered investment advisor (RIA) is a fiduciary. They are legally required under the Investment Advisers Act of 1940 to act in the best interests of clients.  This means client interests come before their own interests, conflicts of interests should be avoided to the extent possible, and, where a conflict of interest exists, it must be disclosed. RIAs are monitored by the Securities and Exchange Commission (SEC). The fiduciary duty is the highest standard of care under U.S. law

 Hybrid Advisor

Some investment professionals operate within a hybrid model.  A hybrid advisor conducts business with clients that is both fee-based and commission-based, and they are usually registered with the SEC and FINRA.  A hybrid advisor may or may not be a fiduciary and may operate in both capacities depending upon the service or product being considered.

How Your Advisor is Compensated

In addition to the fiduciary standard, another major difference in RIAs and broker-dealers is the way they are compensated. RIAs typically charge their clients a fixed percentage of assets under management or a set dollar amount. Broker-dealers often receive a high percentage of their compensation through commissions based on the investment products they recommend and sell and through incentives from cross-selling other products and services available within their company.

Which to Choose?

Hopefully this information serves as a guide in choosing the financial professional that is right for you.  When deciding, ask yourself this question, “Do you want to receive advice that’s objective and based solely on what’s best for you and your financial situation, or do you want to receive advice that could be influenced by how the advice financially benefits the financial professional?”

If you have questions about the differences in RIAs and broker-dealers, give us a call at 800.929.1001 or visit our website at www. CapSouthWM.com or https://capsouthwm.com/about-us/fiduciary/ to read more about the Fiduciary Standard. 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisory firm. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.