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Brokers vs. RIAs: What’s the difference?

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Most investors like to have guidance when making their decisions. As a result, it’s common to look for help when trying to put together an investing plan, or determining which investments work best in a portfolio. This usually means turning to some sort of investment advisor.

Essentially, two types of professionals offer investment advice: brokers and independent, registered investment advisors (RIAs). Let’s explore each so you can decide which is right for you.

BROKERS

A broker, also known as a registered rep, financial advisor or account executive, works at a broker-dealer, typically a national or regional brokerage firm that facilitates investment transactions. Oftentimes, these firms are subsidiaries of commercial banks, investment banks or investment companies.

Brokers help clients decide which investments to purchase and which to sell. Some brokers receive compensation through commissions while others are fee-based. Commissions are based on investment transactions made on a client’s behalf. Some brokers offer financial-planning services However, other brokers’ investment recommendations may lack the perspective of an individual’s full personal financial situation and his or her goals and objectives. This may not mean the best investment for the client; rather only recommendations that meet the client’s tolerance for risk.

Most brokerage activity is regulated under the Securities Exchange Act of 1934. This Act requires that a broker’s investment recommendations be “suitable” for the needs of the client. Conflicts of interest and self-dealing are not prohibited. Though there are brokers who operate with their clients’ best interests in mind and a full view of their financial picture, a broker is not legally required to put his or her own interests above the client’s when recommending investments. As a result, a broker can recommend investments that result in a larger commission, even if there is another investment that might be better for a client’s situation—there is no law that prohibits a broker from doing so.

RIAS

RIAs in contrast, tend to work at smaller, independent investment advisory firms, earning their income from advisory fees. They are registered with and regulated by either the Securities and Exchange Commission (the “SEC”) or their appropriate state securities regulator(s), depending on the size of the assets under management.

RIAs are legally required to put clients’ interests ahead of their own.

Unlike brokers, who must only meet a suitability standard when working with you, RIAs are required by law to act in a fiduciary capacity. This means that RIAs are legally required to put clients’ interests ahead of their own with the advice they give and the investments they recommend for meeting clients’ goals and objectives.

Conflicts of interest must be disclosed, and self-dealing is generally prohibited. When receiving advice from an RIA, clients can be reasonably sure that those recommendations are what the advisor considers truly best for the client’s specific situation.

A prudent starting point for making educated decisions about investments begins with formulating and implementing a comprehensive financial plan that takes into account a client’s goals and objectives. Investment managementis one element of this process. Cash-flow management and risk management are some of the other elements. Unlike a broker-dealer, an independent registered investment advisor earns a fee for providing such services in an integrated way, while acting in a fiduciary capacity.

Understanding the major differences between these two types of firms is important, so you can make a more informed decision. In the end, it’s up to you to decide which approach is best for you. Look at your needs and consider whom you are more likely to trust.

This article was originally published in the June/July 2016 issue of Worth.

Topics
Investing and the Economy

Disclaimer: Worth magazine is a financial publisher and does not recommend or endorse investment, legal, insurance or tax advisors. The listing of any firm in the 2019 Worth® Leading AdvisorsTM Program does not constitute a recommendation or endorsement by Worth magazine of any such firm and is not based upon Worth magazine’s experience with, or prior dealings with, any advisor. The information presented for each advisor, including but not limited to any related profile, statistical data, presentation, report, commentary, recommendation or strategy, has been provided by such advisor without review or independent verification by Worth magazine. Any such information is the sole responsibility of the advisor. Worth magazine makes no representation or warranty as to the accuracy or completeness of such information, assumes no liability for any inaccuracies or omissions therein and disclaims responsibility for the suitability of any particular investment recommendation or strategy for any person. Nothing contained in Worth magazine constitutes or should be construed as any form of investment, legal, insurance or tax advice or as a recommendation to buy, sell, hold or trade any securities, financial instruments or assets. Readers are advised to consult their legal, financial, insurance and tax advisors prior to making any investment or pursuing any investment strategy. Past, model or hypothetical performance is not indicative of future results.

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