Everyone could use a little professional advice sometimes, and investors are no exception. Most high net worth investors seek guidance on their investment decisions from either a registered investment advisor (RIA) or a representative at a broker-dealer firm (B-D).
While both categories of professional can offer investment advice, there is one major difference between the two: RIAs must act as fiduciaries on behalf of their investor clients, while B-Ds follow a different set of standards.
This distinction can have a significant impact on their clients’ investment choices and, ultimately, on the success of their wealth growth and preservation strategies. That said, both have their benefits and it is typically a matter of finding the right fit for an investor’s goals.
Below you’ll fine a primer on each type of professional and how investors can decide which works best for them.
Defining a RIA
A RIA is a financial advisor who is registered with either the Securities Exchange Commission (SEC) or their state’s securities regulator—the difference depends upon the size of their business.
RIAs are required to adhere to a fiduciary standard when advising clients, which means their advice must be in their clients’ best interests in the long run. RIAs are compensated by charging clients either a percentage of that client’s assets under management (AUM) or a set or hourly fee. Their compensation is not based on commission from the products they are selling.
Because of these qualifications, RIA advice is often judged as more accurate and objective than that of B-Ds. However, this perceived objectivity can come at a price, depending on their service fees.
Defining a Broker-Dealer
A B-D is a financial advisor or firm that facilitates transactions on behalf of investor clients. When offering clients financial and investment advice, B-Ds must adhere to a what is known as a “suitability standard,” rather than a fiduciary standard. This means they are required to offer advice that is suitable for a client’s needs in a particular circumstance and at a particular point in time.
B-Ds are compensated through commissions on the products and services they sell, rather than a percentage of AUM or a set or hourly fee. While they are not required to make recommendations based on the client’s best interest, they must make clients aware of any potential conflicts of interest in their advice.
Related: How Do Broker-Dealer Fees Really Work?
The rules and restrictions regarding B-Ds are more lenient than the fiduciary standard to which RIAs are held. And B-Ds are less tied to the outcome of a client’s investments and their overall investment goals.
However, if investors are aware of these differences and use other sources to “vet” transactions and how they align with long-term strategies, B-Ds can be useful conduits for reaching their investment goals.
The Other Options
Some investors seek out what is known as a hybrid advisor, a financial professional who may or may not serve as a fiduciary. This third type of financial advisor is registered with the SEC and the Financial Industry Regulatory Authority (FINRA) and offers investors a broad spectrum of investment products and services as well as a choice in how clients are charged. Hybrid advisors may also earn commissions from the products they sell.
Which Is the Best Choice for Investors’ Portfolios?
Because RIAs are fiduciaries who are not compensated based on the products they sell, they will likely provide investor clients with the most objective advice, geared toward helping clients reach their long-term investment goals.
However, most B-Ds will provide clients with solid, reliable financial advice that can help them make smart decisions about their investments. After all, B-Ds do want clients to remain clients and bring them repeat business, so these advisors do have an interest in their investors’ satisfaction.
Related: 7 Questions to Help Make Your Financial or Real Estate Investing Goals Reality
In addition, using a B-D is generally less expensive than hiring an RIA. The latter could be prohibitive to some investors and eat into their return on investment, depending on the nature and scope of those investments.
Ultimately, investors must approach any financial advisor with an understanding of that advisor’s or firm’s motivations, method of compensation, legal requirements, reputation, and success rate before hiring or buying anything from them. Each investor should also understand their own risk tolerance and the scope of their needs from an investment advisor to get the best service for the price.
Where do you get your investing advice from, and do you prefer B-Ds to RIAs?
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