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RIA vs. Broker-Dealer: What You Need to Know


A financial advisor can help you shape your investment strategy so you can reach your long-term goals. But financial advisors aren’t all alike when it comes to their expertise and experience or the type of advice they’re qualified to offer. When choosing a financial professional to work with, it’s important to understand whether the person or firm you’re considering is a registered investment advisor (RIA) or a broker-dealer. Whether it makes sense to work with an RIA or a broker-dealer depends on many factors personal to the client in question. Consider working with a financial advisor as you create or update a financial plan.

What Is an RIA?

A registered investment advisor or RIA is an individual or firm registered with the Securities and Exchange Commission (SEC). Registration may also be required with state securities commissions, depending on the firm’s size.

RIAs offer financial advice to clients, including advice related to investment management. A registered investment advisor may execute trades on your behalf or help you with completing transactions. RIAs may cater to a specific type of client, such as high-net-worth individuals or retirees.

In terms of how RIAs are paid, they can base their fees as a percentage of assets under management. Or they may choose to charge a fixed or hourly rate for their services. But the most important thing to know about RIAs is that they’re required to act as fiduciaries for their clients.

The fiduciary standard imposes specific ethical and legal guidelines for how RIAs can manage client accounts. A registered investment advisor is required to act in clients’ best interests at all times, while also disclosing any potential conflicts of interest. The fiduciary standard is designed to prevent RIAs from mismanaging client assets for their own personal benefit.

What Is a Broker-Dealer?

Broker-dealers can facilitate investment transactions but they may work with advisors to help clients decide which securities to buy or sell. Broker-dealers can be paid through a commission structure, in which they earn a commission or fee based on the investments a client makes.

While RIAs are required to register with the SEC, broker-dealers may be registered with the Financial Industry Regulatory Authority (FINRA) instead, which is regulated under the Securities and Exchange Act of 1934. As such, they’re held to a different set of standards when offering financial and investment advice.

Rather than a fiduciary standard, broker-dealers are subject to a suitability standard. In simple terms, this means the advice they offer to clients must be suitable for their clients’ needs, but it doesn’t necessarily need to be in their best interest. In other words, a broker-dealer is not prohibited from recommending investments that might earn him or her a larger commission – just as long as that investment meets the suitability standard.

RIA vs. Broker-Dealer: Which Is Right for You?

A broker-dealer talks to a prospective client

When weighing whether to work with RIAs or broker-dealers it’s important to consider what type of advice you’re interested in and what kind of fees you’re comfortable paying. If you want reassurance that your financial advisor is only going to recommend investments that can help you further your goals, then you may be better off working with an RIA. This is the best way to ensure that any advice you receive is purely in your best interest.

When working with a broker-dealer, no such guarantee exists. That doesn’t mean that a broker-dealer is a poor choice for seeking investment advice. But it does mean that the advice or investment recommendations you receive may be influenced at least in part by how large a commission the broker-dealer stands to earn.

Cost can also be an important consideration when choosing which type of advisor to work with. Lower advisory fees can be a good thing if it allows you to keep more of your investment earnings year over year. But consider an RIA or broker-dealer’s track record. For instance, if an advisor or broker-dealer has a strong record of producing above-average returns for clients then paying more in advisory fees may be justified.

How to Choose a Financial Advisor

If you’re ready to work with a financial advisor there are some things to keep in mind to help you decide between an RIA vs. broker-dealer. Asking these kinds of questions can help you narrow down your search for an advisor:

  • Are you a fiduciary or are you held to a suitability standard?
  • How do you structure your fees, and are you fee-based or fee-only?
  • What types of clients do you typically work with?
  • Which types of investments or securities do you typically recommend?
  • What is your overall investment philosophy?
  • How often do you communicate with clients, and what’s your preferred method of communication?
  • Will I work with you only or do you have a team that supports you?

In the case of an RIA, you can also ask for a copy of their Form ADV. This is the form that’s required to be registered with the SEC and it includes specific information about the advisor’s fee structure, assets under management, services offered, whether they’ve been subject to any legal or disciplinary actions and more. A prospective advisor should also provide you with a copy of their brochure, which can offer more detail about their investment strategy, services, fees and practices.

You can use an online tool like FINRA’s Broker Check to review an advisor’s background. It can also be helpful to check online reviews of an advisory firm if those are available or talk to people in your circle who have worked with a particular advisor. This can yield additional insight to help you decide if a specific advisor or firm is right for you.

Bottom Line

A broker-dealer greets a RIA

Both RIAs and broker-dealers are financial service providers. But when choosing between between them, your final decision may largely come down to what type of advice you’re hoping to receive and what you’re willing to pay for it.

An RIA is held to a fiduciary standard, meaning your best interests will always guide their decision-making. A broker-dealer, on the other hand, is allowed more flexibility in making investment recommendations under the suitability standard. Ultimately, it’s important to determine which standard you feel most comfortable with when getting help from a financial advisor.

Tips for Investing

  • A financial advisor can help you create a financial plan for your investments. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Once you’ve found a good financial advisor and set specific financial goals, use a investment calculator to get a good sense of when you can expect to reach those goals.

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