Broker-Dealers vs. RIAs: An Overview

You're an investor who wants to avoid the wirehouses. You are in the market for an independent financial planner or financial advisor who does not work for a large firm such as Wells Fargo or Morgan Stanley. That covers a lot of territory, but ultimately all such 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 (RIAs) or registered representatives that work for an independent broker-dealer. Aside from falling under different regulatory purview, there are several different ways these professionals can provide and charge for their services.

Key Takeaways

  • Investors seeking an independent financial professional to help with advice and investments can choose between independent broker-dealers and registered investment advisors (RIAs).
  • Independent broker-dealers function as full-service brokerage firms but remain free from the constraints and demands of a large Wall Street company.
  • RIAs are independent fiduciaries who may associate with several broker-dealers, selling a range of products and services.
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Kinds of Investment Advisors

Independent Broker-Dealers

Registered representatives who work for major wirehouses are often told what products to sell, what stocks to recommend, and how they can conduct their business. Reps who work for Independent broker-dealers do not have these restrictions, and they usually have a much wider selection of products and services for their clientele than wirehouse brokers.

Independent broker-dealers are equipped to offer a full range of investment offerings that can go far beyond mainstream vehicles such as mutual funds and annuities. Many of them provide alternative investments such as hedge funds, tax credits, non-qualified plans, and IPOs, sometimes marketed in sophisticated investment or retirement programs that are tailored to specific groups or professions such as doctors or dentists. Planners who work as reps for this type of company will charge a commission to purchase an investment, but they may have some leeway in how much they charge for a given type of transaction. (See also: Facts About Independent Broker-Dealers.)

The biggest advantage of an independent broker-dealer is that there is no unnecessary bureaucracy; agents have the freedom to do things their own way.

The RIA Side

Regulated directly by the Securities and Exchange Commission (SEC), RIAs are considered to be acting in a fiduciary capacity, and so held to a higher standard of conduct than registered representatives. This fiduciary 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.

RIAs 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. Advisors who choose this model for their practices must obtain a Series 65 license.

Special Considerations

When it comes to choosing a planner, it may seem like an RIA would be the obvious choice. But the fact is that many planners who work on commissions also act very ethically and put their clients’ best interests ahead of their own. Being an RIA also doesn’t guarantee a certain level of competence, as the Series 65 exam deals chiefly with federal securities laws and regulations.

And to further complicate the matter, many independent brokers also carry the Series 65 license so they can offer turnkey managed money programs that provide active professional management. Some RIAs are likewise affiliated with a broker-dealer so they can offer products such as variable annuities, which do not lend themselves to a pure RIA platform.

The Bottom Line

RIAs and independent brokers both have considerable freedom in how they operate their businesses. RIAs are bound by a fiduciary oath, while independent brokers may have access to specific products or services that are hard to find elsewhere. The right choice for you is most likely going to depend more on the person rather than the business model. When you find an advisor you feel truly comfortable with, the business model they use will likely be of secondary importance.