Today, we’ll be diving deeper into the world of Registered Investment Advisors and one of their counterparts, Broker-Dealers.
As an investor, it’s important you have a good understanding of all of the options available to you in terms of advisors and money managers. This way, you’ll always know exactly what you’re getting, and you’ll feel confident that you’re getting exactly the right level of management, without overspending for services you don’t use.
Previously we discussed the differences between fee-based and fee-only advisors. If you haven’t already read this, we suggest you click here and read that article first. Fee-based advisors won’t be discussed in this piece, but it’s important that you understand what they are, and why they should generally be avoided.
A Quick Primer on RIAs
If you’re reading this, it’s likely you already have a good handle on what an RIA is. There’s a good chance you’ve already sought out one to help you manage your accounts.
Just in case, we’ll go over a few of their most important characteristics. If this is old news to you, feel free to skip down to the What is a Broker Dealer? section below.
RIAs, or Registered Investment Advisors are some of the most heavily vetted and regulated advisors available. In order to qualify, you must first pass a 130 question exam known as the Series 65. This exam covers multiple topics, from retirement planning to portfolio management, and requires the exam taker to have a comprehensive knowledge of laws, regulations, and money management ethics.
RIAs are regulated by the Securities and Exchange Commission (SEC), and are held to the fiduciary standard, which means they are legally obligated to unconditionally put their client’s best interest above their own. RIAs are forbidden from accepting commissions and often earn fees based on a percentage of assets under management, meaning that their ability to earn money is based on their ability to grow their client’s accounts.
What Is a Broker-Dealer?
Many big investment firms serve the dual functions of both Brokers and Dealers, hence the term Broker-Dealer.
A broker is just any party able to provide trade execution to a client. They can be full-service brokers, which are very similar to an advisor and can provide specific investment recommendations and long-term planning, or discount brokers, which are simply a service (such as a website) that allows you to purchase securities without any assistance.
Dealers, on the other hand, conduct trades on behalf of the firm itself, using in house accounts. They help facilitate trading by creating and maintaining liquid markets, and basically just keep everything moving by facilitating the free flow of securities on the open market.
Many large commercial banks and investment banks operate as broker-dealers, as well as some smaller money management firms that cater to specific clients.
Which should YOU Choose?
Typically, an RIA is going to be the optimal choice for most individual investors. They have a legal and personal obligation to grow your accounts as much as possible and they can offer you a high level of assistance in specific areas such as retirement planning or funding your child’s education.
There is potential for a conflict of interest when partnering with a Broker-Dealer, as they’re not held to fiduciary standards like RIAs. However, many Broker-Dealers act on straight commissions from clients, and will also act ethically, putting their client’s interests ahead of their own.
There are also many specific cases in which an individual investor would choose to use a broker dealer instead of an RIA. Principally, if you’re a very skilled DIY trader with a high level of knowledge, using a discount broker might be a lower cost alternative to a full-service broker or RIA.
Broker-Dealers also have access to certain products and services that are difficult to find elsewhere and may fit your specific case. If you’re interested in certain “alternative investment” models such as hedge funds, tax credits, non-qualified plans and IPOs, or retirement programs catered to specific professions, having a discussion with a broker-dealer regarding what they offer might be a good idea.
As always, if you feel you need help navigating the complex field of advisors, brokers, dealers, and broker-dealers, don’t hesitate to schedule a call with a member of our team.
Everyone is different, which is why there are so many categories of advisors. We can help identify which areas of the advisor/client relationship are most important to you and which type of advisor is right for your specific case.
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