Difference Between a RIA and a Broker

There has been no shortage of mixed feelings surrounding the possible imposition of an industry wide fiduciary duty on the financial world.  Advisors who conduct themselves with professionalism and a genuine interest in their clients’ well being couldn’t care less. Their behavior inadvertently opts in to the spirit of the fiduciary duty. The smaller percentage of advisors, are concerned at the possibility as it would force their practices into the light when transparency is the last thing they want. Much is being written directly to High Net Worth clients to educate them on the distinctions between those that push product and those that hold their clients’ interests above all else.  Pete Woodring shares his insights with Kiplinger in “Know the Difference Between a Broker and a Registered Investment Adviser.”

“Generally speaking, brokers get paid a commission from the products they sell. Wrap accounts are becoming more popular and are a way for brokers to select investments and make trades for clients, while charging them a flat quarterly or annual fee instead of collecting a commission for each purchase or sale of a security. Although this has, to some extent, reduced the art of “churning” (frequently buying and selling securities within client accounts to generate commission dollars), it doesn’t always mean that brokers are always making the best decisions for their clients.

Registered Investment Advisers (RIAs) offer a more comprehensive set of services, including investment and planning guidance instead of selling financial products. RIAs examine a client’s entire financial picture, assess the client’s goals and determine the time horizon for each set of assets to be invested: retirement, college savings, general investment, etc. After completing this asset allocation function, the adviser then selects appropriate investment vehicles to achieve specific objectives. Another differentiator is that independent advisers often work in coordination with other professionals (i.e., CPAs, Trust and Estate Attorneys, Philanthropic Planners, etc.) on behalf of the client to ensure comprehensive planning. Comprehensive wealth advisers can be thought of as your personal CFO (Chief Financial Officer).” Advisors, such as Pete, that willingly operate under the fiduciary duty and welcome it’s higher standards with open arms, are gradually taking more and more market share from those that continue to live in the old world of wealth management. They’re making a name for themselves by drawing attention to advisors that abuse the system for their own agenda instead of respecting the industry for the tool that it is to help protect and build wealth. “By contrast, fee-only advisers do not sell any financial products. They are incented, as a fiduciary, to search for the best options for you. They look for low fees, tax efficiency and are not required to use investment vehicles that are favorable to any particular brokerage house. If their clients need products, they work with trusted professionals to find the right products based on the client’s objectives. There is no fee splitting or other incentive in the sale of products, so conflicts of interest are kept to a minimum. 

A broker, or “Registered Representative” as they are sometimes called, is required only to recommend investments that are “suitable” for their clients. This means that a broker can legally put his or her own interest above yours when recommending financial products for your specific situation. RIAs are ethically and legally responsible for acting in your best interests at all times, thanks to the Investment Advisers Act of 1940. They serve as fiduciaries, and one definition of a fiduciary is “a person who occupies a special trust and confidence when working with clients because he/she is legally required to act ethically and with undivided loyalty to the client.”” There is not and should not be anything to fear. The only division that’s drawn is by the increasingly small number of hold outs that insist on fighting the imminent fiduciary duty. Admittedly, the bad press is drawn to the negatively focused outliers within the industry. The more attention that gets drawn to them, the more the industry gets a misplaced bad reputation overall. The silver lining is in the business that the majority of advisors and even brokers are able to bring in as a result of acting with integrity and respect.