Broker-Dealers vs. RIAs: An Overview
Assume you are an investor who wishes to avoid the wirehouses. You can be looking for an independent financial planner or financial adviser who is not affiliated with a huge corporation like Wells Fargo or Morgan Stanley.
This covers a lot of ground, but in the end, all such planners and advisers that handle assets (other than annuities and life insurance) fall into one of two categories: They might be registered investment advisers (RIAs) or registered representatives working for a broker-dealer. Aside from coming under distinct regulatory purviews, these experts may supply and price for their services in a variety of ways.
- Investors looking for unbiased financial advice and investments may select between independent broker-dealers and licensed investment advisers (RIAs).
- Independent broker-dealers provide full-service brokerage services while avoiding the limits and expectations of a huge Wall Street business.
- RIAs are independent fiduciaries who may work with several broker-dealers to market a variety of goods and services.
- RIAs are legally obligated to serve their customers’ financial interests.
- Broker-dealers have greater freedom than RIAs, and their investments are subject to a lesser “suitability” criterion.
Kinds of Investment Advisors
Registered agents for big wirehouses are often advised what items to market, which stocks to promote, and how to conduct business. Independent broker-dealer representatives are not bound by these constraints, and therefore often provide a far broader range of goods and services to their clients than wirehouse brokers.
Independent broker-dealers are prepared to provide a comprehensive variety of investment options that extend well beyond traditional vehicles such as mutual funds and annuities. Many of them provide alternative investments such as hedge funds, tax credits, non-qualified plans, and initial public offerings (IPOs), which are often sold in sophisticated investing or retirement schemes geared to certain groups or professions such as physicians or dentists.
Broker-dealers are only obliged to fulfill the lower suitability criterion and are not obligated to operate in the best interests of the customer. Broker-dealers may earn commissions or other compensation by recommending certain goods to their clients.
Planners who work as representatives for this sort of organization will charge a commission to acquire an investment, but they may have some wiggle room in how much they charge for a certain type of transaction. The primary benefit of using an independent broker-dealer is that there is no needless red tape.
RIAs are subject to a greater standard of conduct than registered representatives since they are functioning in a fiduciary position. This fiduciary standard requires an RIA to always put the client’s best interests ahead of their own, regardless of the circumstances.
RIAs must register with either a state securities authority or the federal Securities and Exchange Commission, depending on the value of their assets. RIAs must also disclose any potential conflicts of interest to their customers and conduct themselves ethically in all business interactions.
If they handle more than $100 million in assets, RIAs must register with the SEC.
Some RIAs charge a portion of their customers’ assets under management, while others charge an hourly or fixed fee to provide advice. Advisors who chose this practice model must get a Series 65 license.
When it comes to selecting a planner, it may seem that an RIA is the logical option. However, many commission-based planners perform extremely professionally and put their customers’ best interests before of their own. Being an RIA does not also imply a specific degree of expertise, since the Series 65 test focuses primarily on federal securities rules and regulations.
To make matters even more complicated, many independent brokers also have the Series 65 license, allowing them to provide turnkey managed money plans with active professional management. Some RIAs are also associated with a broker-dealer in order to sell products such as variable annuities, which are not suitable for a pure RIA platform.
Can an RIA be a Broker-Dealer?
An investment business may be both a registered investment adviser and a broker-dealer, enabling it to collect both fees and commissions. Through different contractual agreements, these “hybrid” RIAs have both a custodial partner and a broker-dealer partner.
Do RIAs Execute Trades?
A qualified investment adviser may assist customers in completing transactions or can execute deals on their behalf. RIAs, on the other hand, are still bound by their fiduciary obligation, which means they cannot conduct transactions without the client’s knowledge and prior approval.
Can RIAs Sell Annuities?
Insurance products such as annuities may be sold by RIAs, but there are extra regulatory requirements. Because variable annuities are considered investment securities, the RIA would need to pass the Series 7 test or have a broker-dealer connection. For fixed annuities, the RIA would require a state regulator’s license to offer life insurance, as well as a partnership with a Brokerage General Agency.
Are Broker-Dealers or RIAs Better?
When deciding whether to engage with a broker-dealer or an RIA, customers should evaluate the sort of assistance they want and the costs they are comfortable with. RIAs have a fiduciary obligation to their customers, which means they may only propose goods that are in the best interests and aims of the client. A broker-dealer has greater leeway since their goods must simply fulfill the appropriateness criteria. In both circumstances, it is critical to understand a financial advisor’s pricing structure and track record.
The Bottom Line
Both RIAs and independent brokers have a lot of leeway in how they run their operations. RIAs are required to take a fiduciary oath, but independent brokers may have access to goods or services that are difficult to get elsewhere.
The best option for you will most likely be determined by the individual rather than the company strategy. When you meet an adviser with whom you are genuinely comfortable, the business model they use is likely to be secondary.
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