Broker-Dealer vs Registered Investment Advisor

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

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Broker-Dealers vs Registered Investment Advisors (RIAs): Overview

Broker-dealers and Registered Investment Advisors (RIAs) are two types of professionals in the financial field. When availing of investment services, clients need to be aware of the differences between the two, so they can select the one that suits them best.

Broker-dealers are licensed professionals facilitating transactions for clients related to the buying and selling of securities. They usually receive commissions for their services.

Registered investment advisors are also licensed professionals. However, they are more focused on advising clients on various aspects of their investments and portfolios. They have a different payment structure from broker-dealers and do not accept commissions.

Both entities play essential roles in the financial markets. Still, there are vital differences between them regarding the client relationships they form, the services they offer, the licenses they must obtain, and the costs involved when working with them.

What Are Broker-Dealers?

A broker-dealer is a financial professional who trades securities on their customers’ behalf. They can also trade securities on behalf of their firm. When they conduct a transaction, they receive a commission based on the value of a client’s investment.

Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) and must meet specific requirements. For instance, they must have adequate capital and sound business practices that protect investors.

What Are Registered Investment Advisors (RIAs)?

Registered Investment Advisors are professionals who advise individuals, institutions, and other organizations on investments and financial planning.

Registered Investment Advisors must register with either their state or the Securities and Exchange Commission (SEC), depending on the type of assets they manage, and provide ongoing reporting to ensure compliance with state and federal laws and regulations.

RIAs act as fiduciaries for their clients, meaning that their interests must always come first, emphasizing the highest possible standard of care. RIAs must also adhere to a code of ethics that defines a higher degree of responsibility that other investment advisors may not have.

Key Differences Between Broker-Dealers & RIAs

Broker-dealers and registered investment advisors differ in a number of ways, including the following:

Client Relationships

The primary distinction between broker-dealers and RIAs is the degree of responsibility they have for their clients. This is an essential factor that can influence the quality of recommendations they offer their clients.

Broker-dealers are only held to a suitability standard, meaning they must ensure that any investments they recommend are good enough to suit the client’s circumstances. However, this standard does not require them to put the client’s interests above their own.

On the other hand, RIAs must adhere to the fiduciary standard, which requires them always to put their client’s interests first. This means that they cannot make recommendations that will result in personal financial gain. Instead, they must suggest what is best for their client.

Services Offered

Broker-dealers’ services are generally limited to buying and selling securities on their client’s behalf. In some cases, they may also provide market research, trading advice, portfolio management, financial planning, and other services.

RIAs typically offer a broader range of services, such as asset allocation strategies, tax planning strategies, estate planning strategies, retirement planning strategies, cash flow analysis, and more.

Professional Licenses

Registered Investment Advisors must obtain the Series 65 license and register with a state or federal financial regulator. Broker-dealers also need to register with securities regulators, but they are also subject to additional licensing requirements, such as the Series 7 license.

The education requirements for both entities will vary depending on the state where they work, but both must adhere to industry regulations and licensing requirements.

Costs Involved

The cost of an RIA’s services will generally be higher than a broker-dealer’s. This is because RIAs provide more comprehensive services and typically require clients to commit to a long-term relationship.

Broker-dealers may have lower costs, but their services are generally more limited and may not include advice or planning.

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How to Choose Between a Broker-Dealer & RIA

When deciding between a broker-dealer and an RIA, there are several questions you should ask yourself.

Do you require comprehensive investment advice and planning services or just assistance with trading? Are the fees associated with the service structure acceptable to you? What is your comfort level when it comes to taking on risks?

Hiring a registered investment adviser might be most suitable if you prefer a wide range of services and the security of a fiduciary relationship. However, if you only require someone to perform trading transactions for you, you might be more inclined toward a broker-dealer.

Ultimately, the choice between a broker-dealer and an RIA should be based on your individual needs. It is essential to ensure that you are comfortable with the services offered by each entity before making any decisions.

Whichever one you choose, it is essential thoroughly check your prospect’s background before signing any contracts. You can do this by using FINRA’s BrokerCheck tool or requesting a copy of the Form ADV filed with the Securities and Exchange Commission.

Both sources can provide valuable information to help you with your decision. By thoroughly researching your candidates, you can ensure that the person you select will adequately meet your needs.

The Bottom Line

Broker-dealers and Registered Investment Advisors are both licensed professionals in the financial field. They differ in terms of the client relationships they form, the services they offer, the licenses they must obtain, and the costs involved when working with them.

Broker-dealers assist with trading securities, while RIAs provide more comprehensive services such as financial planning, asset allocation strategies, tax planning strategies, estate planning strategies, and cash flow analysis.

Broker-dealers are held to a suitability standard, meaning their recommendations must be good enough to suit their client’s circumstances. However, this standard does not require them to put the client’s interests above their own and allows them to receive commissions.

In contrast, RIAs must adhere to the fiduciary standard, which requires them always to put their client’s interests first. This means that they cannot make recommendations that will result in personal financial gain. Instead, they must suggest what is best for their client.

When considering whether to use a broker-dealer or an RIA, it is essential to understand the differences between these two entities. If you are still trying to decide which type of professional best suits your needs, consulting with a financial advisor may help you choose.


Broker-Dealer vs Registered Investment Advisor FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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