What’s the Difference Between a RIA and a Broker Dealer?

Daniel Penzing
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What Is a RIA?

Registered investment advisors (RIAs) are a type of investment firm that focuses on providing financial planning and investment advice to clients. RIAs manage client assets (for a management fee) and provide investment advice. They are regulated under the Investment Advisers Act of 1940.

The investment advice they provide is usually very tactical in nature (i.e. picking stocks, bonds, funds etc) and they are not permitted to sell another firm’s financial products, such as mutual funds or annuities.

Instead, they can offer certain types of insurance products (such as term life insurance), as well as cash accounts and annuities, provided by an insurance company.

The types of clients that RIAs typically work with include the very wealthy (who are looking to invest significant amounts over periods of time), but also a wide array of other clients. They range from ultra-wealthy clients with hundreds of millions of dollars under management, to clients with just a few thousand dollars to invest.

An RIA offers a lot of flexibility, as you can choose the types of assets you want to invest in, and the amount of management fee you are willing to pay.

What Is a Broker Dealer?

Before we go any further, let’s define a broker dealer and what it does. A broker dealer is an organization or firm that issues securities to an investor on behalf of a company, or buys and sells securities for its own account. A broker that deals exclusively in securities issued by its own firm is called an exempt market dealer.

Although a broker dealer is considered a financial advisor of sorts, the broker dealer and the advisor are two very different things. An advisor generally will make a selection on which securities to choose for the investor, and then the broker dealer will execute the transaction. The advisor charges a fee for this advice.

A broker dealer generally charges fees as well. However, the broker dealer will generally charge more for the knowledge and experience of executing the trade, which is why any investor would want to use a broker dealer in the first place.

How can you tell if a company is a broker dealer or an advisor? There are two main telltale signs:

Which Approach Is Best for You?

There are two general types of financial services in the investment world: registered investment advisors (RIAs) and broker-dealers. Both require licensing and monitoring by the Securities and Exchange Commission (SEC), and both facilitate the buying and selling of securities, though broker-dealers act on behalf of the purchaser, and RIAs act on behalf of the investor.

There are also differences in how investments are structured, and therefore, how they are priced. RIAs are likely to charge an asset advisory fee. Although not fixed by any law or regulation, the asset advisory fee is often 1-3 percent of assets under management. Broker-dealers are generally compensated for trade recommendations in the form of commissions. There are also other additional fees such as marketing and referral fees that are typical of a broker-dealer.

Registered Investment Advisor

An RIA is a registered company who provides investment advice to their clients. They are not allowed to accept commissions for their recommendations and are bound by fiduciary duty, which means they act in their client’s best interest at all times. RIAs are highly regulated and can be held accountable in a court of law.

Broker/Dealer

A broker-dealer is typically a company that buys and sells securities on behalf of their clients. Their customers pay commission to buy or sell securities or financial products.

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