In recent years, the line between registered investment advisors (who deliver advice) and registered representatives or brokers (who sell products) has blurred—particularly with respect to how these professionals are marketed to consumers, seemingly all are referred to as “financial advisors.”

No matter who you work with, it’s vital to understand the difference as each is held to a different ethical standard while managing your money.

Broker vs. investment advisors

Investment advisors provide clients with investment advice while managing their investment portfolios for a fee and generally offer personalized service and access to additional types of investments.

If you’re only looking to buy and sell securities such as stocks and bonds, you’ll need to enlist the help of a broker: who acts as an intermediary between investors and a securities exchange. You can choose between full-service brokers—such as Morgan Stanley, Stifel, and Merrill Lynch—and discount brokers such as E-Trade and TD Ameritrade. While the latter charge lower fees and commissions, they compel you to make investment decisions independently whereas full-service brokers provide personalized investment advice.

A fiduciary, defined

A fiduciary is a person or firm that acts on behalf of another person (or people), typically to manage money and other assets. A fiduciary also has a legal obligation to work with the "highest standard of care," meaning honesty and trustworthiness.

RIAs are held to a fiduciary standard

Registered investment advisors, also known as RIAs, are people or firms that provide advice or recommendations for buying and selling securities. They hold themselves to what’s known as a “fiduciary obligation” to put your interests first and are registered with the SEC (or a similar state agency) and thus allowed to dole out investment advice.

Implicit in their fiduciary responsibility is a fiduciary duty of care (they will manage your assets as any rational person would), a fiduciary duty of loyalty (they will put your interests ahead their own), and a fiduciary duty of good faith (they won’t trick you). The bottom line and fundamental distinction from other “financial advisors” is that RIAs are required to act in a fiduciary role at all times.

To identify if a person/firm is an RIA, just ask! You can then research the RIA’s Form ADV, a required public SEC disclosure. The ADV details firm business practices, including methods of payment and if any legal actions were taken against them in the past.

Registered representatives & brokers are held to Regulation BI

Since June 2020, the SEC has required brokers to comply to act in the best interest of their customers through Regulation Best Interest (BI) when recommending strategies or transactions involving securities.

This rule is an improvement over the previously required standard of care, as it requires broker-dealers to disclose any potential conflicts of interest (e.g., the sale of proprietary products, which are investment vehicles issued by the same financial institution advising the client).

In addition, the new rule brings more clarity to consumers looking for wealth management as it prevents brokers from referring to themselves as “advisors” if they don’t work per the fiduciary standard.

Regulation BI does have a few shortcomings, however. The rule does not clearly define “best interest” and still allows for commission-based compensation; and while Regulation BI helps mitigate other forms of compensation—such as award trips and bonuses—the rule doesn’t prohibit them outright.

Morever, the “best interest” standard does not require advisors to have a continuing duty of care or loyalty to clients after providing a recommendation.

Reason for different standards

Perhaps you’re wondering why financial advisors are held to such different standards than their counterparts. In the eyes of the SEC, you should turn to registered investment advisors for financial advice. The primary role of broker-dealers, on the other hand, is to maintain capital market liquidity by connecting buyers with investments.

According to former SEC Chairman Jay Clayton, “Best interest on the broker side has many of the same elements, but we want people to understand that the investment advisor space, and the broker-dealer space, are different.”

He added, “In the broker-dealer space, you get paid usually a commission on a transaction by transaction basis. In the investment advisor space, it’s more of a long-term relationship, where you get paid on a quarterly fee, yearly fee, and the advisor has a more portfolio lifetime relationship with you.”

The bottom line: financial advisors vs. brokers

There is a time and a place for enlisting the help of financial advisors, as both registered representatives and investment advisors serve their purpose. Sometimes, paying a commission to a broker is more beneficial than paying a fee.

However, it’s vital to understand the differences and remain aware of any areas drawing the bias of your advisor (fiduciary or not)—primarily since each is held to different ethical standards with respect to your money management.

Still have questions? Schedule a FREE Discovery call with one of our CFP® professionals today!

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.