RIA or Broker-Dealer: What’s the Fiduciary Difference?

RIA or Broker-Dealer: What’s the Fiduciary Difference?

As an investor, you may want to consider the role your advisor plays within the fiduciary world, as it pertains to your portfolio.  Is the manager being recommended really a best fit for my portfolio?  Is changing my portfolio allocation really in line with my risk tolerance and retirement goals?  These are just two of many questions you can sleep well at night knowing the answers to, by simply defining the role of a fiduciary.  Let’s start with a basic definition…

AH - Fiduciary DifferenceFiduciary Defined:

An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.[1]

In considering this definition further, a fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by a client is actually accepted by the other party or partner entering into the relationship. The duties of a fiduciary include loyalty and reasonable care of the assets they are being trusted to invest. All of the actions of the partner are performed for the advantage of the beneficiary (the client). Mere respect for the client’s judgment or general trust in their character is ordinarily insufficient for the creation of a fiduciary relationship.

When choosing an advisory firm to invest your money with, a fiduciary relationship should be a critical component to your selection process – it is important to know and understand the difference between an RIA (Registered Investment Advisor) and a Broker-Dealer before making any selections.

An RIA (i.e. Beacon Pointe Advisors amongst others) is registered with and regulated by either the Securities and Exchange Commission (SEC) or their appropriate state securities regulator(s), depending on the size of the assets they manage, and is regulated under the Investment Advisers Act of 1940.  A Broker-Dealer (i.e. Morgan Stanley, Merrill Lynch, and Wells Fargo) is usually a member of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization for broker/dealers doing business in the U.S. and is regulated under the Securities Exchange Act of 1934.[2]

Ok, enough data jargon, let’s get to the main point: how the two types differ.  RIAs and Broker-Dealers can be different in many ways, but the main point revolves around compensation.  Broker-Dealers are typically compensated by charging a commission on the sale of an investment product, whereas RIAs are typically compensated by charging a fee for advice – two very different structures. [3]  

How these differing compensation structures fit in to your relationship with an advisor is such: Broker-Dealers are held to a “fair dealing” standard of care and are subject to a “suitability” standard of care with clients (meaning that their investment recommendations must be suitable for the needs of the client), while RIAs are subject to a “fiduciary” standard of client care (meaning that their investment recommendations must be in the best interest of the client AND the client’s interests have to take precedence over their own).[4]

It is not our place to tell you which structure is better, so we definitely won’t do so – every person, every investor, is unique and must go with what best fits his or her investment needs and preferences.  But we, at Beacon Pointe, do stand firm in our belief that the client should always come first, no matter what the situation, and that is why we are an RIA.

Disclaimer: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites or references.

Beacon Pointe consultants can be contacted at info@bpadvisors.com if you have any questions or would like additional information.

 


[2] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 2-3. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011.

[3] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 4. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011.

[4] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 4. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011. 

 

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