What’s the Difference and Why Should You Care?
If you are one of the many individuals who believe the two are basically the same, you are in good company. It is a common misconception…and if you have survived this long without knowing the difference, surely, you can survive a little longer. After all, what you don’t know can’t hurt you, right?
Unfortunately, that is not the case. The differences between the two are so vast and impactful that educating yourself and making an informed decision between the two should be an integral part of your investment strategy. So, what are the key differences?
In the words of Charlie Munger, “We have a passion for keeping things simple.” In that spirit, I have summarized the relevant differences into four key areas: Role, Compensation, Regulatory Standards and Fiduciary Duty.
- The Role of the RIA is to provide financial advice or guidance, assist in financial planning and perform ongoing asset management services. Conversely, the primary role of a broker is that of a salesperson, to affect a transaction.
- The Compensation an RIA receives is in the form of a fully disclosed Advisory Fee, typically based on a percentage of assets under management or a flat fee. Brokers are compensated in the form of a commission, concession or a markup/markdown, which is typically included in the price of the bond for each transaction.
- The Regulatory Standards to which the RIA and the Broker are held to are vastly different. The RIA operates under a Fiduciary Standard (as provided for in the Investors Advisors Act of 1940), which requires that every decision be made in the best interests of the client and an RIA is required by law to adopt and adhere to a Code of Ethics. In contrast, a Broker is held to a Suitability Standard, which requires that the security be suitable for the client’s investments strategy at the time of the transaction.
- The Fiduciary Duty of an RIA requires full disclosure to the client of any actual or potential conflict of interest and to provide full disclosure of compensation. Brokers are not required to disclose their compensation or conflicts of interest.
“Greatness is not a function of circumstances. Greatness, it turns out, is largely a matter of conscious choice, and discipline.”
-Jim Collins
No doubt, Collins could not have envisioned our current circumstances when he uttered those words, but they still ring true, nonetheless.
Making conscious choices and informed decisions are more crucial than ever and possessing the discipline and courage for change when change is necessary is imperative for your organization to thrive, if not survive.
Now is the time for conscious choice, not the status quo.
Having a clear understanding of the differences between an RIA and a typical broker can help you make an informed decision in choosing the right structure for your financial institution.
Registered Investment Advisor vs. Broker
Types of Financial Advisors | Registered Investment Advisor | Broker |
|---|---|---|
Relationship | Ongoing Advice, planning & asset mgmt. | Transactional Facilitate securities trading |
Regulatory Standards | Fiduciary Duty Investment Advisers Act of 1940 - legal requirement of fiduciary obligation (best interest) to clients. | Suitability Standard Securities are suitable for client's investment strategy at that point in time |
Full Disclosure | Yes Investment Advisers Act of 1940 - full and fair disclosure of material facts | No No disclosure requirements |
Compensation | Fee based Based on a percentage of assets under management or a flat fee | Commissions / Markups Per transaction and tipically undisclosed to the client |
ABOUT THE AUTHOR
Bryan Abbott | COO
I’m a soccer referee, as well as a CCO. Although, my two athletes have grown, started their own lives, and have left soccer behind—I’ve never left the field. In much of my spare time, that’s where you can find me. Understanding, educating others, and following the rules is an inherent part of who I am as a person: in life, on the field, and as the Chief Compliance Officer at SB Value Partners.
I have over 25 years of industry experience, 20 of which has been spent in compliance and brokerage back office operations. I started my career as a registered representative and advanced to the position of VP of Fixed Income Trading. Those earlier years provided invaluable experience and a solid foundation as I followed my true calling to the compliance side of the business.
As CCO of SB Value Partners, my mission is to maintain a strong educational foundation and ensure an exacting adherence to regulatory guidelines.
It’s been a pleasure to work with the team at SB Value and having worked with Scott Barnes, in some form or fashion, for over 20 years, I am looking forward to the next 20 to come.