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Registered Investment Advisors vs. Brokers: What’s the difference?


There are some important differences you need to be aware of when selecting who you will trust with some of the most intimate details of your life.  Protect yourself and your family's financial well being by learning the advantages of a proper fiducary advisor.

Fiduciary vs. Suitability

Black’s Law Dictionary describes a fiduciary relationship as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.”  Law.com defines a fiduciary as “a person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.” In short, as your fiduciary it is our ethical AND legal responsibility to act in your best interest at all times. 

In light of news about fraud, Ponzi schemes, lack of regulatory oversight, and the like, we want to make crystal clear how a Registered Investment Advisor (RIA) is legally required to serve our clients. What are the differences between our responsibilities as a Registered Investment Advisor (“Advisor”), and those of a Registered Representative, one usually employed by a broker-dealer, i.e. a “broker” or “stock broker”?

The legal standards by which each type of provider is measured against are quite different.  There are subtle, but important differences between an Advisor’s and a Broker’s legal responsibility to clients. Most RIAs believe it is important for you to understand these differences. Why is the distinction important? The differing levels of legal responsibility have a direct bearing on what investments are recommended for your account(s) and how your portfolio is constructed.  

As a Registered Investment Advisor under the Securities Act of 1940, RIAs are required to act as a fiduciary.  We must put your interests above our own and declare any conflicts of interest that may arise. You can be assured the portfolios RIAs construct to meet your goals put your interests above all else. Our only thought when selecting investment products for your portfolio is how those investments are going to help you get to your financial objectives.

A broker, or Registered Representative, is required only to recommend investments that are “suitable” for you. In other words, a broker can legally put his own interest above yours when recommending investments “suitable” for the situation.

 

Advice vs. Transactions
Since brokers are paid by commissions on products sold, there is also a subtle pressure to do transactions. Also, brokerage firms are usually investment product manufacturers who see their broker/employees as the prime distribution channel to sell their products.  

On the other hand, RIAs are paid an advisory fee directly from the client for advice and service, usually a percent of assets under their care.  RIAs have no incentive to sell any product over another or to do trading in client accounts.  This reduces or eliminates the inherent conflict of interest brokers have. 

 

Transparency vs. Disclosure
Brokers usually follow the rules for legal disclosures, prospectus booklets and voluminous, lengthy legal documents printed in small-type in highly formal and hard-to-read language.  That’s become the standard for “disclosure” for the Brokerage industry.

As RIAs, we adhere to a higher standard of transparency designed to give you meaningful, relevant and straightforward information.  We will fully share details about any aspect of our service offering, and how we earn our fees.  We provide clients with quarterly reports with complete transparency on the fees we charge/receive (from you).The Custodian of your assets will also report these on your account statements for comparison.  We do not take any commissions or “marketing incentives” from investment product providers.

 

Registered Investment Advisor vs. Investment/Financial Advisor
Over the past 10 to 15 years, many brokers have begun to use the title of “Wealth Manager”, “Investment Advisor” or “Financial Advisor” without accepting the fiduciary duty of a Registered Investment Advisor as described in the Securities Act of 1940. Some have no real background or training in giving advice other than the sales training they have received.  Most merely adhere to the “suitability” doctrine. In fact, some very large, household-name brokerages have lobbied Congress to avoid fiduciary level of accountability being imposed on their brokers. Not surprisingly, it is common to find the “suitable” investments at large brokerages be those that pay the broker and his employer the highest fees for the sale of these products.

Financial firms continue to blur the line between broker-dealer and investment advisor by inventing and bundling new products like “Wrap” programs and “Fee-Based” platforms.  Because of the diversity of these products and services, investors sometimes fail to distinguish between brokers and investment advisors. A large cause of the problems of recent years have been because of this disregard for a fiduciary premise and a drive to maximize profits for the brokerage firms and the brokers.

 

Third Party vs. In-House Custody
Another safeguard RIAs employ is the use of third party custodians for your assets. Most typically, your accounts are placed at a major custodian, like Charles Schwab & Co. or Fidelity Investments and are not held in-house at the RIA.  We have limited power over the funds held by these third party custodians. That power is limited to buying and selling securities on your behalf, moving funds between your accounts, and having funds sent directly to you via your address of record or like-registered account.

This practice was not employed by the firms involved in most of the recent fraud or Ponzi schemes. Typically, the parties involved in those fraudulent schemes had direct control of the vast majority of assets under management and direct control of most of the information about those assets (meaning generation of all statements, audit information, and periodic update materials). Those practices greatly facilitated the embezzlement and fraud. By using a third party custodian, clients are able to verify account information provided by and RIA against statements provided by custodians, as a check-and-balance.

 

Ethics vs. Law
Even though more stringent regulations are under consideration by our government, unethical behavior cannot be legislated out of existence. RIAs believe the best way to earn your trust is through sound advice and an open relationship. No matter what regulatory stardards are decided by our government institutions, the majority of quality RIAs gladly accept our fiduciary responsibility to our clients. The ethics and values we have for how we serve clients are higher than any legal standard. At the core of our values is the concept of fiduciary duty and our pledge that we will never compromise those values.

 

 

Broker » Brokerage Accounts

Registered Investment Advisor » Advisory Accounts

Ownership

Large corporation with national presence. Brokers are employees.

Locally owned and operated. Independent small business.

Account Placement

Limited to Broker parent company.

May choose account platform that best fits client needs.

Breadth of Offerings

Vast, but may direct investment to in-house proprietary products.

Vast and open-architecture platform where only the best investments are utilized.

Type of Professional

A broker is an intermediary between a buyer & seller. They arrange transactions suitable for clients.

A registered investment advisor manages relationships from a holistic perspective across multiple financial topics.

Investment Decisions

The broker typically relies on their parent company for recommendations and portfolio allocations.

The registered investment advisor is the investment professional and clients have direct access to the decision maker. Investment and allocation decisions are made in a coordinated effort between advisor and client.

Legal Standard

FINRA conduct rule limits recommendations to suitable investments.

SEC Requirement of a Fiduciary Standard: RIA Must Act in Best Interest of Client.

Compensation

Commissions, Loads, 12b-1s, Finder's Fees, Sales Bonuses. Based on the Type of Securities and Number of Trades

Management fee based on assets under management

Disclosures

Limited disclosure requirements.

Full Disclosure Requirements as Required by the SEC, fiduciary law, state laws and Uniform Prudent Investor Act. (ADVII)

Proprietary Products

Many brokers offer their parent company's investment products and receive extra compensation for doing so.

No proprietary products.

Education

Typically a sales background, but more experienced brokers have investment education.

An investment education and/or financial planning background.

 

Wealth Management Advisors, LLC (WMA) is Registered with the Commonwealth of Massachusetts and the State of New Hampshire as a Registered Investment Advisor.  Stephen P. Ahern, CPA/PFS, CFP, MST is the President and Managing Member of the the firm.

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Comment   |  7 years, 10 months ago from Tewksbury, MA