Broker vs RIA: Which one serves you?

by | Mar 23, 2022 | Research

Greasy salesman with a sales contract and a pen.

Do you want to trust your financial future to this guy?

Many factors combine to shape your financial future, but ultimately you are the one in control. Choosing to work with a financial advisor to manage your funds can help ensure you are on the right path to financial success. But the type of adviser you choose can have great implications on your investment performance and your overall financial future.

So before choosing between a Registered Investment Advisor [RIA] and a broker-dealer, it is important to thoroughly research and understand the differences. After all, you are trusting someone with savings that have taken a lifetime to build.

picture of a salesman with many phones making cold calls

Do you want an adviser that spends his time like this?

What is a Broker-Dealer?

Broker-dealers are financial intermediaries that facilitate securities transactions. Essentially, these firms connect buyers of a security with sellers of that security, and include traditional Wall Street organizations, large commercial banks, and investment banks.

Broker-dealers often employ representatives who can make recommendations about which investments you should purchase. These representatives are employees of the firm and are typically paid based on commissions earned from trades.

Broker-dealer representatives are governed by a suitability standard. This means that the investments they recommend must be suitable for a client’s situation given the information the broker has collected. Unfortunately, ‘suitability’ is a broad term with many interpretations.

Just because an investment is suitable, doesn’t mean that purchasing it is in the client’s best interest. For example, if two funds invest in similar underlying securities, have a similar risk profile, and a similar time horizon, but one pays a higher commission, both would be equally suitable for a client’s portfolio. While the fund with the higher commission would be equally suitable, it may not be in the client’s best interest to purchase that fund over the less expensive alternative. However, the fund with the higher commission would generate more profit for the broker-dealer. This compensation structure and the relatively lenient suitability standard can create a conflict of interest between investors and broker-dealer representatives.

Why is a Registered Investment Adviser (RIA) different?

Representatives of a broker-dealer are employed by a firm, while RIAs work directly for clients to help them manage their assets. RIAs are not typically paid based on commissions, and therefore have no incentive to recommend certain products based on profit. Instead, RIAs usually charge a set percentage of assets under management. This is known as a fee-only compensation schedule because the RIA earns income only based on the fee they charge.

For a fee-only RIA, their only paycheck comes from their clients. For example, if a fee only investment adviser earns 1% of assets under management, the only way for the advisor to increase his or her pay is to grow your investments. This type of compensation structure helps ensure that there are no conflicts of interest and advisors are always working in their clients’ best interest.

RIAs are also held to a higher standard than suitability. They are required to act as a fiduciary. As a fiduciary, RIAs must put the client’s interests above their own. This includes a duty of loyalty and care. RIAs must also make investment recommendations based solely on the client’s best interest, without regard to their own compensation or sales goals. So, when you have received advice or a recommendation from an RIA, you can be confident that they truly believe that their recommendation has your best interest at heart.

Definition of fiduciary from

Which is Best for You – Broker-dealer or RIA?

Choosing between a broker-dealer and a fee-only RIA depends on your unique situation. If you have the time, tools, expertise, and inclination to choose your own investments, then you could use a broker-dealer to facilitate your trades.

On the other hand, if you need a trusted financial partner to work with you to determine which investments best suit your needs, a fee-only RIA could be the best option for you. A fee-only RIA is held to a strict fiduciary standard, and not paid based on recommending certain trades or products. This type of advisor makes more money when you make more money. So, it is in the best interest of the RIA to safely grow your savings.

Let’s take one more look at RIAs vs Broker Dealers:

RIA vs Broker. Pros and Cons

Get the Most from Your Investments with DreamWork Financial Group

DreamWork Financial Group is a fee-only RIA. Our advisors are never paid trade commissions, so you can be assured that our investment recommendations are made with your best interest in mind.

Our exclusive investment program, Investing Gameplan™, ensures you are invested in stocks, ETFs, and other securities that are in the best interest of your investing goals. So, if you need a knowledgeable, client-focused advisor who can manage your portfolio without conflicts of interest, contact us today.

Article Topics: Fiduciary | Investments