broker vs ria - which advisor is a fiduciary

Broker vs RIA: Which one serves you?


Greasy salesman with a sales contract and a pen.

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

Broker dealers are entities that facilitate securities and other investment transactions. Most firms that one would consider a “stock brokerage” act as both brokers and dealers thus referred to as “broker dealers” by industry regulators. Broker dealers often include traditional Wall Street organizations, large commercial banks, and investment banks. They often employ representatives who act as advisers that will help you determine which investments you should purchase. In addition to being paid by the broker dealer firm, these representatives earn additional paychecks directly from the investment companies and mutual funds. These commissions are based on selling their products. So as you can see, broker dealers earn more by selling you specific products, not by improving the performance of your investment portfolio. You may have also noticed that many of these broker dealers have huge advertising budgets. You may have even been “cold called” by one of these firms. Their ads are on thousands of billboards and commercials. They make investing your hard earned savings seem as simple as following a “green line” or knowing your “magic number” for retirement savings. They feel that once they get you in the door, their highly trained sales force (who call themselves advisers) and

picture of a salesman with many phones making cold calls

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

advanced marketing techniques will easily manipulate you into buying their heavily loaded or high sales commission products.  The worst part is you will likely walk out the door feeling great about your poor decision.

Also, be aware that broker dealers are not required to meet a fiduciary standard to their clients. Actually, the representatives of these firms have a responsibility to put the company’s interests first and the client’s second. These representatives can also recommend products that may pay them or their organization a larger commission even if there are dozens of better products available (many of which may be a better fit for your personal situation). Don’t worry, these organizations aren’t allowed to completely take advantage of you. They are required to make recommendations that meet the client’s “suitability.” You should be aware of their standards of “suitability” and what is involved in their decision process before doing business with a broker dealer.  As you can see from the SEC’s loose definition of “suitability“, it can be quite difficult to prove that a broker dealer chose an “unsuitable” investment product for your portfolio.

Conclusion:  broker dealers serve Wall Street… Not you!

Why is a Registered Investment Adviser (RIA) different?

Registered Investment Advisers have completed the necessary qualifications to be registered with the SEC and applicable state agencies. Typically RIAs work with clients directly and help them manage their assets. RIAs usually charge based on a percentage of assets under management. However, some charge a flat rate or a rate based on hourly work. Fee-only RIAs are the most popular as they do not earn any outside commission. This means their only paycheck is coming from their clients. For example, if a fee only investment adviser earns 1% AUM (that’s a industry term for “Assets Under Management”), the only way to increase his or her pay is to grow your investments.  This really helps ensure that there are absolutely no conflicts of interest. This model is better designed for ensuring that the client’s happiness is the adviser’s number one priority.  This is the logic used by trusted radio personality and personal finance guru, Dave Ramsey, who recommends Fee Only Investment Managers (or Fee Only Fiduciaries) as the only sensible option for your personal wealth management.

Definition of fiduciary from

The most important trait of an RIA is that they are required by law to act as a fiduciary to their clients. This is crucial because they absolutely have to put the client’s interests above their own. 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.  It is important to remember that a Fee Only RIA makes more money when you make more money. In contrast, if your portfolio loses value, the RIA will also be taking a pay cut.  So, as you can see, the incentives for an RIA line up perfectly with the clients needs. It is in the best interest of the RIA to safely grow your savings.

Conclusion:  RIAs serve you… Not Wall Street!

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

RIA vs Broker. Pros and Cons

When all is said and done, you are the one in control of your financial future. After reviewing your goals, you may wonder if you even need to hire an advisor. Unless you have the proper tools, time, inclination and experience, you need a financial adviser. Whichever adviser you choose to assist you can have great implications. It is definitely smart to thoroughly research and understand your options before making a selection. After all, you are trusting someone with your savings that have taken a lifetime to build.