Registered Investment Advisor (RIA) vs. Broker-Dealer: What’s the Difference?

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Who to hire to help manage your money and build wealth in the long run is an important decision. As such, it requires careful consideration, an understanding of the options available, and a thorough vetting process. 

One of the most important steps when hiring a financial professional is their registration. But what does that mean?

Financial professionals can be registered in either one of two ways: with a Registered Investment Advisor firm, also known as an RIA, or a Broker Dealer. While this may seem like a trivial difference on the surface, the reality is that there are significant differences and implications between the two that Tencap believes you should be informed of, when hiring a financial professional.

What Is a Registered Investment Advisor (RIA)?

A Registered Investment Advisor (RIA) is a financial advisory firm regulated by the U.S. Securities and Exchange Commission (SEC) or state securities authorities, depending on the size of the firm. 

Advisors who work at an RIA are called Investment Advisor Representatives (IARs), and as the name implies, IARs provide investment advice. This advice may include recommendations on asset allocation, portfolio management, retirement planning, and wealth management, among other topics.

In our opinion, most importantly, RIAs are required to act in their client’s best interests and adhere to a fiduciary standard. They are obligated to disclose any conflicts of interest and advise in a way that solely focuses on their clients’ needs, not their financial interests.

What Is a Broker-Dealer?

A broker-dealer is regulated by the Financial Industry Regulatory Authority (FINRA) and provides services related to securities transactions. This includes executing buy and sell orders on behalf of clients and providing financial recommendations, portfolio management advice, and other similar activities. 

Advisors who work at a broker-dealer are called Registered Representatives (RRs). Unlike RIAs, broker-dealers have a different set of standards they must follow.

The suitability standard states that broker-dealers must “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.”

In other words, RR’s recommendations don’t have to be what’s in the best interest of their clients but instead be suitable for someone in a similar situation (a similar age, phase of life, risk tolerance, etc.). Of course, this can create a potential disconnect between the advice and what’s best for the client in their unique situation. 

Most notably, broker-dealers may offer proprietary products or engage in other business activities that can create conflicts of interest between the firm and its clients. Think: recommending certain financial products because they pay the advisor or firm a commission, even if it’s not best for the client.

So, What Does This Mean for You?

To understand what this could mean for you, consider this example.

Imagine that you’re approaching the end of your career and want to hire a financial advisor to help you navigate the upcoming transition into retirement. You’ve worked hard as a business owner and saved up a considerable amount of money. You also plan to sell some or all of your business to a successor and invest the proceeds for retirement.

If you choose an RIA, they will be held to the fiduciary standard and must act in your best interest. They won’t recommend investments or strategies just because it’s better for them or their firm. So, you sit down with an advisor at an RIA, and they recommend the following:

  1. Structure the sale of your business as an installment rather than a lump sum to spread the payments out over multiple years, creating a lower overall tax liability.
  2. Invest the proceeds into a low-cost, broadly diversified investment portfolio with a 60% stock and 40% bond portfolio based on your risk tolerance and timeline until retirement.
  3. Assess your personal situation for Social Security. An RIA may unflinchingly advise you to wait until age 70 to provide the maximum lifetime benefit.

Their recommendations are in your best interest and tailored to your unique situation, goals, and lifestyle.

On the other hand, if you select a broker-dealer, they would be held to the suitability standard. Their advice and recommendations only need to be suitable for someone in your situation, so you may not get the best possible advice for your unique needs. An example of what we have seen recommended is:

  1. Structure the sale of your business as a lump sum.
  2. Invest the proceeds into a variable annuity that pays the advisor a high commission.
  3. Purchase a whole life insurance policy with an absurd annual premium.

While these recommendations may be suitable for someone in a similar situation, the unfortunate reality is they may not be in your best interest and result in higher fees, poor investment performance, and a low lifetime retirement income.

The takeaway is that when selecting a financial professional, it’s essential to understand the different standards of care and how they impact the advice and products recommended.

With a fiduciary, you can rest assured that their advice is in your best interest—it’s why informed investors decide to go this route when selecting an advisor.

Summary: The Key Benefits of Working with an RIA

In summary, selecting a Registered Investment Advisor over a broker-dealer can provide several key benefits, including:

  1. Fiduciary Standard: RIAs are legally obligated to act in your best interest, ensuring you receive financial advice and recommendations that best suit your unique needs and goals.
  2. Transparency: They offer full transparency into their fee structure, investment approach, and potential conflicts of interest through their form ADV.
  3. Customized Advice: RIAs provide personalized financial advice based on your financial situation, risk tolerance, and long-term goals, as opposed to a one-size-fits-all recommendation.
  4. Comprehensive Services: RIAs often provide a wider range of services, including retirement planning, tax planning, estate planning, and business exit planning, making them a one-stop solution for all your financial planning needs.
  5. Relationship-Focused: They typically focus on building long-term relationships with their clients, offering continuing financial guidance, and adapting strategies as your financial situation changes.

And that’s why Tencap Wealth Coaching is intentionally registered as an RIA firm.

Tencap Wealth Coaching is Here to Help

If you’re interested in working with a trusted fiduciary advisor to work towards your financial success, then Tencap Wealth Coaching is here to help.

At Tencap Wealth Coaching, we take a comprehensive approach to financial planning. Our goal is to help you develop strategies to build and protect your wealth over the long term.

To do so, our team of experienced advisors provides a comprehensive range of services, including retirement cash flow structuring, insurance design, tax strategy, estate planning, and business exit planning—all while adhering to the fiduciary standard. 

We help our clients reach their financial goals by providing personalized advice—ensuring they feel secure and empowered with their money.

So don’t wait. Learn more or schedule a no-cost introductory meeting below.

Schedule a meeting.

Photo of Nick Carrigan
Nick Carrigan
Wealth Advisor | + posts

Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.

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