What is the difference between an RIA vs Broker?

A Registered Investment Advisor is a fiduciary. A fiduciary is a legal standard adopted by a relatively small but growing segment of financial advisors. They have abandoned their big-box firms, relinquished their broker status and made the decision to become an RIA. RIAs get paid for financial advice and must remove any potential conflicts of interest(or disclose them to clients) and put the client’s best interest above their own. Brokerage firms, banks and credit unions only have to invest in what is “suitable” for clients even if it is not in their best interest. Before you make a decision about where to get your advice, it’s a good idea to understand your options, as well as the source of the advice. In many cases, you have a choice between an RIA or a broker.

Suze Orman on choosing an advisor: “Someone who doesn’t sell products”, receive compensation based on a percentage of account value rather commissions on loaded investments.

David Certner policy director AARP: “We think all advice should be subject to a fiduciary standard,”

Fred Reish, 401k attorney: “The fiduciary standard requires the RIA to take into account a number of considerations: reasonable fees, investments are adequately diversified and conflicts of interest.”

What is an RIA?

VIMA RIA is an individual who has completed the qualifications to be registered with the SEC. An RIA works with high net worth clients to help them manage their assets. In addition to creating financial plans to improve the client’s wealth and diversification, an RIA can also make trades on your behalf. An RIA is required by law to act as a fiduciary to clients. As a result, the client’s best interest is the most important consideration when making recommendations. VIMA provides advice on client 401k plan accounts, brokers are not allowed to provide this service.

What is a Broker?






A broker is an individual who facilitates investment transactions. In most cases, a broker receives compensation through commissions. You must be aware that a broker isn’t required to meet fiduciary standards, they do not have to act in their clients best interest. Brokers are able to recommend investments that give them the bigger commission, even if there is a product that is more fee friendly. The SEC does not require brokers to make investments based on the best interest of the client.

 Registered Investment Advisor vs. Broker

Brokers have begun to use the title of “Wealth Manager”, “Investment Advisor” or “Financial Advisor” without accepting the fiduciary duty, acting within your clients best interest, of a RIA. It is common to find that the “suitable” investments at large brokerage firms are the house products that pay the highest commissions to the broker and the firm. This compensation system can lead a broker to give you a biased investment advice towards riskier investments because they pay the highest commission, while safe(fixed) investments have lower compensation. It is in your best interest for a broker to recommend no-load investments although they won’t make a commission from the sale so it is avoided.

 Below is a chart of differences:

Table 2


Financial Times: Wealth Management business change will improve clients returns

March 2016
Stephen Foley

The White House is fighting to push through the last big financial reform — Wall Street is uniting to stop it.
They are close to finalizing proposals that will radically change the way retirement products are sold to Americans, introducing a new “fiduciary standard” that will sweep away hidden fees, huge commissions and conflicts of interest that cost savers billions of dollars a year. But Wall Street contend that a key provision — a legal requirement to put their clients best interests first — is simply too burdensome.

“We have millions of investors, particularly in mutual funds, depending on us for their lifetime’s security” says Jack Bogle, who founded Vanguard, has long campaigned for a fiduciary standard to cover financial advice. “Anybody who touches other people’s money should be deemed a fiduciary(best interest of the client).”

Tightening the standard Registered Investment Advisors have been held to a fiduciary standard that requires them to put their client’s interest above their own. But brokers on Wall Street who sell products are not. Staff at the country’s 5,100 brokerage firms are only required to recommend “suitable” products.

That leaves them free to push savers into higher-cost products that stunt the growth of their retirement nest eggs. The administration says returns will be improved by 1 percentage point annually if brokers did what was in their clients “best interest”, rather than just “suitable” ones that generate the highest fees — and the difference would help narrow the gap between what Americans are saving and what they will need for retirement.

The fiduciary rule is being drawn up by the US Department of Labor, whose responsibility for overseeing retirement investment has expanded. The DoL has indicated it hopes to have the new standards implemented by next January, a victory in what has been a long battle with the wealth management industry. Wall Street still hopes to block the proposal in Congress or the courts.

Preparing for change

There are also question marks about whether many of the most complicated retirement products will still fit into the country’s $7tn of retirement accounts. Among those products that may not pass muster are variable annuities. Over the past decade $1.5tn of variable annuities have been sold. About half the sales are estimated to be purchased through retirement vehicles, making them vulnerable to the overhaul.

Proponents of the products argue that they combine the benefits of holding an equities mutual fund with protection against losses. Critics say they contain the largest internal fees, with commissions paid to the broker between 7 and 10 per cent upfront, and surrender penalties for selling before 7-10 year window. If the broker receives 7-10 commission the client internal fees go up dramatically.

Tweaking the model

But amid the overhaul, there is one set of companies that are doing little more than sitting and waiting for new customers to arrive. RIA firms, while small compared to Wall Street are expecting to pick up clients.

After 3,400 comment letters rolled into the DoL, most critical of the new rules were pleading to protect brokers income levels. Jon Stein fired off a letter of his own, “Behind all the rhetoric is an age-old dynamic,” they wrote. “There are those who are busy building innovative services to better serve consumers, and then there are the rent-seeking brokers who are busy deploying their formidable resources lobbying to preserve the status quo.”
Mr Bogle seized on Morningstar’s estimate of annual revenue losses for Wall Street firms. “If Wall Street loses $2.4bn in commission, their clients are $2.4bn better off. This is not complicated,” he says.