March 15, 2019 in Transparency | by Scott Wood

Invested in True Transparency: Broker-Dealer vs. Registered Investment Advisor. What’s the Difference?

I have been in the financial services industry for almost 30 years. While the language of our industry is second nature to me, I know that the various terms describing who we are and what we do can be confusing for those unfamiliar with such industry vernacular. It’s been difficult, even for recent legislative efforts, to simplify language and bring the entire industry under one standard. This past spring, the reversal by the Trump Administration of a Department of Labor (DOL) ruling only makes things more confusing on the part of the consumer and the industry.


So let's talk terms. Financial advisor, registered rep, investment advisor representative, wealth advisor, financial planner, broker, banker, wealth manager, portfolio manager, etc. There are a myriad of ways to describe the individual who provides financial advice to you and your family. Further confusion arrives when you layer industry designations into the mix. Such terms as Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Certified Investment Management Analyst (CIMA), Chartered Financial Consultant (ChFC), etc. According to the Financial Industry Regulatory Authority, there are 188 industry designations. Seriously? I had to count them twice to be sure I was reading this correctly. It’s understandable that the marketplace and the consumer are confused.

To simplify this entire discussion, there are really only two main terms you need to know. Registered Investment Advisor or Broker-Dealer. These are the two structures that our industry operates within.

First let’s discuss Broker-Dealer. Very simply put, a Broker-Dealer is a registered entity with the Financial Industry Regulatory Authority (FINRA). FINRA is a private corporation acting as a self-regulatory organization. Think self-policing. It is non-governmental. It supervises member firms and exchanges. Members of FINRA and their advisor representatives (registered representatives) operate with a standard of suitability. Registered representatives advice can include conflicts of interest with their clients as long as the recommendations are suitable. The firm can be on the other side of a transaction and may profit even if the investor does not. As long as an investment is determined to be suitable based on an investor’s age, stage, risk and other profiling criteria, the registered representatives or broker-dealers are off the hook.

A Registered Investment Adviser is a firm that is an Investment Adviser registered with the Securities and Exchange Commission (SEC) or a state's securities agency. A Registered Investment Adviser must act as a Fiduciary, putting the client’s interest ahead of its own. It is unable to operate with the same conflicts of interest that exist in the Broker-Dealer world, as it would create a violation of fiduciary duty.

As I write in an attempt to simplify the discussion, I realize even the above to non-industry types is confusing. So simply remember this:

  • Broker-Dealer = Suitability
  • Registered Investment Adviser = Fiduciary

That by itself is the structural difference that draws a line in the sand for the consumer.

Now that you are clear on the structure of the industry, let me throw one more concept at you. Many Broker-Dealer’s today are Dually Registered. This means that they are registered as a Broker-Dealer AND a Registered Investment Adviser. What does this mean? I thought I understood? No. Yet again, the financial services industry does a masterful job at creating confusion and complexity. Dual registration allows a Broker-Dealer to operate in both worlds as it is expedient for the rep or the firm to do so. They can process a transaction in the Broker-Dealer world under the suitability standard when it is convenient. They can also operate in the Registered Investment Adviser world as it is befitting. Today, recent studies show that the industry is still roughly split 50/50 between commission based compensation and fee based compensation.

Let me ask you a question. Is your advisor or advisory firm a Fiduciary? If so, are they a full time Registered Investment Adviser or a part time (Dually Registered)? The answer to both of these questions matter a great deal. Our industry is built on trust. That trust needs to be both relational and structural. Knowing that your firm or advisor is a full-time fiduciary leads to a relationship where you can trust your interests are always placed ahead of the firm’s!



Filed Under: Transparency

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