Newsletter: Special Edition – Understanding the Difference Between a Broker and a Registered Investment Advisor

In March 2018, the United States Court of Appeals for the Fifth Circuit added to the lingering saga of the DOL Fiduciary Rule by voting to vacate the rule. As a result, the debate over who is and who is not a fiduciary continues. The lack of clarity on this subject was one of the main reasons we decided to form our own Registered Investment Advisor (RIA) and leave the confusion behind. So, what’s the difference between a broker and an advisor?

A critical distinction between the two is regulatory. A broker is registered with the Financial Industry Regulatory Authority (FINRA) and owes a duty of fair dealing to their clients. They are only required to make recommendations that are suitable for clients and can legally put their interests above the clients’. On the other hand, an RIA is registered with the Securities Exchange Commission (SEC). As a fiduciary, an investment advisor has an affirmative duty of care, loyalty, honesty and good faith to act in the best interests of clients.

Compensation is also typically different between the two. By definition, a broker is someone who buys and sells products on behalf of another for a commission. This compensation can be a natural conflict of interest. Advisors, on the other hand, provide advice for a fee and generally provide a more comprehensive array of services, including financial planning, estate planning, tax guidance, etc.

Another difference is transparency. The standard for the brokerage industry is disclosure, which means a lot of voluminous documents, often creating greater confusion. The RIA world is about clarity. Advisors adhere to the highest standard of transparency, sharing details about their services, fees and even the makeup of their firm. This information is required to be provided to clients and is published on the SEC website.

While there are clear differences between a broker and an advisor, good and bad individuals can be found in both categories. Although we have always held ourselves to the fiduciary standard and tried our best to be transparent in our dealings, the time was right to make it clear where we stand. We are committed to the highest standards of care and will do our best to validate this newest change.

This article was originally featured in NNP’s Special Edition newsletter. To read the other articles, download the entire newsletter.

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