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RIA vs. Broker-Dealer: What’s the Difference?

RIA vs Broker

There are many different factors you should consider when choosing a financial and investment advisor. Perhaps the most important factor, however, is one that many people are unaware of: whether or not their advisor is legally obligated to make investment decisions that are in their best interest.

This legal obligation is referred to as a fiduciary duty. Fiduciary is a fancy word that simply means an advisor is required by law to offer financial and investing advice that’s best for the client, not for the firm.

RIAs and Broker-Dealers

All financial advisors fall into one of two broad categories: Registered Investment Advisors (RIAs) and broker-dealers. RIAs are fiduciaries, while broker-dealers aren’t.

RIAs are registered with the Securities and Exchange Commission (SEC) or their state securities regulator, depending on their size. Most broker-dealers, meanwhile, are members of the Financial Industry Regulatory Authority (FINRA), which is regulated under the Securities and Exchange Act of 1934.

Broker-dealers are held to what’s referred to as a suitability standard when offering financial and investment advice, rather than a fiduciary standard. This means that their advice must be “suitable” for the client’s needs at that particular time. The suitability standard is less stringent than the fiduciary standard in terms of the advisor’s obligation to make recommendations that are in the client’s best interest.

In addition to the fiduciary obligation, the other main difference between an RIA and a broker-dealer is in the way they are compensated. RIAs either charge their clients a percentage of assets under management or a fixed or hourly fee. Broker-dealers, in contrast, receive most of their compensation through commissions based on the investment products they recommend and sell.

There is also a hybrid advisor — this type of advisor conducts business with clients on both a fee-based and commission-based compensation structure. Hybrid advisors are registered with both the SEC and FINRA and can offer clients a wide range of investment products and services and a choice of how they’d like to be charged. A hybrid advisor may or may not be a fiduciary.

Which Should You Choose?

In deciding which type of financial and investment advisor you should choose, one of the main questions you should ask yourself is this: Do you want to receive advice that’s objective and based solely on what’s best for your situation? Or do you want to receive advice that could be influenced, at least in part, by how much money the advisor will make based on the recommendations?

The only way to ensure that the recommendations you receive from your advisor are totally, 100 percent unbiased is to work with a Registered Investment Advisor. As a fiduciary, an RIA must offer financial and investment advice that is based on your best interest — not on his or her compensation.

Your interests will always take precedence over the advisor’s interests — specifically, how much money he or she makes — when you work with a Registered Investment Advisor.

Got questions about the differences between an RIA and a broker-dealer? Give us a call — we’ll schedule a time to sit down and talk about it in more detail.


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.