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Financial advisors typically operate under one of two regulatory structures: as a Registered Investment Advisor (RIA) or through a Broker-Dealer. This distinction significantly affects how they're compensated and regulated.
Registered Investment Advisor
RIAs are investment advisors registered with the SEC or state securities regulators. They provide ongoing investment advice and are held to a fiduciary standard, requiring them to act in clients' best interests.
Broker-Dealer Representative
Broker-dealers are firms that execute securities transactions for clients. Representatives at these firms sell investment products and typically earn commissions on transactions.
| Aspect | RIA | Broker-Dealer |
|---|---|---|
| Regulatory Standard | Fiduciary - must act in best interest | Suitability - must be appropriate |
| Compensation | Fees (AUM, hourly, flat) | Commissions on transactions |
| Primary Regulator | SEC or State Securities Regulator | FINRA and SEC |
| Relationship Model | Ongoing advice and management | Transaction-based |
| Disclosure Form | Form ADV | Form CRS and BrokerCheck |
For comprehensive, ongoing financial advice, an RIA structure typically offers better alignment of interests. Broker-dealers are appropriate for specific transactions but be aware of commission-based incentives.
Many advisors are "dually registered" - affiliated with both an RIA and Broker-Dealer. This can create confusion about which capacity they're acting in at any given time.
For RIAs, check the SEC's Investment Adviser Public Disclosure (IAPD) database. For broker-dealers, use FINRA's BrokerCheck tool.
RIAs are often preferred for retirement accounts due to their fiduciary duty. However, Department of Labor rules now require broker-dealers to meet higher standards for retirement advice.
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