Shakespeare Blog: View from the Lake

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The Difference Between RIAs and Broker-Dealers

Written By: Nick Ziarek, CFP®, CFA

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When searching for a financial advisor, there are many options and terms used to define a firm’s role and obligations to you, the client. There are broker-dealers, wirehouses, independent broker-dealers, registered investment advisors (RIAs), fee-only advisors and fee-based advisors. To complicate it even more, there are even dually registered advisors.

So what does it all mean? At the highest level, there are broker-dealers and RIAs and within each of those categories there are important differences.

What is a Broker-Dealer?

Most notably, a broker-dealer is registered with the Financial Industry Regulatory Authority (FINRA) and is held to a suitability standard when making recommendations to a client. That means the advisor is not obligated to offer you a product that is in your best interest as long as the one they recommend is suitable for your stated goals. The suitability standard can best be explained as there are two products that meet the client’s stated investment objective and risk tolerance, but one comes with a slightly higher commission or other benefit.

The most recognizable broker-dealers are the wirehouse firms – Merrill Lynch, Morgan Stanley and Wells Fargo to name a few – where the advisors are employees of the firm. Independent broker-dealers include firms like LPL where the advisors are independent, may have their own advisory firm but use the independent broker-dealer for the buying and selling of securities.

What is a Registered Investment Advisor (RIA)?

RIAs are held to a fiduciary standard when working with their clients. The fiduciary standard is very different from the suitability standard for broker-dealers. It imposes legal and ethical guidelines on how an advisor works with a client. It requires that RIAs act in the best interest of their client at all times and disclose any conflicts of interest.

Unlike broker-dealers, RIAs fall under the regulation and oversight of the Securities and Exchange Commission (SEC). RIAs under $100 million in assets are regulated by their state’s securities administrations.

RIAs are paid directly by the client through transparent fee arrangements such as a percent of assets under management, flat-fee or hourly rate. They are independent firms that typically select one or two brokerage firms (ex. Schwab, Fidelity, TD Ameritrade) through which client accounts are held and trades are executed.

Fee-only advisors are paid only by the client while a fee-based advisor is paid by both the client and through commissions from financial products sold to the client. A fee-based advisor could be dually registered with a broker-dealer to sell products like annuities or insurance and also as an advisor with a RIA.

The Shakespeare Difference

There has been a shift in the financial industry to fee-only services but not all fee-only advisors are created equal. Just because an advisor positions themselves as fee-only does not mean you are receiving the same services and depth of knowledge as the next fee-only advisor.

Shakespeare Wealth Management is a fee-only RIA regulated by the SEC, meaning our financial advisors are held to a fiduciary standard for our clients. At Shakespeare our strength lies in the comprehensive planning based off the deep relationships built with our clients from day one. We spend time learning about more than just your investment accounts, focusing on everything from your family dynamics, to maximizing tax strategies, to ensuring your estate plan is best structured to meet your goals. We are not just your financial advisor, we are your partner. In addition, our Shakespeare financial advisors have multiple certifications that require ongoing education. They work as a team to ensure each client is benefiting from the multiple areas of expertise that individual advisors provide. The trust we instill from our holistic planning, deep relationships and advisor expertise provides peace of mind. We truly focus on our client’s best interest.