RIAs vs. Brokers

Brokers vs. Investment Advisers

There are two primary types of individuals in the investment business: brokers and Investment Advisers (IAs). The differences between the two are often shocking to many individuals who have started the process of researching the best person to handle their hard-earned money. Perhaps the biggest difference between the two is the standard of care they must provide the client:

IAs are required to put the client’s interests first at all times.

Investment Advisers are held to a fiduciary standard, meaning the IA is required by law to put the client’s interest first at all times. Additionally, IAs are required by law to disclose conflicts of interest and to keep fees and expenses reasonable.

Brokers are required to put their firm’s interests first at all times.

A broker is held to a suitability standard, which means they can recommend investments that generate the highest commissions for themselves and their firms, as long as they are deemed suitable for the client. To make matters worse, brokers are not required to disclose these conflicts of interest and do not have to keep fees and expenses reasonable.

What’s in a name?

Given the stark contrast between the standard of care mandated by Investment Advisers and brokers, it is not surprising that many investors will attempt to seek out an IA to manage their money. However, it is often difficult to spot brokers because of the titles under their names. Instead of seeing ‘broker’ listed as a broker’s job title, you are likely to see more ambiguous titles, such as ‘financial advisor,’ or ‘financial planner.’ Don’t be fooled! In fact, most people who use the terms ‘financial advisor’ or ‘financial planner’ are actually brokers. Unfortunately, the only way to discover if someone is held to a fiduciary level of care is to ask. However, even if a person states he/she is acting as a fiduciary – be sure to get it in writing. If an investment professional refuses to state in writing that he/she is held to a fiduciary level of care, you should take your money elsewhere. Why put your financial future into the hands of someone who will not put your interests first?

Click below to hear Dr. Lach’s thoughts on finding the right investment professional.