Broker vs. Registered Investment Advisor: Understand Your Rights

When managing your investments, you typically interact with brokers and registered investment advisors (RIAs). Understanding their differences is essential to protect your financial interests.

What is a Broker?

A broker executes securities transactions for clients by buying and selling securities on their behalf. Brokers earn commissions based on each transaction. They must comply with Regulation Best Interest (Reg BI), which ensures recommendations are suitable and in their clients’ best interest at the time of the recommendation. However, brokers are not necessarily held to a fiduciary standard.

What is a Registered Investment Advisor (RIA)?

An RIA provides investment advice and portfolio management, usually charging a fee based on assets managed. They’re registered with the SEC or state regulators and must always act in their clients’ best interest, which is called a fiduciary duty. 

Key Differences and Why They Matter

Here’s a chart to make it easy to see the differences:

These differences matter because:

• Standard of Care: The fundamental difference between brokers and investment advisors lies in the standard of care they owe their clients. RIAs are held to a fiduciary standard, requiring them to always act in their clients’ best interest — a stricter duty than the broker’s Regulation Best Interest standard.
• What You Need: If you seek comprehensive, unbiased financial advice where your interests are legally prioritized, an RIA operating under a fiduciary standard may be preferred. However, if your needs are primarily transactional and you are comfortable with a commission-based structure and the suitability standard, a stockbroker might be appropriate. 
• Cost and Incentives: Brokers earn a large portion of their income from commissions. This creates a natural conflict of interest, as brokers may be incentivized to suggest more trades or recommend high-commission products, such as alternative investments, REITs, or private placements. RIAs typically charge fees for ongoing investment advice, aligning their compensation with the growth of your investments, which can benefit you in the long term. However, these fees may sometimes be higher for clients with smaller portfolios, even though they tend to be more transparent.

Can A Financial Professional Be Both a Broker and an Investment Advisor? 

Yes, many financial professionals are “dually registered,” meaning they can act either as a broker or an investment advisor representative. 

While dually registered financial professionals offer flexibility, operating under two different regulatory frameworks can create unique risks for investors.

The primary concern with dually registered professionals lies in the potential for conflicts of interest and the confusion over their legal standard of care. When acting as an RIAR, they are typically bound by a fiduciary duty, meaning they must always act in your best interest. However, when acting as a stockbroker, they are held to a less stringent “best interest” standard (under Regulation Best Interest), which still allows for product recommendations that generate commissions, as long as they are deemed suitable and disclosures are made.

This “switching of hats” can make it difficult for clients to discern under which standard their advice is being provided at any given time. A dually registered professional might be incentivized to recommend a commission-based product that benefits them or their firm more, even if a lower-cost, fee-based alternative (or a different commission-free product) would be equally or more appropriate for your financial goals. While they are required to disclose these conflicts, the nuances can be complex and easily misunderstood.

Always ask a dually registered professional for clear explanations of their compensation structure, their legal obligations in different scenarios, and how they manage potential conflicts of interest to ensure your financial well-being remains their top priority.

Frequently Asked Questions

What is a Fiduciary Duty?

A fiduciary duty is the legal obligation to always act in a client’s best interests.

How does a Fiduciary duty differ from a broker’s duty to act in a customer’s best interests under Regulation Best Interest (Reg BI)?

Whereas some held to a fiduciary standard that requires brokers to always act in the best interests of their clients, Reg BI requires only that brokers place their customers’ best interests ahead of their own at the time of the investment recommendation. 

What is a Dually Registered Financial Professional?

A dually registered financial professional is an individual who holds registrations as both a Registered Investment Advisor Representative (RIAR) and a stockbroker (Registered Representative) with a broker-dealer. This means they can offer both advisory services, where they are held to a fiduciary standard, and brokerage services, where they are typically held to a “best interest” standard (under Regulation Best Interest, or Reg BI, which replaced the suitability standard for broker-dealers).