Registered Investment Advisor or Broker/Dealer: Which is right for you?

by: Smith and Howard Wealth Management

The investment world offers so many options not just in your investments, but in those you work with who manage them. In your financial life, it is important that your investment strategy begin with someone you not only can trust, but who is educated and well qualified in investments and has only your best interests at heart. But how can the average investor have confidence that the investment firm and/or professional that they choose fits the bill?

One of the ways to do this is to understand what difference between the responsibilities of the investment manager and the broker/dealer are and second, to understand who is most committed to the highest standards of fiduciary responsibility.

As recently as 2010, the Securities and Exchange Commission was itself hammering out just what exactly a fiduciary is and what “fiduciary duties” are. In a memorandum to its own Investment Advisory Committee, it said, “In the financial services arena, it is generally accepted that an investment adviser owes a fiduciary duty to his clients. This is only the beginning of the inquiry, however, because it does not explain the substance or scope of the duty. What is an “investment adviser?” When is an investment adviser acting in that capacity such that the fiduciary duty applies? When the fiduciary duty applies, what standard of conduct does it require? For example, if a broker recommends that a client invest in a particular mutual fund and the broker receives 12b‐1 fees: Is the broker acting as an investment adviser? If he is, then what does the fiduciary duty require with respect to the disclosure of the 12b‐1 fees?”

When it’s all said and done, as an Registered Investment Advisor (RIA) with the SEC, we have a fiduciary duty to our clients. And as an RIA, we eliminate the question asked by the SEC above about receiving brokerage fees this way: we don’t receive any. Additionally, we don’t sell products. In this way, all of our decisions are made with the investment interests of our clients in mind. Because we are registered with the SEC, we must maintain and pass strict requirements and are regulated under the Investment Advisors Act of 1940.

A broker-dealer, on the other hand, is a member of a self-regulated organization (Financial Industry Regulatory Authority – FINRA). Because they are subject to a “suitability standard” and not the fiduciary standard of an RIA, they are able to receive commissions and sell products.

The decision on which approach is best for you is a personal one. We, of course, are firm advocates of the fiduciary standard. It is only with this standard in place that the client’s interests – yours – are assuredly considered first and foremost

If you have questions on this topic, please feel free to call us at 404-874-6244.