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Registered Investment Advisors - RIAs vs Broker-Dealers: Why they're different.


The term Financial Advisor can mean many things. Traditionally, a Financial Advisor was a broker at a large firm that called wealthy clients with stock ideas. Now, it is a broad term that can mean just about anything from an insurance agent selling life insurance and annuity products to full-fledged Registered Investment Advisors. Before deciding to work with a Financial Advisor, one of the most important considerations is whether or not that advisor will be legally obligated to put your needs before their own. 

This legal obligation is called a fiduciary duty, which is just a fancy term that means the advisor is required by law to offer financial and investment advice that is in the client's best interest at all times, not the advisor's or that of the firm.

So, let's break down the differences between the two general types of financial advisors.

RIA and Broker-Dealer

Generally, financial advisors fall into two categories. Registered Investment Advisors (RIAs for short) and broker-dealers. Advisors at RIAs are fiduciaries, while those at broker-dealers are not. 

Advisors at a broker-dealer adhere to what is known as a suitability standard when making recommendations. This means that the advice must be "suitable" for the client's needs at that particular point in time.

There are also differences between their compensation models that make the picture a little more clear. Broker-dealers receive most of their compensation through commissions based on the investment products that they recommend and sell. This can create a conflict of interest between the client and advisor's interests.

RIAs, by contrast, are paid by the client directly through a fixed or hourly fee or as a percentage of the assets under management. This aligns the advisor's interests with the client's and should provide a clearer picture of what the client is actually paying for, which is financial advice instead of financial products.

There are also hybrid advisors, known commonly as dual-registered advisors, that conduct business on both a fee-based and commission-based compensation structure. A hybrid advisor may or may not be giving advice based on the fiduciary standard.

What does this mean for investors in Visalia?

For those interviewing potential financial advisors, it's best to come prepared with a list of questions. Be prepared to ask the advisor if their firm is a Registered Investment Advisor, a Broker-Dealer, or if the advisor is dual-registered. You can also ask how the advisor will be compensated for their work with you. Most advisors have no problem discussing their business model, compensation, or normal processes. If they do have a problem answering these questions, that may be a red flag.

 - Schad TenBroeck, Sequoia Financial LLC

Opinions expressed are subject to change without notice and are not intended as tax, legal, or investment advice, but for informational purposes only. Past results do not predict future performance.

Schad TenBroeck is an Investment Advisor Representative of Sequoia Financial, LLC. Investment Advisory Services are offered through Sequoia Financial, LLC, a California Registered Investment Advisor. Insurance services are offered through TenBroeck Insurance Services. Sequoia Financial, LLC and TenBroeck Insurance Services are affiliated.


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