The financial services and investment fields are full of acronyms and terminology that isn’t intuitively obvious to many. The descriptive terms for the firms and individuals in the profession are a great example. We have three learning objectives for this post:
- To know the difference between a broker-dealer, commonly called a brokerage firm, and a registered investment advisor, commonly referred to as an RIA
- To understand the individual roles of a stockbroker as compared to an investment advisory representative
- To be familiar with the different compensation models of how firms and individuals get paid for their services provided to you
Brokerage firms, officially known as broker-dealers, are the custodians of client accounts. In today’s way of doing business, most investors use a brokerage account to hold their securities like stocks, bonds, mutual funds and exchange traded funds for safe keeping. Transactions to buy and sell these securities is done from within the brokerage account.
A brokerage account can be registered in one of several different ways. Common registrations include individual, joint tenants, IRA, Roth IRA, revocable trust, etc. These different types of accounts undergo differing tax treatment of income, profits and losses.
Registered investment advisor firms, RIAs for short, may take custody of your assets in some cases, but most commonly use a brokerage firm to hold custody of their clients’ assets. This allows the RIA to initiate trades for their clients, buying and selling securities believed to be in the client’s best interest to achieve their investment and retirement planning objectives. Charles Schwab & Company is the largest custodian of accounts for independent registered investment advisors.
When you work with a RIA firm, you will most likely authorize “discretionary authority”. This means the RIA will buy and sell securities on your behalf without needing to call you for permission to make each trade. Chances are they are making the same trades for many clients at the same time.
While you can grant discretionary authority to a broker-dealer firm or its representatives, in most cases clients of broker-dealers have a more transactional relationship. This has implications for the way the firm and employees are compensated compared to the RIA model.
The individual employees of these two types of firms go by many descriptive labels. Formerly, the advice-giving representatives of a brokerage firm were called “brokers”. Today, more common names are financial consultant, financial advisor, wealth manager, etc. Officially, an employee of a broker-dealer is known as a “registered representative”.
Advice giving employees of RIAs are officially know as “investment advisory representatives” (IARs for short). But the descriptive term on their business card probably uses a term like we reviewed above for the employees of the brokerage firm.
If you retain an RIA and one of its IARs to provide investment management and planning advice, you are probably receiving advice from the firm and individuals acting in a fiduciary capacity. In simple terms, a fiduciary must place his or her client’s interests before their own and disclose all conflicts of interest. Fiduciary advisors are often called “fee-only” advisors. This means that the only compensation the RIA firm and its employees receive is from the fees the clients pay the firm. There are no forms of transaction-based or commission-based compensation paid to either the firm or the individuals.
Registered representatives and broker dealer firms are not required to uphold the fiduciary standard, nor to disclose all conflicts of interest. Many of these brokers recommend products that result in commission or transaction-based income. These factors don’t make this business model bad, but clients should understand how their advisor is being compensated and if the advisor is acting in a fiduciary capacity, or not.
Integra Capital Advisors is a fiduciary, fee-only RIA and our individual advisors are compensated only by the fees our clients pay us. We believe this is the best advice and compensation model and we have used it since our firm’s inception in 1992.
Call us today at (941) 778-1900 or visit www.integrcapitaladvisors.com to schedule an appointment today to learn more about how our investment management and planning services can help you reach your financial goals.