Registered Investment Advisor (RIA) vs Broker / Financial Advisor / Registered Rep / Wealth Manager
In the financial services industry, there are brokers and there are advisors. There are people who sell products and there are people who sell knowledge. There are people who look out for commissions and people who look out for you. This is the fiduciary difference. Is your advisor held to the fiduciary standard? Because he or she should be.
As you've heard us mention, our "fiduciary" obligation is what really sets us apart from the rest. A fiduciary is someone that manages money for the benefit of another. A fiduciary is bound by law to place the interest of its beneficiary first - before the fiduciary's own interest. You would naturally think that anyone giving financial advice would be a fiduciary, but you'd be wrong. Stockbrokers, registered representatives, and most people that call themselves financial advisors (the term is used very loosely) are not fiduciaries even though they are engaged in marketing themselves as financial advisors. Unfortunately, only a small proportion of “financial advisors” are federally or state-registered investment advisors. Most financial advisors are considered “Broker-Dealers” by the United States Securities and Exchange Commission (SEC).
A RIA, subject to the Investment Advisors Act of 1940, is a fiduciary. The legal investment advising standards that govern a non-fiduciary stockbroker and a fiduciary RIA are very different. A non-fiduciary stockbroker only has to follow a "suitability" standard, which doesn't require the stockbroker to place the interest of the client above his own. The stockbroker only has to provide "suitable advice".
A RIA ,on the other hand, must follow the highest known standard in law which is the "trust" standard. The RIA is required by law to place the interests of its clients before its own and fulfill critical fiduciary duties of trust and confidence. The RIA must provide its "best advice".
A stockbroker owes fiduciary duties to its broker-dealer, not to its investment clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients. A RIA owes fiduciary duties to its investment clients only. At Vanguard Financial, we have no association with any broker-dealer, ensuring that the only entity that we serve is the client. The critical point made is that an RIA is subject to the high fiduciary legal standard when providing investment advising services while the stockbroker is not.
MOST COMMON THREE TYPES OF COMPENSATION
Fee-only. This model minimizes conflicts of interest. A fee-only financial advisor charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution. Fee-only financial advisors sell only one thing - their knowledge.
Fee-based. This popular form of compensation is often confused with fee-only, but it is very different. Fee-based advisors earn some of their compensation from fees paid by their client. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell. Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The fee-based model creates many potential conflicts of interest, because the advisor’s income is affected by the financial products that the client selects.
Commission. This type of advisor is not paid unless a client buys (or sells) a financial product. A commission-based advisor earns money on each transaction—and thus has a great incentive to encourage transactions that might not be in the interest of the client. Indeed, many commission-based advisors are well-trained and well-intentioned. But the inherent potential conflict is great.