Broker-Dealer vs. Registered Investment Advisor (RIA)

Bill Engel in Investments 30 August, 2021

Written by: Bill Engel, CFP® | Senior Vice President

What Is a Broker-Dealer?

A broker-dealer (BD) is a firm that buys and sells securities for its own account on behalf of customers. BDs act on behalf of customers in their brokerage capacity by buying and selling securities for them. They act as a dealer when buying securities for their own account. BDs provide market liquidity by ensuring a buyer for every seller and a seller for every buyer. BDs are often compensated on both sides of a transaction through a spread and earn a commission for their services, although they may also have fee-based compensation models as well.

How Does a Broker-Dealer Make Money?

Individuals who are brokerage representatives are commission-based planners and typically receive compensation when they sell a certain product or service to a client. These products could include bonds, insurance products, mutual funds, stocks, or a variety of other securities. If the representative works for a BD, the products are often those marketed by the BD or partners of the BD. Individuals working under this model must disclose any relationships and payments received to clients. However, it can be unclear whether they are working in their own best interest or the client’s.

What Is a Registered Investment Advisor (RIA)?

Registered investment advisors (RIAs) have a fiduciary duty to their clients. This means that they must put their clients’ best interests first. RIAs are often compensated on a fee-only structure, but they may also operate on a fee-based structure.

How Does a Registered Investment Advisor (RIA) Make Money?

Advisors who work on a fee-only model receive compensation based on a certain percentage of assets under management (AUM). For example, if an advisor charged a 1% annual fee and a client had $1,000,000 AUM, the annual fee would total $10,000 regardless of what products and services were sold to the client. Fee-only planners have a much more transparent way of being paid and do not have the same conflicts of interest that commission-based planners have. For fee-only planners, as your assets grow, so does their fee. This compensation structure aligns the firm’s interests with the client’s.

What Is the Fee-Based Model?

As was briefly mentioned, one more compensation model exists– the fee-based model. In this model, advisors can still receive commission for the sale of certain types of investments but also charge an asset-based fee for their services. Both BDs and RIAs can utilize this payment model. This can help to align advisor interests with client interests but does not completely succeed in doing so.

Should You Work With a Broker-Dealer or a Registered Investment Advisor (RIA)?

In the end, the choice of a financial professional should not be made simply based on the fee structure. Instead, your financial professional should be someone that you trust to handle your money and trust to make the best possible financial decisions on your behalf.

About the Author:

Bill Engel, CFP®
Senior Vice President
Fort Pitt Capital Group, LLC
680 Andersen Drive, Pittsburgh, PA 15220
(412) 921-1822 |

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