Broker Dealers vs. Registered Investment Advisors

Subtopic: Catalonia Wine Region Air Date: September 11th, 2020

Since the 1920’s, Broker-Dealers have been part of the investment scene. Registered Investment Advisors didn’t exist until mid-20th century.

Consumers don’t know the difference – “a study in 2015 revealed that only 3% of consumers recognized that Registered Investment Advisors were the only type of financial professional held to a fiduciary standard.

Core difference: a broker-dealer, since their inception, were only held to the “suitability standard”. This is consistent with a “sales-centric” role.  RIA’s, on the other hand, have always been held to the “fiduciary standard”.  A simple way to keep them straight – these standards were written for a world where broker-dealers sold securities and investment advisors sold advice.

Conflicts of interest – Eliminate vs. Disclose??? This is another element that needs more work.

The New World of Regulation Best Interest (BI) – this is the SEC’s effort to focus on lifting the standards of conduct that apply to broker-dealers. The effect for RIAs was minimal since the fiduciary rule has always been the standard for RIA’s.

 As a broker, dealer… When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations we provide you.”

By contrast, RIAs will be required to state:

As an RIA… “When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you.”

Creating a single, uniform standard that applies to B-D’s and RIA’s was not necessarily appropriate.  While this does not require the elimination of commissions altogether, potential shifts that may come from Regulation Best Interest include:

  • A curtailment of especially-high commission products (that may produce an untenable conflict to sell)
  • Equalization of compensation within product categories to reduce differential compensation incentives
  • Equalization of compensation between proprietary and non-proprietary products (including potential limitations on “integrated grid” payouts that require sales in certain product categories)
  • Reforms to product and/or grid compensation payouts that unduly incentivize reaching certain levels of production for higher payouts (e.g., akin to the Department of Labor’s fiduciary rule, the use of graduated grid schedules instead of cliff payout thresholds)