You are using an outdated browser. Please upgrade your browser to improve your experience. Their roles and responsibilities to you as a client are as different as night and day. By Pete Woodring, RIA , Founding Partner Cypress Partners September Contact Me. When families are looking for guidance on how they should manage their wealth, common questions include: Do we need a broker or a registered investment adviser?

What is the difference? And why does it matter how he or she is paid? You would think that the roles and responsibilities would be clear and that there would be a strong line between individuals who call themselves advisers and those who call themselves brokers. Unfortunately, this is not the case, creating lots of confusion between the two.

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There are some important differences you need to be aware of when selecting who you will trust with some of the most intimate details of your life. Following is a brief summary of the differences to help you make the distinction between an adviser and a broker:.

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Each investment decision is a distinct transaction for which the broker gets paid. Consultation and advice between the broker and client is common, but essentially it is mostly a transaction-based relationship.

Generally speaking, brokers get paid a commission from the products they sell.

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Wrap accounts are becoming more popular and are a way for brokers to select investments and make trades for clients, while charging them a flat quarterly or annual fee instead of collecting a commission for each purchase or sale of a security. Registered Investment Advisers RIAs offer a more comprehensive set of services, including investment and planning guidance instead of selling financial products. After completing this asset allocation function, the adviser then selects appropriate investment vehicles to achieve specific objectives.

Another differentiator is that independent advisers often work in coordination with other professionals i.

Comprehensive wealth advisers can be thought of as your personal CFO Chief Financial Officer.

Some RIAs charge an hourly fee, but most charge a percentage of the assets under their care. There are two different compensation models: The difference is important because fee-based advisers do sell products. They are not required to inform their clients in detail how their compensation is accrued. As you might imagine, the fee-based model opens up the conflict-of-interest door. By contrast, fee-only advisers do not sell any financial products. They are incented, as a fiduciary, to search for the best options for you.

They look for low fees, tax efficiency and are not required to use investment vehicles that are favorable to any particular brokerage house. There is no fee splitting or other incentive in the sale of products, so conflicts of interest are kept to a minimum.

This means that a broker can legally put his or her own interest above yours when recommending financial products for your specific situation. RIAs are ethically and legally responsible for acting in your best interests at all times, thanks to the Investment Advisers Act of The Act of precludes brokers from being considered investment advisers. While advisers must act in your best interest at all times, brokers are not legally bound by this same requirement. What I mean by this is that with lots of hard-to-understand disclosures, you might feel overwhelmed and intimidated and simply assuming that your broker has your best interests at heart.

Advisers adhere to a higher standard of transparency designed to give you meaningful, relevant and straightforward information. Advisers share details about all aspects of their services, and how they earn their fees, so that you understand how your wealth is being cared for and the associated cost for that care.

Every RIA is legally obligated to send to their clients a copy of their Form ADV, which is a filing explaining the makeup of their firm, what services they offer and what they charge.

A broker typically holds a Series 63 license, in addition to either a Series 7 or 6 license, in order to sell securities. Some brokers have no real background or training in giving financial advice other than the sales training they have received.

In fact, some very large, household-name brokerages have lobbied Congress to avoid fiduciary level of accountability being imposed on their brokers. RIAs are required to receive a Series 65, which qualifies an investment professional to function as an Investment Adviser Representative.

The license covers topics such as industry laws, regulations, ethics and topics such as retirement planning, portfolio management strategies and fiduciary responsibilities.

It is not a product sales license. Other poplar adviser designations include the CFP Certified Financial Planner and CFA Chartered Financial Analyst. This allows you the ability to reconcile your custodian statements and the statements you receive from your adviser. Avoid, at all costs, holding your assets in-house with your adviser.

RIAs believe the best way to earn your trust is through sound advice and an open relationship. No matter what regulatory standards are decided by our government institutions, the majority of quality RIAs gladly accept the fiduciary responsibility to their clients.

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The ethics and values they have for how they serve clients are higher than any legal standard. At the core of their values is the concept of fiduciary duty and their pledge that they will never compromise those values.

Woodring is founding partner of San Francisco Bay area Cypress Partners , a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern. Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff.

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