What is the Difference Between a Broker and an RIA?

John Faith
July 29, 2014

This question came into my mailbox. The writer said he asked his HR Director what was the difference between the two and she said she didn’t know. She gave him the right answer. HR Directors are usually not Financial Advisors and typically are not licensed (and therefore shouldn’t) offer investment or financial advice. They know retirement

Also Read: 5 Things You Need to Know About Survivor Benefits as a Federal Employee or Retiree
Also Read: How FEGLI Premium Changes Are Forcing Federal Employees to Reevaluate Their Plans
Also Read: Why FEHB and Medicare Could Be the Most Important Decision You Make as a Retiree

and may have a fairly sound knowledge about certain financial terms and instruments because of their knowledge of benefits. However, I find absolutely nothing unusual about the HR Director’s answer. She probably looked at the writer very strangely and wondered why he was asking her such a questions. We are going to take a shot at answering this question because of our financial literacy educational platform.

The difference between a broker and a registered investment advisor (RIA) has a lot to do with how that professional’s business is structured. This might sound a little unkind, but it is what I believe constitutes the most significant difference between the two. The broker is generally a representative who works for a brokerage firm selling securities. Brokers are not really financial advisors (regardless of the name they might call themselves), but are selling a product. The selling of products generally carries a commission, sort of like in the movie – The Wolf of Wall Street. The brokers, not to say they are not good people, but they truly have a motive to sell a product. The question becomes – Does their interest come before yours? Just a question to think about.

A Registered Investment Advisor (RIA) is required by law to not only give you suitable advice or recommendations, but must act with a tremendous amount of fiduciary responsibility. Both are regulated by the Securities Exchange Act of 1934 but to different degrees or operating parameters. RIAs are required to put the client’s interest first and not their own. In short – if you have a choice, a RIA may be your better option.

The most important requirement is making sure you are educated about what direction you want to take when it comes to financial planning and managing and transferring your wealth.