Guilderland, NY – The retail financial services industry offers products and services through two very broad arms – broker-dealer and registered investment advisor. It is important for consumers of financial services to understand how their advisor is being compensated.
The Broker-Dealer world consists of well-known firms such as Merrill Lynch, Morgan Stanley Smith Barney, and Wells Fargo, along with many independent firms such as LPL Financial, Commonwealth Financial, and VOYA Financial Advisors. Broker-dealers are regulated by both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) and their revenue is generally a result of commissions generated by securities transactions. A securities transaction may be the purchase or sale of a stock, bond, mutual fund, real estate investment trust, variable annuity, variable life insurance, etc. An advisor with such a firm is considered a ‘registered representative’ of the firm, and his/her income is generally based on transactions processed on behalf of clients. Commissions are typically built into the price that a consumer pays for a securities product, which means that the consumer is not making a direct payment to the broker-dealer firm.
The Registered Investment Advisor (RIA) world is regulated by the SEC and/or the states in which it serves clients. Generally speaking, an RIA firm provides financial advice and guidance to clients in exchange for fees paid directly by the client. Types of advice offered by an RIA firm vary, but typically include cash flow analysis, retirement income planning, income tax analysis, portfolio management, estate distribution planning, etc. RIA firms are generally viewed as having fewer conflicts of interest with their customers due to the non-transactional nature of the relationship.
The financial services industry has seen a large shift during the past 10 years away from the broker-dealer channel and towards the RIA channel. According to Cerulli Associates in its December 2013 edition of “The Cerulli Edge: US Asset Management Edition”, the RIA channel grew at an average annual rate of 8% from 2004 to 2012, while broker-dealer channels actually saw an overall decline in business during this same period. We attribute this trend to the notion that RIA firms owe their clients a fiduciary duty, which is a much stronger duty of care than the suitability standard required by broker-dealer firms. In other words, an RIA firm is required to sit on the same side of the table as its client, while a broker-dealer firm is not.
AllSquare Wealth is a Registered Investment Advisor (RIA), and our primary business is to provide fee-only advice and guidance to our customers.
We have developed a white paper entitled ‘An Overview of the Financial Services Industry’ that provides much more detail on this topic. If you would like to receive a copy of this paper, please request a copy by sending an email to firstname.lastname@example.org or calling our office at (518) 456-8900.