Broker Check

Registered Investment Adviser vs Registered Representative

| February 20, 2015
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Recently I was in a web discussion with other financial advisors conversing about whether an investor should use a RIA (Registered Investment Adviser) or an RR (Registered Representative). This can be a delicate subject since the investment industry is currently well represented from both camps. The biggest difference between a Registered Representative and an Investment Adviser from a client’s perspective in general is the fiduciary/suitability issue. An RIA is held to the fiduciary standard, while the RR is held to the suitability standard. The industry has currently focused on this issue specifically in the past few years with the creation of the Dodd Frank provisions. Yet most consumers still today do not understand or are aware of the differences between having a financial adviser that is regulated by a fiduciary duty and a financial adviser that is required to abide by a suitability duty. Fiduciary means that the client’s interests are always first. Suitability means that the client can only be sold those investments that are appropriate for the client when considering that client’s situation. Suitability does not  take into consideration the fact that the client might be better off without the investment, or that there are better investments available in the marketplace (cheaper, better track record, higher rated by established rating/investment analysis firms) then the one investment being recommended by the adviser.

The word “fiduciary” has even been redefined lately. Because sales commissions are considered by most individuals as being a deterrent to what is “in the best interest” of the client, many in the industry believe that any adviser that is compensated in any way by a sales commission is not a fiduciary. Yet many advisers at major firms are at least partly compensated by sales commissions and yet feel that form of compensation does not disqualify them from acting in the best interest of their client. In fact, it is rare to meet a Registered Representative that does not believe he/she is also a fiduciary. Redefinition of “fiduciary” has become the new game in town.

Of course, a fiduciary standard is better than a suitability standard. It must be mentioned that in real life however all things are not equal. It is possible that when considering two specific individuals, one an Investment Adviser, and the other a Registered Representative, it is possible that overall the Registered Representative will be the better adviser. As a past active FPA member, and as a practitioner who has been both a Registered Representative and currently an Investment Adviser, I have seen Investment Advisers that I would not wish on my worst enemies. I likewise have a few good friends that are Registered Representatives that I would hope my wife would utilize to guide her in her financial dealings if I were to beat her to the grave. I understand the wrath that Registered Representatives have towards us fee-only Investment Advisers, as we tend to be a little self-righteous in our fee-only fiduciary stance. The problem is that the issue can be more complicated than fiduciary fee-only vs. suitable commission. The following factors are critical attributes of a competent adviser, and yet none of these qualities is determined by whether an adviser is an IA or a RR:

  1. The training and knowledge of the adviser is a big factor.
  2. Experience is a very important
  3. The breadth of offerings available to the adviser affects the advice.
  4. The “bed side manner” of the adviser is important.

Understanding the caveats mentioned, I would recommend the client consider first hiring an Investment Adviser due to the higher standard of fiduciary duty that the Investment Adviser must follow over the Registered Representative’s suitability standard.

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