Whether you are just beginning to build an investment portfolio, or have been investing for years, chances are you will need the guidance of a finance professional to ensure that your investments are sound and protected. Depending on your needs, risk tolerance and interests, you may find yourself working with a registered investment advisor (RIA) or a broker. There are differences in how these groups work in regards to their duties and the regulatory bodies they answer to, so we thought we would break those differences down for you.
Registered Investment Advisors
RIAs owe a fiduciary duty to their clients. This means they must put the interest of their clients ahead of their own when they recommend purchases, trades or sales. In short, a RIA cannot make a trade unless he or she:
- Discloses any conflicts of interest in regards to the trade with the client.
- Discloses any potential risks of the trade to the client.
- Has given the client full details about the proposed trade first.
- Has obtained the client’s consent to make the trade.
Registered investment advisors generally make their money based on percentages of the assets of their clients. No matter how many trades, sales or purchases a client makes, the RIA will still make money off the account. This eliminates the risk of improper actions like churning, but even a RIA who does nothing for a client’s account will still make money off of it.
Brokers (or broker-dealers) are regulated by FINRA and are bound by a duty of good faith and fair dealing. They must make recommendations that are suitable to their clients’ needs, goals and risk tolerances, and must disclose any potential risks or conflicts of interest that could arise. Brokers are often granted permission to make trades on behalf of their clients, by their clients, which means that unless a person keeps a close eye on his or her account activity, that person may not know at all times what assets he or she currently possesses.
This “freedom,” so to speak, can lead to problems for investors. Brokers are generally paid based on transaction fees, and less scrupulous brokers may breach their duty to their clients by making unsuitable trades, by selling and buying products to generate higher commissions (churning), or by creating a portfolio that is overconcentrated in one area or type of product.
Whether you work with a broker or an RIA, if you sustain losses because of a breach of duty or negligent behavior, you have options available to you to pursue damages. The Frankowski Firm provides comprehensive representation to investors who have been victims of stocker broker fraud and financial advisor negligence. To learn more about our services, please call 888.741.7503 or fill out our contact form, and speak with an experienced stockbroker fraud attorney about your needs.