Broker-Dealers vs. RIAs: Understanding the Key Differences

One of the most important distinctions in financial services is the difference between broker-dealers and Registered Investment Advisers (RIAs). These two business models operate under different regulatory frameworks, compensation structures, and standards of care.

Fundamental Business Model Differences

Regulatory Framework

Broker-Dealers operate under a dual regulatory structure:

• SEC Registration: Must register under the Securities Exchange Act of 1934
• FINRA Membership: Must become members of FINRA
• Individual Registration: Representatives must pass qualification exams (Series 7, Series 6, etc.)

RIAs follow a different registration path:

• SEC or State Registration: Based on AUM ($100 million+ requires SEC)
• Form ADV: Must file disclosure documents with regulators
• Individual Registration: IARs must pass Series 65 or Series 66

Standards of Care: The Critical Distinction

Suitability Standard (Broker-Dealers)

FINRA Rule 2111 requires broker-dealers to believe a recommendation is suitable for the customer:

Limitation: A suitable recommendation does not need to be the best option—only an appropriate one.

Regulation Best Interest (Reg BI)

In June 2020, the SEC's Regulation Best Interest took effect for broker-dealers recommending securities to retail customers:

Reg BI's Four Obligations:

1. Disclosure Obligation: Provide Form CRS and disclose material facts
2. Care Obligation: Exercise reasonable diligence, care, and skill
3. Conflict of Interest Obligation: Identify, disclose, and mitigate conflicts
4. Compliance Obligation: Establish written policies and procedures

Exam Tip: Reg BI requires acting in the customer's "best interest" at the time of recommendation. However, this is NOT the same as fiduciary duty because it applies only at the point of recommendation, not as an ongoing duty.

Fiduciary Standard (RIAs)

RIAs owe a fiduciary duty under the Investment Advisers Act of 1940:

Comparing the Standards

Compensation Models

Broker-Dealer Compensation:

RIA Compensation:

Fee-Only vs. Fee-Based:

• Fee-Only: Compensation solely from clients—no commissions or third-party payments
• Fee-Based: Charges fees but may also receive commissions

Hybrid (Dually Registered) Advisers

Many financial professionals operate as both broker-dealer representatives AND investment adviser representatives:

• Different standards apply depending on capacity (broker = Reg BI; adviser = fiduciary)
• Must clearly disclose which capacity they are acting in
• Clients may not understand which "hat" the adviser is wearing

Key Regulatory Developments (2025-2026)

FINRA 2026 Priorities: Reg BI compliance remains a top examination priority with focus on practical implementation of the Care Obligation, fee transparency, and documentation of "best interest" analysis.

CFP Board's Universal Fiduciary Advocacy: In September 2025, CFP Board identified extending fiduciary duty to all financial advisers as its top policy priority.

For CFP Professionals

As a CFP professional, you owe fiduciary duty to clients at all times when providing Financial Advice, regardless of whether you work through a broker-dealer or RIA. The CFP Board's standard is often higher than the regulatory minimum, requiring you to act in clients' best interests even when Reg BI might allow a merely suitable recommendation.