A.3.1 Broker-Dealers vs. RIAs
Key Takeaways
Broker-dealers are held to a suitability standard (and Reg BI for retail customers), while RIAs owe a fiduciary duty at all times
Broker-dealers are regulated by FINRA and SEC under the Securities Exchange Act of 1934; RIAs are regulated under the Investment Advisers Act of 1940
Broker-dealers earn primarily through commissions; RIAs typically charge asset-based fees, flat fees, or hourly rates
Regulation Best Interest (Reg BI) elevated broker-dealer standards in 2020, but remains distinct from fiduciary standard
Hybrid (dually registered) advisers operate under both standards and must disclose which capacity they are acting in
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
| Characteristic | Broker-Dealer | RIA |
|---|---|---|
| Primary Role | Facilitate securities transactions | Provide investment advice |
| Relationship Type | Transactional (may be episodic) | Ongoing advisory relationship |
| Legal Framework | Securities Exchange Act of 1934 | Investment Advisers Act of 1940 |
| Primary Regulator | FINRA + SEC | SEC or state securities regulators |
| Standard of Care | Suitability / Reg BI | Fiduciary |
| Compensation | Primarily commissions | Primarily fees |
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:
| Component | Requirement |
|---|---|
| Reasonable-Basis Suitability | Understand the product before recommending |
| Customer-Specific Suitability | Match recommendation to customer's profile |
| Quantitative Suitability | Ensure number of transactions is not excessive |
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:
- Disclosure Obligation: Provide Form CRS and disclose material facts
- Care Obligation: Exercise reasonable diligence, care, and skill
- Conflict of Interest Obligation: Identify, disclose, and mitigate conflicts
- 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:
| Component | Requirement |
|---|---|
| Duty of Loyalty | Place client interests ahead of your own |
| Duty of Care | Act with competence, skill, and prudence |
| Best Interest | Recommendations must be in client's best interest |
| Full Disclosure | Disclose all material conflicts |
| Ongoing Duty | Continuous obligation, not just at recommendation |
Comparing the Standards
| Feature | Suitability | Reg BI | Fiduciary |
|---|---|---|---|
| When it applies | At recommendation | At recommendation | At all times |
| Standard | Suitable for customer | In customer's best interest | In client's best interest |
| Conflicts | Disclosure encouraged | Must mitigate | Must avoid or disclose and manage |
| Ongoing monitoring | Not required | Not required | Required |
| Who it applies to | Broker-dealers (institutional) | Broker-dealers (retail) | RIAs |
Compensation Models
Broker-Dealer Compensation:
| Type | Description | Potential Conflict |
|---|---|---|
| Commissions | Paid per transaction | Incentive to trade frequently |
| Markups/Markdowns | Spread when trading as principal | May not get best price |
| 12b-1 Fees | Ongoing fees from mutual funds | May recommend higher-fee funds |
| Revenue Sharing | Payments from product sponsors | May favor certain products |
RIA Compensation:
| Type | Description | Potential Conflict |
|---|---|---|
| AUM Fee | Percentage of assets managed | May discourage withdrawals |
| Flat Fee | Fixed annual or project fee | Less incentive to grow assets |
| Hourly Fee | Charged for time spent | May over-service |
| Fee-Based | Fees + some commissions | Same as broker-dealer conflicts |
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.
Which standard of care requires acting in the client's best interest at ALL times, not just at the point of recommendation?
Suitability standard
Regulation Best Interest (Reg BI)
Fiduciary standard
All three standards require ongoing best interest duty
A dually registered adviser recommends a variable annuity that pays a 7% commission through their broker-dealer registration. Which standard applies?
Only fiduciary because they are also an RIA
Only suitability because it's a brokerage transaction
Reg BI because it's a recommendation to a retail customer through a broker-dealer
No standard applies because compensation was disclosed
What is the primary difference between "fee-only" and "fee-based" adviser compensation?
Fee-only advisers charge higher fees
Fee-only advisers receive compensation solely from clients; fee-based may also receive commissions
Fee-based advisers must be fiduciaries; fee-only follow suitability
There is no difference; the terms are interchangeable
Sections you finish are checked off in the contents.