As a recent college graduate, I understand how the perils of unfamiliarity can be unsettling. Like many other graduates, once the euphoria of receiving my diploma began to wear off, I was confronted with the dreadful reality of deciding what to do next. With a generic idea of my post-grad plans, but no practical knowledge of where to begin, I was quite apprehensive of what lay ahead. I was sure I wanted to work in the financial planning industry, as that had been my plan ever since I first started studying finance, however I was not entirely certain I knew what that meant. The field of financial planning is quite vast and when first entering the field, it is easy to feel overwhelmed by the wide variety of options available. For that reason, I believe that anyone considering working with a financial advisor should be aware of the following information about the industry to ensure they are making the best decision for themselves.

The first thing to consider when choosing a financial advisor is whether you want to work with a Registered Investment Advisor (RIA) or a broker-dealer. While from afar, these two classifications may appear to be very similar, the manner in which they operate could not be more different. The number one difference to understand is that these financial institutions are regulated by separate governing bodies, holding them to different standards of conduct.

Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) who requires all financial institutions to maintain a standard of suitability. This standard allows broker-dealers to sell investment products and provide financial recommendations that they believe are suitable for their clients. It is also important to note that advisors working for broker-dealers are often compensated through commissions which incentivizes the buying and selling of particular investment products. As a result, when working with a broker-dealer, you should be aware of advisors pushing investment products that add to their commission rather than the very best option for their clients.

On the other hand, Registered Investment Advisors, such as Avier, are required to adhere to a fiduciary standard as regulated by the Securities and Exchange Commission (SEC). Acting as a fiduciary requires that all financial advice and recommendations provided by the investment advisor is in the absolute best interest of the client. In addition, working with a fee-only RIA eliminates some potential conflicts of interest. Registered Investment Advisors feel no external pressure to sell any investment products and can focus all of their efforts to providing financial planning and education to their clients.

Registered Investment Advisor vs. Broker-Dealer
Advise Function Facilitate Transactions
Fees only Compensation Sales Commissions
Fiduciary Standards Suitability

When deciding with whom to work with in the financial planning industry, it is important to understand these two classifications. If you are interested in learning more about these differences, please be sure to check out the links below.

Links: What’s the difference between a RIA and a broker-dealer

Links: Investment Advisers: What You Need to Know Before Choosing One