In today’s world, there are several different types of investment firms, but with important differences between them that confuse not only consumers but even many investment professionals. The short article below provides a basic overview of the various types of firms and how they differ.
“Brand Name” Brokerage Firms
Much investment advice in the U.S. is dispensed by a few, well-known, brand name brokerage firms. These entities may come in the form of large wirehouses, (such as Morgan Stanley and Merrill Lynch), regional firms (such as Edward Jones) or “boutique” offices. A distinguishing characteristic of a broker, banker or adviser working for one of these firms is that they are an employee of that company. Compensation to the advisors in such firms may come in the form of (1) fees based on your total assets under management; (2) commissions when securities are bought or sold; or, (3) potentially, both fees and commissions.
Independent Broker/Dealer Firms
Independent broker/dealer firms offer similar services to the firms described above, but the advisor is an independent contractor rather than an employee. The broker/dealer firm provides varying levels of support to its advisors, and the advisor must abide by the rules and standards of the broker/dealer’s compliance department. As with the brand name brokerage firms, advisors can be compensated in the form of fees and/or commissions. LPL Financial is currently the largest independent broker/dealer.
Both the large brokerages and the independent broker/dealers are overseen by FINRA, a self-regulatory organization that is responsible for overseeing all US stockbrokers and brokerage firms. In the eyes of FINRA, big brokers, investment banks, and similar household names are viewed as principally traders or lenders. This means that the investment advice they offer must be appropriate or “suitable”, but it need not rise to the level of “fiduciary”.
Registered Investment Advisor Firms
Registered Investment Advisors (RIAs) are comprised of Investment Advisor Representatives whose primary role is to offer fiduciary (highest interest) advice for a transparently published fee. RIA firms are regulated by the US Securities and Exchange Commission, a government agency responsible for ensuring fairness for the individual investor. Because of a RIAs distinct, over-arching responsibility:
RIA firms do not receive commissions (unless dually registered).
RIA firms typically use third-party custodians to house client assets. The RIA firm oversees and manages assets, but the transactions and execution remain appropriately arm’s length, independently reported as an additional layer of protection.
Advice That’s Built to Last
The trend in the industry, as far as market share, is toward the RIA model. According to research conducted by Cerulli Associates, RIAs held 15% market share in 2007 and are projected to achieve a market share of 28% by 2018.
Core Wealth Management chose to organize itself as a Registered Investment Advisor firm because it is the only model that allows us to provide advice that is independent, fiduciary, and “fee-only” – all three of which help us demonstrate our commitment to putting our client’s interests first. If you have any questions about this or any other topic, please feel free to contact us at (561) 491-0231.
Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.
Jackie Goldstick, CFP® is the Director of Financial Planning at Core Wealth Management. She is a member of the National Association of Personal Financial Advisors (NAPFA) as well as the Financial Planning Association (FPA).