If you’re interested in learning about the financial services industry, you may have noticed there’s quite a bit of jargon out there. The sheer amount of industry terms (and acronyms that go along with them) can be overwhelming, so we’re going to clear up some things you may run into along your finance journey.
Some terms you have likely heard before are Broker-Dealer (BD), Registered Representative (RR), Registered Investment Advisor (RIA) and Investment Advisory Representative (IAR). While these are often associated with each other, they make up very distinct pieces of the financial services puzzle. In the following post I’ll discuss each of them in turn and how they relate to each other in the ecology of investment professionals.
Broker-Dealers (BDs)
Generally, broker-dealers (BDs) are simply stock brokerages. More specifically BDs and their Registered Representatives (RRs) are in the business of buying and selling securities, either for themselves or on behalf of someone else. They are referred to as “broker-dealers” because they act as agents/brokers when they execute orders on behalf of clients and they act as principals/dealers when they make trades for their own accounts.
Most BDs are registered with FINRA, a self-regulatory organization of the securities industry.
BDs serve an important role in the securities industry. They promote the free flow of securities on the open market and ensure there is a market for securities for their clients.
Registered Representatives (RRs)
Individuals who represent BDs, or brokerage companies, are registered representatives (RRs) and are often referred to as brokers. As transaction-based service providers, RRs buy and sell securities for clients. Similar to IARs, RRs must pass appropriate licensing exams to sell securities.
One important difference between RRs and representatives of Registered Investment Advisors (or RIA, which I’ll discuss further below) is that RRs are not fiduciaries. While RRs must provide “suitable” investment advice to their clients, they aren’t legally bound to the client’s best interest and don’t have to disclose conflicts of interest.
Perhaps the most important difference between RRs and representatives of RIAs is in the way they are compensated. RRs receive commissions based on the securities they sell and the accounts they open.
Registered Investment Advisors (RIAs)
Now our discussion shifts to the other side of the investment professional sphere, while BDs and their RRs are in the business of buying and selling securities, RIAs and their representatives are in the business of providing advice and exacting fees for that advice. In a nutshell, an RIA is generally a business entity registered with the SEC or a state regulatory agency and is practicing in the investment advisory business. RIAs are a result of the Investment Advisers Act of 1940, which defines them as a “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.”
RIAs are fiduciaries, which means they are mandated to give suitable investment advice and act in the best interests of their clients. Representatives of RIAs must pass a licensing requirement recognized by the regulatory agency that governs them. If the representative owns or is a partner of the firm, then it is considered an Independent IRA. However, if it is part of a larger institution, the IRA is likely to be a subsidiary of a holding company.
Investment Advisory Representatives (IARs)
The representatives of RIAs are called Investment Advisory Representatives (IARs). As a representative of an RIA, the function of an IAR is to provide investment advice. However, they are only able to provide advice on topics over which they have passed the respective licensing exam.
While it isn’t necessary, many IARs will hold the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designations. Most states require IARs to pass the FINRA Series 65 exam or the Series 66 along with the Series 7. The business model of IARs is fee based, often dependent on hourly rates or a percentage of assets under management. It is up to the RIA that the IAR is registered with to ensure they are sufficiently licensed and registered correctly, otherwise the RIA may incur penalties.
It’s complicated
The world of investment professionals is a little more complicated than the summaries above would suggest. For example, there are hybrid financial advisors that act as both IARs and RRs and so receive fees and commissions for their compensation, depending on the product. Similarly, there are advisors that are fee-based and fee-only. So, it’s important that you do your own research to fully understand a financial professional’s role in managing your investments.
It is a vast and complex system of professionals and firms, with each playing their respective roles to make our financial world turn. And while this post only scratches the surface of this world, hopefully you will have a better idea of how the above terms fit into its ecology. In the future, I’ll discuss each of these elements in greater depth.
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https://www.investopedia.com/terms/r/ria.asp
https://www.thebalance.com/what-is-a-registered-investment-advisor-357220
https://www.investopedia.com/terms/i/iar.asp
http://www.finra.org/investors/brokers
http://frontierwealth.com/ria-vs-broker-dealer-whats-the-difference/
