Just like Santa Claus, often times firms go by a multitude of names which can be very vague in the type of services they offer. In order to choose the investment professional that best suits you, it helps to have an understanding of the type of services their firm offers. Investment firms providing services to the average investor will probably be listed as a Brokerage Firm, Registered Investment Advisor and/or both, which is covered below, including who regulates each type of firm.
Brokerage Firms (Broker-Dealer)
A brokerage firm’s primary job is to buy and sell securities on behalf of their client base. Brokerage firms must register with the Securities & Exchange Commission (SEC), then they must either be a member of a self-regulatory authority (SRO) or a national securities exchange. The SEC is an independent, federal government agency responsible for protecting investors, maintaining fair and orderly securities markets, and facilitating capital formation. The Financial Industry Regulatory Authority (FINRA) is a non-profit organization that is overseen by the SEC. It is the SRO that most brokerage firms join that helps monitor and enforce the rules governing brokerage firms and brokerage firm employees, including licensing those brokers.
Brokerage firms and brokers’ primary form of compensation is usually through trading commissions. For the average investor that doesn’t need financial advice and is just looking for help in trading their securities, a discount brokerage firm may be a better fit and a lower cost than a full-service brokerage firm. Brokers are required to help clients invest based on what is suitable for the client at the time of the trade.
Registered Investment Advisor (RIA)
Many successful investors may plan for their financial future, by seeking the assistance of an RIA. A Registered Investment Advisor’s primary function is to provide investment advice and in many cases guidance through financial planning and portfolio managing. Most RIAs are usually compensated by fees which are based on an a percentage of assets under management, an hourly rate, a flat fee or a combination of the three. They are typically not compensated by trading commissions. RIA professionals must act in a fiduciary manner when providing advice to their clients, meaning they must recommend investments that are in the best interests of their client. This fiduciary standard is considered a higher standard than the previously mentioned suitability standard of brokers.
Registered Investment Advisors are required to register either with the state they're domiciled in through the North American Securities Administrators Association (NASAA), which is a state level regulatory authority, or the SEC. If the RIA manages over $100 million in assets they are required to register with the SEC, smaller firms must register with NASAA. The SEC has a filing requirement that requires RIA firms file Form ADV, which is a publicly accessible report that provides many of the relevant details about a firm. Form ADV contains info that includes but is not limited to: personnel information, how the firm is compensated, investment strategies, history of the firm, etc. When meeting with an RIA, it is advisable to review their Form ADV on the SEC website, and discuss how they’re compensated.
Firms registered as Broker-Dealers & Registered Investment Advisors
The SEC allows investment firms to dually register as broker-dealers and RIAs. Practicality reasons, this is a good thing because it allows the investor to use the same financial professional to trade securities for them and to provide them with guidance. However, serving in both roles may cause a conflict of interest. Often there is no clear understanding as to which capacity the financial professional is acting in and as a broker they may not be acting in your best interest. It is important that when you are dealing with a dually registered financial professional you find out how the professional and the firm are being compensated for each of their investment suggestions.
Links to the sites mentioned above:
SEC ADV Database
Additional info from my sources:
FINRA's page for Investors
SEC's Page for Investors