The traditional stockbroker role is disappearing, as old-school brokers are getting replaced by a growing number of “registered investment advisors,” or RIAs. A registered investment advisor is not a salesman and is generally held to a higher standard when selling investment products to investors than a broker-dealer.
RIAs are generally in the business of selling advice, not financial products. People typically hire RIAs on a flat fee as a percentage of their wealth each year, or simply on an hourly basis, to help them make informed decisions about how to invest their money.
These are the defining elements of a registered investment advisor.Asset-based compensation — Registered investment advisors are typically compensated in the form of an asset management fee. If you hire an RIA to manage a $250,000 investment portfolio for you, they might charge you 1% per year in asset management fees as their only compensation for the service. According to one 2018 study of RIAs, the average charged a fee of 0.95% of assets each year.
Fewer conflicts of interest — Because you pay an RIA a fee to manage your money, there are fewer conflicts of interest about what financial products they recommend to you. An RIA also has what’s known as a “fiduciary duty” to put your interests above their own, which means they are obligated to help you find good investments, and cannot legally put their interests above yours. This is a clear differentiator between RIAs and broker-dealers (traditional stockbrokers).
On-going relationship — Hiring the services of an RIA is rarely a one-off transaction. Though you might buy an annuity from a stockbroker and then never or rarely speak to them again, most RIA practices are structured to provide continued support over time.
Pay attention to how an RIA advertises its services. A “fee-only” advisor is one who is only compensated in the form of fees you pay them directly. Advisors who advertise themselves as “fee-based” advisors can and do make their money from fees they charge clients, but they can also collect commissions for selling certain financial clients.