Within the highly competitive world of wealth management services, the top two contenders for industry dominance have long been registered investment advisors on the one hand and brokers on the other. If you’re a participant in the industry, you understand the difference. If you’re not, you probably don’t. And the confusion, especially for consumers, is about to get a whole lot worse, meaning RIAs, who have long argued for the primacy of their standard of care, must shift strategies.

Historic Differentiation
For many years, RIAs have sought to differentiate themselves from brokers not only with their services, people, platforms, fees and overall approach, but also through the dramatically different legal framework in which they operate. In general, RIAs are registered with the Securities and Exchange Commission or a state regulator and receive fees for providing investment advice and related services. A broker, in broad terms, is an entity or person that sells and trades securities for the accounts of customers.

But beyond these most basic definitions, RIAs have relied on some important legal distinctions when competing against brokers. Their main arguments have centered on the comparative standard of care, scope of advice and ways they are regulated.

Standard Of Care
RIAs have argued for decades that their model is better for clients because they are subject to a higher standard of care than brokers. They are legally subject to the “fiduciary standard,” requiring them to place the interests of their clients ahead of their own. And they are asked to eliminate, or at least expose, through full and fair disclosure, all conflicts of interest they may have.

Brokers, by way of contrast, have not been subject to the fiduciary standard. Instead, they have had to meet an obliquely less protective “suitability standard,” requiring merely that they recommend investments suitable for their clients while considering any personal client information that could be relevant in making their recommendations.

Scope Of Advice
The best legal argument RIAs historically have made is that they are held to the fiduciary standard. After all, what client (if fully aware of the choices) wouldn’t want assurances that their own interests will come ahead of the advisor’s?

Why are brokers not subject to a fiduciary standard in the first place? Because they are legally salespeople, and any “investment advice” they provide must be “solely incidental” to their serving as a broker. Given the SEC’s generous interpretations of what the term “solely incidental” means, RIAs have asserted that clients who want real, continuous investment advice must come to them and not to the brokers.

How They’re Regulated
The third main legal argument RIAs have used to advocate for themselves is that they are regulated directly and exclusively by the government—either by the SEC or a state regulator, depending on a variety of factors. Brokers are also regulated by the SEC and the states, but in most cases they are primarily regulated by the Financial Industry Regulatory Authority—a self-regulatory organization whose members are the very brokers and dealers the body oversees. RIAs point to the obvious conflict of interest this presents, arguing that clients are better protected being served by firms that are regulated directly by the government and not by their peers.

Consumer Confusion
Despite these legal distinctions, as well as the continued advocacy among RIAs and their supporters, most consumers of financial advice remain confused, a fact even acknowledged in comments from the SEC. Brokers have been around longer than registered investment advisors, and many brokerage firms are far larger than even the largest RIAs. As such, they have larger marketing, public relations and advocacy resources and have successfully focused on building well-known brands and steering discussions away from their legal shortcomings.

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