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.

Enter ‘Regulation Best Interest’
After many years of allowing brokers to operate under the suitability standard of care, the SEC has moved to strengthen it. But despite the urging of many, the result did not place brokers under a fiduciary standard. Instead, the agency adopted a new “best interest” standard, which became effective June 30, 2020. Under this new “Regulation Best Interest” or “Reg BI” standard, brokers are now required to act in a retail customer’s best interests when making a recommendation and not put their own interests ahead. Thus obligated, brokers must:

1. Provide certain disclosures about their recommendations, as well as their relationship with the customer, in a timely manner;

2. Exercise reasonable diligence, care and skill in making their recommendations;

3. Have appropriate written policies and procedures to address conflicts of interest; and

4. Have appropriate written policies and procedures to ensure compliance with Reg BI.

Reg BI does impose stricter obligations on brokers than the suitability standard, but it falls short of fiduciary rigor. Perhaps most important, while the new standard requires brokers to act in the best interests of their customers, this requirement applies only at the point of a particular recommendation and does not apply continuously.

Now, when registered investment advisors explain the advantages they enjoy with the fiduciary standard, they will be met by brokers saying that they, too, are subject to something similar-sounding—a “best-interest” standard. RIAs already challenged to show their claim over the high ground will be even more challenged when the difference is less discernible. If consumers were confused before the advent of Reg BI, we can expect them to be even more so now.

That means RIAs should focus more than ever on differentiating themselves through their services, people, platforms, fees and overall client-centric approach. Their arguments about their legal advantages should shift so they demonstrate their knowledge of their legal standard of care, emphasizing the scope of advice they offer in the new regulatory framework.

Under the paradigm that became effective in June, RIAs can argue that:

1. Brokers have some level of legal parity with RIAs at the time a specific recommendation is made, but only RIAs are required to continuously act in the best interests of their clients.

2. While RIAs focus on continuous advice, brokers are focused on sales, with advice being incidental to the sales activity.

3. RIAs are subject primarily to governmental regulation, while brokers are subject primarily to self-regulation.

Putting it all together, registered investment advisors can argue that they are best for clients who seek continuous, in-depth advice that’s always supposed to be in the client’s best interests and for clients who feel more comfortable with an advisor directly regulated by the government. In fairness, RIAs should also be prepared to acknowledge those legal points for customers who are primarily looking for help buying and selling securities and people who are less concerned about who regulates their service provider.

And this leads us back to what remains, and has always been, the greatest and clearest differentiator of all: culture. Brokers generally remain salespeople and work in a sales model. RIAs generally operate from and within a culture of advice. Yes, there are exceptions on both sides, but the advent of Reg BI isn’t likely to change a business’s overall philosophy and culture that much. RIAs that seek to set themselves apart from brokers need to remind themselves why they operate within the RIA model and not the broker model. Then they need to remind their clients, prospects and everyone else as well.

Michael J. Nathanson, JD, LLM, is chairman and chief executive officer of the Colony Group.