Written by The White Law Group• February 6, 2022• 7:22 pm• Blog, Current Investigations

Registered Investment Advisor (RIA) – Securities Fraud Attorneys

How does a Registered Investment Advisor (RIA) differ from a Broker Dealer?

A registered investment advisor (RIA) is an individual or firm that advises individual clients on their investments and may also manage the assets of institutional investors. They typically make their money through a fee that is calculated as a percentage of the client’s assets under management.

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Under law, RIAs must register with the U.S. Securities and Exchange Commission (SEC) and/or a state regulatory agency, usually depending on the value of assets under the RIA’s management.

FINRA registered Broker Dealer vs. Registered Investment Advisor (RIA)

Broker dealers typically focus more on the sale and purchases of securities for their clients, whereas RIAs offer advice on many aspects of finance including financial planning, estate planning, and taxation.

Broker Dealers are required by law to follow suitability standards, while RIAs must take it a step further to act as a fiduciary, which means always putting their clients’ best interest first. The Fiduciary rule is based on interpretation of common law principles, not specifically defined by an SEC regulation.

A Registered Investment Advisor’s fiduciary duty under the Advisers Act includes a duty of care and a duty of loyalty but acting in the “best interest” of its client at all times encompasses both. This would include:

Putting their clients’ best interests ahead of their own best interests
Get to know their clients and get an understanding of their financial goals, risk tolerance, and personal background.
Make only suitable investment recommendations based on their client’s profile.
Give clear concise advice on any investment opportunity, making no misrepresentations and making sure the client is informed on all aspects of the investment.

Broker-Dealers & Suitability Standards – What are they?

Historically broker-dealers have been required by the Financial Industry Regulatory Authority to meet certain suitability standards, but were not required to disclose potential conflicts of interest or inform their clients about more tax-efficient investment alternatives, or less expensive alternatives.

To sum up FINRA Rule 2111 (Suitability), a member or registered representative must have a reasonable basis to believe that an investment is suitable for the customer based on the customer’s investment profile including the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.

Regulation Best Interest (Reg BI)

Regulation Best Interest (BI) is a 2019 Securities and Exchange Commission (SEC) rule that requires broker-dealers to only recommend investments to their customers that are in their customers’ best interests, and to clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have for the sale of those products.

The Best Interest Rule applies to broker dealers, dual-registrants and RIAs and was intended to set a standard of conduct when recommending any securities or investments to retail customers.

But according to one interpretation document posted by the SEC, the implementation of the rule is still somewhat indeterminate and it may actually have different applications on the investment advisory side versus the broker dealer side.

There are four components included in the Regulation Best Interest:
Disclosure obligation
Care obligation
Conflict of interest obligation
Compliance obligation

What About Dual Registration?

A Dual registrant typically refers to a broker dealer/registered representative who is also a Registered Investment Advisor/individual advisor representative.

Dual registrants are expected to follow the Regulation Best Interest (Reg BI) when acting in a broker-dealer capacity. Reg BI was created to improve the standard of conduct that applies when broker-dealers make recommendations to retail customers.

According to the SEC the purpose of Reg BI is to “improve investor protection by enhancing the quality of broker-dealer recommendation to retail customers and [to reduce] the potential harm to retail customers that may be caused by conflicts of interest.”

The added obligation on broker-dealers was meant to more closely resemble the fiduciary obligations of RIAs. Broker dealers and their associated persons must act in a retail customer’s best interest and cannot place its own interest ahead of the customer’s when making a recommendation.

Recovery of Investment Losses

If you have suffered losses investing with a FINRA registered broker-dealer you may be able to recoup your losses by filing a FINRA Dispute Resolution Claim. Aside from the new Reg BI, broker dealers are required to ensure any investment recommendation they make is suitable for the individual investor. They must due diligence on the particular investment and also understand their client’s suitability profile.

If your investment losses stem from poor investment advice from a Registered Investment Advisor (RIA), you may also have recovery options if it can be proved that your RIA breached its Fiduciary duty. Examples would be if there was a conflict of interest involving the investment or you were not fully aware of all of the risks involved.

Potential Lawsuits to Recover Financial Losses

This information is all publicly available and provided to you by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.

The firm represents investors in all types of securities related claims, including claims involving stock fraud, broker misrepresentation, churning, unsuitable investments, unauthorized transfers, disappearing funds, and botched transfers, among many others.