What is the Difference Between an Investment Advisor Representative and a Broker-Dealer Agent?

Financial professionals often use terms such as “financial advisor,” “investment manager,” and “wealth advisor” to describe themselves. Beneath these broad titles are the specific - and varying - ways people are registered, licenses they hold, and regulations they must follow. Within the investment industry there are three common ways someone may be registered:

Investment Advisor Representatives provide ongoing advice to clients regarding their investments. They may also buy and sell securities on behalf of their clients.

Broker-Dealer Agents buy and sell securities for a firm and for clients outside of their firm. Broker-dealer agents may also give investment recommendations to their clients.

Dually Registered investment professionals are registered as both a Broker-Dealer Agent and as an Investment Advisor Representative. Someone who is dually registered may act as an Investment Advisor Representative on some accounts, and as a Broker-Dealer Agent on others.

These groups follow different regulations as they work with clients in the financial industry. These regulations and standards aid in protecting the consumer by requiring financial professionals to disclose how they are compensated and incentivized and if any conflicts of interests are present that may impact the advice or products offered to the consumer. Advisors acting as Investment Advisor Representatives must follow the Fiduciary Standard, which is considered the stricter standard. They are not allowed to put any interest above that of their client’s throughout the duration of their relationship. Broker-Dealer Agents follow Regulation Best Interest, which does not require the client’s best interest to be put first all the time, just at the specific time that advice is being provided.¹

Fiduciary Standard vs. Regulation Best Interest

Fiduciary Standard

Registered Investment Advisor Representatives are subject to the Fiduciary Standard, which requires them to operate in the client’s best interest throughout the duration of their relationship. At no point are they permitted to put their own interests, or the interests of their employer, ahead of the client’s.

Regulation Best Interest

Broker-Dealer Agents must follow Regulation Best Interest when working with clients. Regulation Best Interest stipulates that they must act in their client’s best interest at the time that they are providing the client with advice. This differs from the Fiduciary Standard in that the agent is only required to place the client’s interest ahead of their own at the specific time that a recommendation is being made. There are no specific parameters established as to what exactly defines a “recommendation.” The SEC states that “factors considered in determining whether a recommendation has taken place include whether communication ‘reasonably could be viewed as a call to action’ and ‘reasonably would influence an investor to trade a particular security or group of securities.’”¹

Can a Financial Advisor be a Fiduciary and a Broker-Dealer Agent?

Registered Investment Advisor Representatives are legally required to abide by the Fiduciary Standard, while Broker-Dealer Agents, when working with retail clients, are subject to Regulation Best Interest. Dually registered financial professionals follow Regulation Best Interest when they are acting as a Broker-Dealer Agent, and they follow the Fiduciary Standard when acting as a Registered Investment Advisor Representative. This becomes a point of confusion in marketing. If registered only as a Broker-Dealer, a firm cannot call itself a financial advisor in its marketing. However, if a firm is dually registered as a Broker-Dealer and an Investment Advisor, then they may use the term “financial advisor” in marketing, even if they act as a broker-dealer for most of their clients.

At One Day In July, we are fiduciaries on all accounts, for all clients, all the time. We do not accept commissions from funds, and we do not participate in mutual fund revenue sharing. We charge one low, asset-based fee. Interested in learning more? Set up a free consultation with a One Day In July financial advisor today by filling out the form below, or calling us at (802) 503-8280.

1. https://www.sec.gov/info/smallbus/secg/regulation-best-interest