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Independent Advisor vs. RIA: What's the Difference?

Independent Advisor vs. RIA: What's the Difference?

| April 19, 2023

Ensuring the best for your financial future typically involves having a qualified financial advisor in your corner, but do you know your current advisor's qualifications? They are either an independent advisor or a Registered Investment Advisor (RIA).

Understanding these two roles' differences is essential in selecting the best financial professional for your situation. So today, let's dive into the differences between an independent advisor vs. RIA.

What's an Independent Advisor?

When a financial advisor works for a big bank, they're often told what products they need to sell. In contrast, an independent advisor usually works for an independent broker-dealer, so they have much more flexibility when finding and recommending investments. As such, they are well-equipped to help you find investments beyond the more typical mutual funds and annuities. Here's a sampling of what an independent advisor may be able to help you with:

  • Hedge funds
  • Non-qualified plans
  • Tax credits
  • Initial public offerings (IPOs)

Independent advisors will usually work on commission, though they have some flexibility regarding their pricing. However, it's important to note that independent advisors are not bound by fiduciary responsibilities. Instead, they must meet a "suitability" standard, ensuring the product they're selling is appropriate given your goals and risk tolerance.

Independent advisors sometimes will receive additional commissions from separate companies when they sell certain products to you. In such a case, the "suitability" standard they must meet is less stringent than a fiduciary duty.

What's a Registered Investment Advisor (RIA)?

Unlike independent advisors, RIAs do not work on commission. Instead, they are registered with the Securities and Exchange Commission (SEC), offering you guidance and investment management for a fixed fee. 

When you work with an RIA, there's a different system in place to safeguard your money. While the RIA will oversee your funds and how they're invested, the funds are physically held by a major, reputable entity like Fidelity or Schwab.

The most significant advantage of working with an RIA is that these advisors are bound to a "fiduciary duty." This means they must always act in a client's best interests without considering other factors—like their personal commissions—thus setting them apart from advisors who are only bound by a suitability standard.

Let's consider the difference in more practical terms: Suppose your financial advisor makes a risky investment on your behalf. You have a well-paying job and can afford some risk, so the investment would be considered "suitable," but suddenly, you lose your job and need to be more conservative with your investments. Given the current situation, an RIA's fiduciary duty would require them to re-evaluate that initial investment. At the same time, an independent advisor would not be obligated to continue to ensure your investments remain suitable for you. If the independent advisor confirmed that the investment was appropriate for you at the time of purchase, their duty has been fulfilled.

Should I Work with an Independent Advisor or an RIA?

In many cases, the individual you work with is more important than the type of financial planning professional they are (independent vs. RIA). After all, you want to be comfortable communicating with the person managing your investments.

If you want the extra assurance that your advisor is working in your best interests, choosing an RIA may be a good option. However, if you find their flat fee too costly, you might appreciate the commission-based payments collected by independent advisors.

Ultimately, your choice will come down to what you're comfortable with. Before you choose, it's a good idea to ask your potential advisor a few questions regarding their overall investment philosophy, preferred means and frequency of communication, and whether they work alone or as part of a team.

Discover the Good Life

So what's the difference between an independent advisor vs. RIA? We hope this blog helped answer your question! Remember, with the professional guidance of a competent financial advisor, you can work toward growing your investment portfolio and creating durable and sustainable wealth.

Whether you aim to develop a retirement plan, run a business, or need guidance for planning your estate, the knowledgeable advisors at Good Life are here to answer your questions. If you're considering working with a financial advisor in Morehead City, NC, contact us today to schedule a free discovery call. There's no obligation, and this meeting allows you to speak with us and decide if we are the right team to help you work toward your goals.

Once again, thank you for visiting our blog, and we hope to work with you soon!

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.