A Beginner’s Guide to Financial Advisors & Broker-Dealers


by Christopher E. Mediate

It goes without saying that the world of finance can be… complicated. It’s an ecosystem that most casual onlookers don’t want much part in understanding outside of what they might know from watching The Wolf of Wall Street. And that’s more than understandable, there’s so many different players involved in it, so many rules, and practically has its own dictionary of jargon. Think about any time you’ve been to a social gathering where someone is trying to explain a new board game to you; you half-listen, your mind trails off, and before the explanation even ends you get frustrated and insist that you’ll learn as you play it. That’s pretty much what finance is like for most people. Except with this game, the consequences for not understanding its moving parts can be devastating.

In terms of learning more about which moving parts you have direct control over, I want to touch on two important players you’re likely to come across: Investment Advisers (RIAs) and Broker-Dealers (B/Ds).


So, what are they? What do they do? Well, there are a lot of differences, but at face value they tend to get mixed up. Let’s kick this thing off by discussing the B/D.

By definition, they are a natural person or financial entity that engages with trading securities on behalf of clients or for its own account(s). You may be wondering, “Why the hyphen mark?” Well, that is because there are two different roles or capacities a B/D could be acting in. If they are acting in the “Broker” role, we might also refer to them acting as an Agent. In this role, they’re a middleman between the buyers and sellers of stocks, bonds, mutual funds, and other investment products. They facilitate these transactions in the stock market and earn commissions or fees when these transactions go through.

So, let’s say you are looking to buy 100 shares of stock in XYZ company straight up. You’d contact your Registered Representative (RR) at the brokerage in which you have an active account. An RR is basically the foot soldier of the B/D, where they will fill the trade order once they find a seller that matches your specifications. Upon completion of the transaction, your B/D and RR will then earn a commission in the form of a percentage of the transaction. Inversely, they could also reach out to you on the seller’s behalf to provide the same function and, once again, earn a commission after you agree and the trade is completed.

The other role they might take on is that of the “Dealer”, where we’d say that they’re acting in a Principal capacity. Like we said in the last portion of the definition, in this role they are making trades for their own accounts (or inventory). So, just as you, a potential investor, would be looking to buy low and sell high to break profit, an RR acting as a Dealer is trying to do the same for their brokerage. Essentially, instead of earning a commission by way of a fee, they earn money through mark-ups and mark-downs (A.K.A. how well they do trading for their own portfolio). Just as you take on risk trading in the stock market, so does a Dealer. By law, the RR is required to disclose to you which capacity they are acting in.

But why would this role exist at a brokerage? The reasoning is somewhat intricate, so to avoid confusion I don’t want to go too deep into it. But by trading securities for their own account, they are making sure there is a market for the securities. That’s why you might hear some of the major brokerages referred to as “market makers.”

Overall, B/Ds play a major role in upkeeping the flow of securities within the stock market, along with ensuring it stays liquid.


So those are what B/Ds are, but what about RIAs and the individuals who represent them?

A Registered Investment Adviser (RIA) is a firm or business that offers financial guidance as a service. But the person you would be in direct contact with is an Investment Adviser Representative, which is who I want to focus on for this comparison. This is natural person who is licensed and employed or affiliated with an RIA. If we think about this intuitively, if B/Ds are on the front lines facilitating and executing trades, an IAR would generally be someone on the opposite side of that providing you financial/investment advice.

The IAR is more commonly identified as a financial advisor. They might offer recommendations on investment strategies, asset allocation, financial planning, setting and staying on track with financial goals, wealth management, amongst other services. Typically, their approach is more comprehensive and service oriented.

Where B/Ds are paid on commissions, financial advisors are paid based on a fee. This fee can be at a flat or hourly rate, or a percentage of the assets you have under management with them. In the latter, the more money you contribute to your portfolio and the better it performs, the more money they make. Additional services that can be offered with the proper licensing could be tax planning, estate planning, supplemental planning, and they can also sell life insurance products and annuities.

There are certain cases in which an individual or financial entity can be dually licensed, where they are acting as both investment adviser and stockbroker. If this is the case, they would have a legal obligation to disclose this as a potential conflict of interest prior to your signing on as a client. And it’s easy to see why. If you recall from earlier, a B/D has some incentive to ensure a transaction goes through, as they get a cut of the sale by way of commission. The line between providing financial advice that benefits you and advice that benefits the sale can become quite blurry in this regard. Put a pin in this idea, it transitions well into my next point of emphasis when comparing the two.

Regulation and Registration

This can be pretty tricky to explain so I’ll go over the key things you should know. For a more in-depth breakdown of the technical stuff on this subject, I encourage you to visit this link and this link. Otherwise, you can follow me further for the basics.

Starting with B/Ds, because they partake in the buying and trading of securities, they are required to register with the U.S. Securities and Exchange Commission (SEC) along with a Self-Regulatory Organization (SRO). An example of an SRO would be the Financial Industry Regulatory Authority (FINRA), or even the state in which the B/D is registering in. As far as licensing goes, the specific RR cannot partake in registration until they pass their SIE or Series 7 exams, which essentially qualifies them to partake in the buying and selling of securities.

In contrast, financial advisors are not required to register with the SEC unless they have $110 million or more in assets under management (AUM). When an advisor reaches that threshold, they then must become federally registered and held to federal regulations. Otherwise, they are generally required to register and be regulated by the state AND an SRO, which is commonly FINRA. To become a financial advisor, you must pass either the Series 63 or Series 65, which qualifies them to give advice on securities and charge a fee.

It’s important to note that state registration varies by each state, as do regulations. And like I said, I wanted to provide general basics, as there are a lot of different nuances between how the two are regulated and defined between the federal and state levels.

Another thing I want to touch on is the different standards the two roles are held to. With B/Ds, we say that they are held to a suitability standard, where (loosely) they are required to make investment decisions/recommendations to their client that suit the client’s interests. This standard is not considered to be very stringent. However, I want to avoid misconstruing that knowledge with the belief that stockbrokers seldom act in the best interest of their clients – but it is something you should be aware of.

On the other hand, financial advisors are held to a much stricter standard of conduct known as the Fiduciary Standard. Under this dogma, an advisor must put the interests of the client ahead of their own no matter what. So basically, we are honor-bound to ensure the advice we are giving is based on information that is complete and timely, that we are thorough, all potential conflicts of interest are disclosed, and that the trades we make are both low-cost and efficient. If this standard gets violated, an advisor can face a civil lawsuit amongst many other serious penalties. For more detail on the differences between the two standards, you can find a pretty helpful article here.

With that, I have concluded my beginners guide to the differences between financial advisors and B/Ds. I do hope it encourages you to utilize the resource links I provided, and also to conduct further in-depth research to get the full picture and seek the services best fit for you.





We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.