Wikipedia has the legal definition of Registered Investment Adviser.
Following is a summary of the difference between RIA (Registered Investment Adviser) and B/D (Broker/Dealer).
Registered Investment Adviser:
- Manages the assets of high net-worth individuals and institutional investors, usually requires a minimum $100,000 or more to open an account.
- Receives fee for investment management service, and the incentive is to grow clients’ asset.
- Typically there is no relationship termination penalty.
- Sits on the buy side of the investment field.
- Must pass Series 65 license exam, and must register with SEC and/or States.
- Why? As the amount of money an individual has increases, the need for risk control increases, and the ability to achieve the best results with shrink-wrapped financial products diminishes.
- What is the benefit? Clients have access to customized portfolios, and managers can monitor portfolios on daily basis.
Broker/Dealer:
- Sells financial products to consumers, typically requires very low minimum $500 or more to open an account.
- Receives commissions from product sales, and the incentive is to sell more products.
- Some products have sales load in lieu of commission, or have early termination penalty up to a few years for insurance related products.
- Must pass Series 6, 63, or 7 license exams and State insurance license exam, and must register with SEC and/or States.
- Why? It is cost effective to buy financial products for smaller accounts. Some products also provide tax-deferred benefits.
Here is a picture showing how RIA works in practice:
