Types Of Firms In The Financial Advising Industry

This is the first post in a new series about financial advisors and the financial planning industry. We will cover a variety of topics, such as: what financial advisors do, fees, the different types of firms in the industry, licenses and designations, fiduciary duty, and whether or not you need a financial advisor.

This post will introduce the different types of firms in the industry. There are different types of entities that either give financial advice or sell financial products. From the outside looking in, all of these companies may look the same, but there are some important differences.

The differences can be confusing

As just mentioned, the different types of firms in the financial advising industry may all look the same, but they are not. It can get especially confusing, because many financial advisors may be associated with multiple different types of firms – for example, an advisor may sell insurance through an insurance agency and sell securities through a broker/dealer. Regardless, understanding some about the differences will help us understand the industry and frame our further discussions about licenses, fee structures, etc.

There are additional types of firms that we will not discuss, but I want to focus on: broker/dealers, registered investment advisors (RIAs), and insurance agencies.

Broker/Dealer

Broker/dealer firms execute securities transactions and sell securities to customers. Brokers will charge a commission for their services. Clients must authorize each transaction that a broker recommends.

Registered Investment Advisor (RIA)

Registered investment advisors (RIAs) give investment and financial advice to clients. They cannot charge commissions for transactions, rather they charge fees for the advice they provide. RIAs can be given “discretion” or authority to made changes to a client’s portfolio without the client’s authorization. RIAs are paid to manage investments on an ongoing basis, as opposed to broker/dealers, who are just being paid to execute/sell a specific transaction.

Insurance Agency

Insurance agencies sell different insurance products, such as life insurance and annuities. They earn a commission, typically based on the size of the policy, for selling these products.

The different types of firms are often combined

As mentioned above, these different types of firms will often employee the same representatives. Many large financial firms will have a broker/dealer, RIA, and insurance agency – if you ever read the fine print on their website or other disclosures you will likely see multiple entities listed. If you are working with a professional, I think it is a good idea to understand what type of firm they are a part of and how that will impact how you work together and how they are compensated.

If you have any comments, questions, or ideas for future posts, please let me know

I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.