RIA or Broker-Dealer: The Pros and Cons of Each

Clients sign a prime brokerage agreement detailing what responsibilities the prime broker will assume in providing their services, along with their applicable fee structure. The Aon Custody Consulting Team consists of custody industry veterans that are 100 percent dedicated to custody and investment operations. The team maintains strong relationships with the leading custody banks, and can work with non-profits of different sizes to determine the best broker dealer vs custodian custody partner depending on your circumstances. Cannabis ETFs provide investors with exposure to companies that deal directly and indirectly with the growth of marijuana plants, as well as software, technology, and other parts of the industry. The best-performing cannabis ETFs may provide investors with substantial returns.

Custody or safekeeping: What’s the right solution for government investments?

These “hybrid” RIAs have both a custodial partner and a broker-dealer partner through separate contractual arrangements. And to further complicate the matter, many independent brokers also carry the Series 65 license so https://www.xcritical.com/ they can offer turnkey managed money programs that provide active professional management. Some RIAs are likewise affiliated with a broker-dealer so they can offer products such as variable annuities, which do not lend themselves to a pure RIA platform. I understand that my information will be used in accordance with the relevant privacy statement for my location.

Are Prime Brokers Just for Hedge Funds?

• Brokerage firms are required to periodically calculate net obligations to customers, and the excess of customer credits must be kept with an insured depository institution, such as a bank.
• You must remember that there is no right or wrong choice between being an RIA or working with a broker-dealer for your practice.
• Brokers have to pass the Series 7, otherwise known as the General Securities Representative Exam; the Series 7 also acts as a precursor to further exams in the securities industry.
• As a general rule, broker dealers will use a clearing firm while an RIA will use a custodian, but there are plenty of exceptions to this rule.
• Custodians hold stocks as well as additional assets within both physical and electronic form on behalf of clients.
• Client assets held in margin accounts are not fully segregated, as a result, the broker-dealer may pledge those assets as collateral or use them for other client’s needs, such as covering short positions.

A prime broker is a financial institution that facilitates and coordinates extensive, complex investment and trading activity. These institutions include large investment banks and firms like Merrill Lynch and Goldman Sachs (GS). Prime brokers like these offer prime brokerage services to large investment clients, such as hedge funds. In this article, we focus on the role of prime brokers and how large investment clients choose the right one. Providing clients with access to the right custodian, given the clients’ needs, is essential to success for a registered investment advisor (RIA) or family office. From large brokerage firms and behemoth custody banks to a dwindling number of smaller boutique firms, the decision for advisors can ultimately impact client relationships if the arrangement doesn’t work.

What Is the Difference Between a Prime Broker and a Custodian?

As a hybrid firm, you can dual register as an RIA and broker-dealer which allows for you to operate with both a fee- and commission-based practice. This approach can provide the flexibility of an RIA with the added support of your broker-dealer. Remember, there are now many investment options available for your clients and prospects, particularly through the recent explosion of robo-advisors and other fintech initiatives. When the decision for your clients is purely based on a performance number on a quarterly statement, that money can become transient. For an investment management firm or family office to be successful, differentiating yourself through a personal client relationship is key.

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Broker-dealers are typically used by clients for their ability to generate ideas and place trades. By contrast, bank custody is a specialized service focused on the administration and reporting of client portfolios; bank custodians are agnostic as it relates to the generation of ideas or execution of trades. The table below highlights further considerations when comparing the two types of custody services, which can impact how you grow and preserve your wealth over time. These days, it’s not uncommon to see brokers dual-registered as investment advisers. Brokers may also be involved heavily as part of a sales team in private placements, initial public offerings (IPOs), or secondary issuances. Working alongside their firm’s corporate finance departments, brokers may work to sell their clients on a hot new issuance or private deal to help a company raise capital.

What Are the Largest Prime Brokerages?

The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because most of them act as both agents and principals. An additional distinction between the Series 7 and the Series 65 is that the Series 7 requires an individual to be sponsored by a firm prior to enrolling for the test. The Series 65 is also often used by certified public accountants (CPAs) to enter the investment advisory business. Unlike chartered financial analysts (CFAs) and certified financial planners (CFPs), the CPA designation does not meet the prerequisites to have the Series 65 exam waived.

What Is the Difference Between a Broker and an Investment Adviser?

It also helps large financial institutions facilitate their businesses and outsource activities that allow them to focus on their core responsibilities. For these companies, a prime broker can be a one-stop shop that makes doing business much easier. The relative size or success of prime brokerages can be measured in several ways.

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Joining a pre-established RIA (or “tucking in”) can mitigate those fears of establishing your own infrastructure. Broker-dealers do not have to act in the best interests of the client, and they are only required to meet the lower suitability standard. Broker-dealers may receive commissions or other income by promoting certain products to their customers. Having multiple asset managers and providers can make it harder to get a consolidated view of your wealth. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

RIAs and independent brokers both have considerable freedom in how they operate their businesses. RIAs are bound by a fiduciary oath, while independent brokers may have access to specific products or services that are hard to find elsewhere. An investment firm can dual-register as both a registered investment advisor and a broker-dealer, allowing them to collect both fees and commissions.

Here the key selling point you will always be told by anyone who is in favor of it is the chance of higher returns. Since custody accounts incur fees, the lack of fees with a brokerage account allow assets to grow at a slightly higher rate. In addition, should a client want standard loans, margin or any form of debt themselves then a brokerage account might offer better terms since their business is based on debt. Evaluating a clearing firm or custodian is more than just comparing the categories; it is also about comparing firms within a firm. For example, Fidelity and Pershing can both act as either a clearing firm to broker dealers or a custodian to RIAs. Even within the same parent firm, the services and the pricing may be different.

In an increasingly complex world, we guide our clients through US cross border challenges to provide a transparent and consolidated approach to multi custody, multi jurisdiction and multi asset strategies. Though the issue of custodian versus broker-dealer may not seem directly relevant to a potential cannabis ETF investor, there are a few important things that investors should keep in mind. Watch out for the potential of added costs involved in participating in these funds. This may happen because of additional audits required by the Securities and Exchange Commission (SEC) depending on the status of who’s holding the securities. The SEC requires custodians for investment vehicles such as ETFs to submit to annual audits of the assets contained in those funds if they are not already subject to annual audits.

National bank custodians are regulated by the Office of the Comptroller of the Currency (OCC), and their parent bank-holding companies are supervised and examined by the Federal Reserve Board. To ensure compliance with federal consumer financial laws, the Consumer Financial Protection Bureau supervises and examines certain depository institutions as well. Learn the differences between using a bank and a brokerage firm, and discover which provider best meets your portfolio’s needs. In this regard, broker-dealers are essential, and they are also well-compensated, earning a fee on either or both sides of a securities transaction. A broker-dealer (B-D) is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers.

Although their jobs might seem similar to anyone who is unfamiliar with these job titles, investment advisers and brokers perform very different roles in financial services. Below, we highlight the similarities and differences between an investment adviser and a broker. To reiterate, an RIA approach offers more flexibility and will allow you to personalize the services and relationships you have with your clients. A broker-dealer approach provides your practice with a firm structure, with an extensive network of solutions at hand, and is ready to go for your client. Or, financial advisors often switch to a hybrid model to ease their transition.

You will want to ask questions related to technology integrations, client account fees, or even the cost of trading. To add to the complexity of the decision, the RIA or broker dealer you are evaluating may neutralize any pricing differences between a clearing firm and custodian negating or even inverting the differences. AssetMark, Inc. (“AssetMark”) is a leading provider of extensive wealth management and technology solutions that help financial advisors meet the ever-changing needs of their clients and businesses. The information on this website is for informational purposes only and is intended as an overview of the services offered to financial advisors, not a solicitation for investment. Information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. A financial institution called a broker offers a brokerage account which is also commonly known as a trading account, securities account or investment account.

As such, even upon a bank’s insolvency, custodied securities should be returned to each individual investor. Brokerage custodians are regulated by the SEC, and these regulations are supplemented by the jurisdiction and oversight of various self-regulatory organizations (SROs), such as FINRA or the National Securities Exchange. The rules of SRO membership (Section 15(b)(8) and Rule 15b9-1) require brokerage firms to become a member of an SRO in order to assist the SEC in regulating the firms’ activities. A broker dealer works in tandem with a clearing firm to ensure the trades are executed and transferred exactly as they should be.

However, RIAs are still bound by their fiduciary duty, meaning that they cannot execute trades without the client’s knowledge and advance permission. Some RIAs charge clients a percentage of their assets under management while others charge either an hourly or a flat fee to dispense advice. Registered investment advisors usually must obtain a Series 65 license as well as other qualifications.