TD Ameritrade vs RIA
Updated: Feb 1
My friend David invests with TD Ameritrade and asked me to explain the differences between my firm, Freshfield, an independent Registered Investment Advisor (RIA) and major financial services providers such as TD Ameritrade, Fidelity, Wells Fargo, JP Morgan.
According to The Investment Advisers Act of 1940, a Registered Investment Advisor (RIA) is:
"A person or firm that, for compensation, engages in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications"
In plain language, an RIA is a business entity that has been approved by the regulator that oversees it (either the SEC or a state securities board) to provide investment advice, including portfolio management.
A major difference between an independent RIA and other firms that provide financial services is that an RIA is bound by a fiduciary duty. This is the highest standard of care under the U.S. legal system and requires the RIA to always put the interest of the client above its own. This is a much more stringent rule than the "suitability" standard which can apply to other financial services providers.
Let's get back to David's question and compare a financial services provider to an independent RIA.
A common structure of a financial services provider is (1) a firm representative, (2) financial products and services such as investments and portfolio management, and (3) custody and brokerage services. Let's take a closer look at these three components. The firm representative interacts with the client, facilitating the provision of financial services by the firm to the client. The firm representative is not an RIA. Neither does the firm representative carry out the portfolio management. Instead, the portfolio management is often carried out centrally from the firm’s headquarters. The firm itself may or may not be an RIA—some firms such as Edward Jones are broker/dealers and hence not RIA’s, while other firms such as UBS, JP Morgan and Vanguard have asset management firms and separate RIA businesses (which may steer clients to the firm’s asset management products and services). Some firms may contract out brokerage and custody services while other firms may have separate brokerage and custody businesses (to which they direct their clients).
One of the implications of this setup is that, depending on how it is organized, the firm may receive commissions for recommending products, receive fees for investment advice, recommend the products and services from its asset management unit and profit from brokerage transactions. Consequently, clients may face multiple sources of costs and may find their total investment costs difficult to measure precisely.
I am an independent RIA. And I am a financial economist and the portfolio manager, personally managing each client’s portfolio. I use the brokerage and custody services of Interactive Brokers (IB), a global brokerage and custodian with huge capitalization and minuscule transaction costs.
My only compensation is the management fee I receive from my clients. A management fee for an account depends on the account's value. Hence, the better a client’s portfolio performs, the greater is my compensation. I am, therefore, motivated to build and maintain the optimal portfolio for a client, which includes securing the lowest investment costs.
In summary, on the one hand, large financial firms deliver mass-produced financial products and services to a client via a firm representative. The qualifications of, and standards of care provided by, the firms and their representatives vary—not all firms and their representatives are bound by the fiduciary standard which requires the provider to always act in the best interests of the client. Also, firms use many compensation models, some of which potentially cause a conflict of interest between the firm and the client and may lead to higher costs for the client. On the other hand, I am an RIA, thus legally obligated to provide the highest standard of care to clients, a qualified portfolio manager personally managing each client’s portfolio and have a fee-only compensation model, ensuring that my clients’ interests and my interests are aligned.
Dr. Andy Lawson is the principal of Freshfield Investments, a Registered Investment Advisory firm in Plano, Texas serving clients locally and nationwide. Freshfield provides investment management and financial planning as a fee-only, fiduciary. To book a virtual or in-person complimentary consultation, please visit our Contact page.
I gratefully acknowledge the advice, corrections and suggestions provided by Alexandra Sukhoverko, Bank of Texas, Carol Doughty, David Welch, Citibank, Fiona Zhang and Pamela Peters. Any errors are my own.