A broker-dealer is a firm registered to buy and sell securities — as broker when executing for customers, as dealer when trading its own account. In the alternatives market, broker-dealers are the primary distribution channel: the firms whose registered representatives sell non-traded REITs, BDCs, interval funds, and private placements to retail investors.
What broker-dealers are and do
Registration under the Securities Exchange Act of 1934 and membership in FINRA are the defining credentials; representatives carry FINRA licenses (Series 7 and companions) and appear on BrokerCheck. The economic model is transactional: compensation flows from commissions, selling commissions and dealer-manager fees on offerings, and trailing payments like shareholder servicing fees — a structure that differs fundamentally from the asset-based fees of RIAs, and that explains why the same fund is often sold through different share classes in each channel.
In alternatives distribution, several BD roles recur. The dealer manager (often sponsor-affiliated) runs a non-traded offering’s distribution; selling group BDs sign agreements to offer it through their reps; and firms owe FINRA-mandated diligence on the products they approve for sale — the “reasonable investigation” standard that makes a BD’s product shelf a curated (and sometimes slow-moving) list. Recommendation conduct is governed by Reg BI, which requires acting in a retail customer’s best interest and disclosing conflicts — including the compensation differences that alternatives often carry.
BD vs. RIA — the distinction clients actually need
The two channels differ in standard of conduct (Reg BI for BDs; fiduciary duty under the Advisers Act for RIAs), compensation (transaction-based vs. asset- or fee-based), regulator (FINRA/SEC vs. SEC or states), and dispute forum (FINRA arbitration vs. courts/contract). Many professionals are dually registered — a “hybrid” advisor may act in either capacity depending on the account — so which hat is on for this recommendation is a fair and useful client question. For product access, the channels also shape availability: commission-based alternative share classes live in BD accounts, while advisory-friendly classes (lower or no load, no trail) exist for the RIA channel.
FAQ
What is a broker-dealer in simple terms?
A licensed securities firm that executes trades for customers and/or its own account — the regulatory category behind brokerage firms and the reps who sell investment products for commissions.
What's the difference between a broker-dealer and an RIA?
BDs transact and earn commissions under Reg BI’s best-interest standard with FINRA oversight; RIAs advise for fees under a fiduciary standard with SEC/state oversight. Many firms and advisors operate as both.
Why do broker-dealers matter in alternative investments?
They’re the main pipeline: non-traded products reach most retail investors through BD selling agreements, and FINRA’s product-diligence and compensation rules shape what’s sold and how.
Related terms
IBD (Independent Broker-Dealer) · RIA · Dealer Manager · FINRA · Regulation Best Interest
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
