I keep getting broker-dealers and investment advisers confused.

Broker-dealers perform many different activities, from investment banking to providing custody for both retail and institutional investors. Investment advisers provide two main services: financial planning, or portfolio management. A mutual fund involves the services of a broker-dealer and an investment adviser. Sometimes, the two firms are affiliated. Sometimes, they are not. Either way, the investment adviser manages the portfolio of securities for compensation, while the broker-dealer acts as the sponsor of the fund. That means the broker-dealer markets the mutual funds and lines up broker-dealers to promote and sell the shares.

The better the investment results achieved by the investment adviser, the easier it is for the broker-dealers to sell the fund shares to investors. In a fictitious example, for the ABC Funds, ABC Distributors is a broker-dealer, while ABC Capital Management is the registered investment adviser to the fund. The broker-dealer markets and sells the investment to investors, while the investment adviser manages the portfolios for the various funds within the family.

Investment advisers providing portfolio management services to high net worth individuals and institutions typically have unaffiliated broker-dealers act as custodians for client assets. Broker-dealers are good at this kind of recordkeeping, while RIAs specialize in managing securities portfolios.