While their jobs may seem separate investment advisors and brokers play extremely diverse roles in the world of finance. In this article, we will shed light on the connections and distinctions between an investment advisor (also known as a financial advisor) and a broker.
A General Idea
– Investment advisors are paid a flat fee or a percentage of assets under management (AUM) to advise clients on securities and/or portfolio management.
– Brokers are paid commissions to execute trades or to buy and sell assets to clients.
– Brokers and investment advisors are regulated by different agencies and the practice requires different qualifications (e.g., FINRA regulates brokers, and the SEC regulates investment advisors).
– Both professionals are legally prohibited from giving advice that conflicts with the needs of their clients.
Who Are Brokers?
Before online trading, access to a broker was a luxury reserved for wealthy individuals. In return, brokers cut very high commissions. However, the changed broker position is catching up with web-based discount brokers.
However, today people who want to trade no longer need a broker on standby to perform their buy and sell orders and can have immediate access to as little as pennies in commissions. Although brokers still perform orders, many have extended their services to custom investment management to warrant charging superior commissions.
These days, it is not uncommon to see brokers with dual registration as investment advisors. Brokers may also be heavily involved as part of a sales team in private placements, initial public offerings (IPOs), or secondary launches. Working alongside their firm's corporate finance departments, brokers may work to sell their clients on a new issue or in a private market to help a company raise capital. In return, the broker may receive a commission, stock, or warrants in the issuing company.
Who are Investment Advisors?
In contrast, investment advisors work in a fee-based system of distributed investment advice that meets the needs of individual clients and, in times of care, manages investment accounts. For example, an investment advisor may work with a client to create a complete wealth management framework, including assisting clients through tax, estate, and mortgage planning.
What Are The Main Differences in Regulations?
Investment advisers are subject to a higher legal standard than brokers. Their rules establish an affirmative duty of good faith and full and fair disclosure of material facts by the advisor as part of the advisor's duty to exercise loyalty and care. This includes a duty not to subordinate the interests of clients for his or her benefit. Given the importance of this fiduciary behavior, most investment advisors can make investment decisions for their clients without first obtaining the client's consent.
Brokers, as the SEC generally states that any person engaged in the business of effecting transactions in securities for the accounts of other persons (which may also include investment advisers), have to register with the SEC. The most famous brokerage self-regulatory authority is the Financial Industry Regulatory Authority (FINRA).
What Are Key Differences in Testing and Licensing?
Investment advisors and brokers likewise have various training and licensing obligations. Brokers must pass Level 7, also known as the General Securities Representative Examination; Level 7 also serves as a precursor to additional exams in the securities industry. On the other hand, prospective investment advisors must pass the Tier 65 exam, which is a requirement before they can distribute financial advice for a fee.
The Verdict: What Should You Choose?
The decision to choose to work with an investment advisor or a broker-dealer depends on what you’re looking for from your financial professional.
An investment advisor is a better fit if:
- You are able to invest a considerable amount of money
- You are not well acquainted with the stock market
- You would instead let a pro take management
- You do not have the time to stock-market research
A broker is a better fit if:
- You are self-confident in your investing skills
- You have loads of time to dedicate to research
- You would instead invest in low-cost ETFs (exchange-traded funds)
- You are concerned with a high expense ratio
But you can choose both if:
- You need some help in your trading/investing journey
- You have at least some time to dedicate to researching the market
- You are not a beginner and have a reasonable understanding of the stock market
The Final Word
When it comes to making the ultimate decision on which one to work with, one thing is crucial: it should not be taken lightly. While investment advisors come with a cost, their precious under standing may be what takes your investment portfolio to another level.
In contrast, it’s possible to outpace median returns on your own by investing through a broker-dealer, but then again, that means that the ball is in your court and you’re on your own.
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