WHILE BROKERS AND advisors may fill similar roles in a client's life, the services they offer and fees they charge can vary greatly.
"It's always a good idea to do some of your own due diligence before hiring a professional, whether that's looking up a broker through your Better Business Bureau, running a broker check or checking on (Financial Industry Regulatory Authority's) website to see if the advisor has any disclosures," says David Wright, executive director of practice development at M&O Marketing.
Wright says you can usually tell whether a professional is a broker or advisor, or a combination of the two, by the disclosures at the bottom of their website. If the person is an advisor, you can also find a Form ADV, which will tell you the products and types of financial planning the advisor specializes in, on their website or available for free from the Investment Adviser Public Disclosure database, sponsored by the U.S. Securities and Exchange Commission.
Financial Advisor vs. Broker
The difference between financial advisors and brokers comes down to the services they provide and how they're paid for those services. "A broker earns a commission on the sale of some type of investment, and a financial advisor earns money by giving people advice on their money," says Mazi Bahadori, vice president of securities at Altruist. In other words: Financial advisors advise, and brokers sell.
In technical terms, a broker is a specific designation that refers to someone who is licensed by the Financial Industry Regulatory Authority, called FINRA, to buy or sell securities, says Mark Schrader, a financial planning strategist at TIAA. The title of financial advisor is murkier as there is no legal requirement that must be met to call yourself a financial advisor.
For this reason, Jason Steeno, president of CoreCap Advisors, says it's always wise to check the background and history of your financial advisor on the Investment Adviser Public Disclosure database and via FINRA's BrokerCheck.
"Typically, financial advisors need to learn more about you before they can give you advice, whereas brokers just need to collect the bare minimum amount of information before they can conclude that an investment can be sold to you," Bahadori says. This is because advisors and brokers may be held to different standards.
Brokers must adhere to the suitability standard, which states that an investment or product need only be "suitable" for an investor's situation. This means a broker could recommend one investment, even if there is a lower cost or better option available, as long as the recommended product is suitable to your needs.
"Brokers are not bad people, and there's nothing inherently wrong with earning a commission," Bahadori says. The problem is where their incentives lie.
"Most financial services companies simply incentivize sales and aren't always interested in delivering the best possible outcome to their clients," he says. "If you happen to find a broker that bucks that trend, great. But odds are people will do what they get paid to do, and that won't always bode well for clients."
Advisors more commonly follow the fiduciary standard, which requires them to act in their clients' best interests at all times. A fiduciary could never recommend a suitable product if there was a better option available. That said, not all advisors are fiduciaries. Some are only held to the suitability standard, so be sure to ask rather than assume. Others are both advisors and brokers and may wear their advisor hat while helping you develop a financial plan, then put on their broker hat when recommending specific products to use as part of that plan.
"Many firms will have employees titled 'financial advisors' who are also licensed brokers, so it can be important to understand the capacity in which the advisor is working," Schrader says.
Fiduciaries also cannot earn commissions because this may present conflicts of interest. They may be incentivized to put you in the product with the highest commission rather than the best one for your needs. Instead of commissions, advisors typically earn a fee for the advice they give. This can be charged as a flat or hourly fee or a percentage of the assets you have under their management. Someone who is both an advisor and broker may earn both a fee and commissions, however, so be sure to ask how a professional is compensated before hiring him or her.
Investment Advisor vs. Broker
The key difference between an investment advisor and broker rests on one familiar word: fiduciary, Bahadori says. Unlike financial advisors or brokers who can choose to be a fiduciary or not, investment advisors are obligated, by law, to act as a fiduciary. This means anyone who calls herself an investment advisor must also be a fiduciary working in her clients' best interests at all times.
Fiduciaries are held to a higher standard of care than brokers because, as fiduciaries, they can make decisions about your portfolio without first getting your permission. For instance, an investment advisor can make trades in your account without calling you. A broker would have to get your express permission to buy or sell a security in your account.
As fiduciaries, investment advisors cannot earn commissions. They are fee-only advisors who are paid a flat or hourly fee or a percentage of assets under management. This latter arrangement is usually 1% to 2% of the assets you hold with them, Steeno says.
"With this arrangement, the client's interests and the advisor's interests are more closely aligned," he says. "When the account value increases, so does the amount the advisor collects, and vice versa."
Brokers and investment advisors are regulated by different government agencies. Investment advisors fall under the jurisdiction of the Securities and Exchange Commission, while brokers are regulated by FINRA, says Steve Azoury, financial advisor and owner of Azoury Financial.
They also must pass different licensing exams. A broker is only required to pass the General Securities Representative Exam (Series 7), while an investment advisor must pass the Uniform Investment Adviser Law Examination (Series 65) or a combination of the Series 7 and the Uniform Combined State Law Examination (Series 66).
Do You Need a Broker and Advisor?
The answer depends on the services you want and how much you're willing to pay. "If you simply want to buy or sell a stock (or other investment), a broker or discount brokerage may make sense," Schrader says. "If you have questions about saving for goals and retirement preparedness, you may expand your search to financial advisors who offer a wide range of services." And if you are looking for someone to help you manage your investments, the best option may be an investment advisor.
Keep in mind that advisors offer more services and can help with more complex financial planning situations, but often come at a higher cost, Azoury says. They also may not be as accessible for investors who are just starting to build their wealth.
"Investment advisors typically have higher account minimums, often starting at $50,000 or more of investable assets," Steeno says. "Brokers and investment advisors can work with accounts of any size, but with smaller accounts, it's often hard for advisors to obtain the appropriate amount of diversification" to meet the fiduciary standard of care requirements.
At the same time, he says, he's seen affluent clients who subscribe to more of a buy-and-hold strategy and prefer to use a broker to minimize fees. "In either case, a client's needs and level of comfort with the fees being paid relative to the services being provided will help inform which of the two options is the better choice."
This article was originally published by Coryanne Hicks, money.usnews.com.
