Whether someone else is managing your money or you’re investing for yourself, chances are you will deal with someone else at at some point. Maybe it’s a financial adviser. Or an investment broker. Or both. So, what’s the difference between a financial adviser and a broker? A lot, as it turns out.
However, you are forgiven for thinking these two financial professionals are one and the same. A lot of people don’t understand the exact role of either a financial adviser or broker. We will explain each position and how they can help you to reach your financial goals.
When you think of a broker, you most likely picture someone standing on the floor of the New York Stock Exchange, frantically waving pieces of paper in the air. The traditional role of a broker was to buy and sell stocks for clients at requested prices. Before the advent of online trading, brokers were usually employed only by extremely wealthy people. Individual investors had very little or no direct access to the stock market.
It may sound strange now, but stock orders used to be placed over the telephone. Brokers used to charge very high commissions on the trades they placed for clients. Not anymore, though. The rise of online and discount brokerages has largely democratized stock trading. So the role of brokers has changed quite a bit in recent years.
Today, you’re not required to have an in-person broker to buy and sell stocks. Instead, you can place orders yourself with the click of a mouse. You’ll pay anywhere from a few pennies up to $5 a trade in commission fees. The term “broker” today is more likely to refer to a trading platform itself, rather than a specific person. Popular online brokers include Questrade, Robinhood, or Weathsimple.
Stockbrokers do still exist though. They can act as independent agents for you. However, most brokers work for money management firms. Some brokers also register as investment advisers. Brokers today may also be involved heavily as part of a sales team in private placements, initial public offerings (IPOs), or secondary issuances. Brokers usually receive a salary but may also get commission, shares, or warrants in a company that is issuing stock.
Investment advisers typically provide investment advice to clients for a set fee. They cater to individual clients and can manage your investment accounts. For example, an investment adviser may work with you to create a wealth management plan that involves helping clients with taxes, estate planning, and even their mortgage. Investment advisers are registered with (and regulated by) the Securities and Exchange Commission (SEC) in the United States. They are technically different from financial advisers. They are also sometimes called asset managers, investment managers, or wealth managers.
Investment advisers can pick stocks, bonds, funds, and other investments for you. They can also build an investment portfolio that involves tools such as asset allocation, investment diversification, and investment strategies. Ideally, they will optimize your money up to (and during) retirement. Investment advisors also create and implement tax strategies for clients, utilizing tax-friendly investment strategies such as 401(k)s, IRAs, and charitable giving.
Differences Between The Two
Investment advisers are held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the “Investment Advisers Act of 1940.” That Act calls on advisers to perform fiduciary duties and act in their clients’ best interests. Before 2011, all investment advisers with $30 million or more assets under management had to register with the SEC. Meanwhile, advisers with less than $25 million needed only to register with their state regulatory body. In 2011, the Dodd-Frank Act increased the minimum assets under management for SEC registration to $110 million.
Brokers, on the other hand, must register with the SEC and a self-regulatory organization. The most well-known broker self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).
Investment advisers and brokers also have different training and licensing requirements. Brokers are required to pass a test known as the “Series 7” or “General Securities Representative Exam.” Investment advisers must pass what’s known as the “Series 65” exam — a requirement before they can dispense financial advice for money.
There are additional distinctions between the Series 7 and the Series 65 exams. Only the Series 7 requires an individual to be sponsored by a firm prior to taking the test. The Series 65 is often used by Certified Public Accountants (CPAs) to enter the investment advisory business.
Which One Is Right For You?
So how should you distinguish between an investment adviser and broker? The best way is to remember that a broker executes a transaction on your behalf – helping to facilitate a stock purchase or sale. On the other hand, an investment adviser provides financial advice, guidance, and money management for a fee. Which one is right for you largely depends on how you handle your money and investments.
If you invest yourself, you will likely depend on a broker to execute transactions that you place. However, you might still need an investment adviser if you want a professional to advise you on how to manage your money and invest for retirement. Ultimately you’ll want to do some research before deciding whether you will need an investment adviser or broker to meet your personal financial and investment needs. It might be one or the other — or maybe both!