Difference between Brokers and Investment Advisors

Timothy Brown |

It seems everyone these days calls themselves a financial advisor, wealth manager, or financial planner. And to be honest, there is nothing preventing anyone from calling themselves any of these. There are no regulations on what people call themselves. Unfortunately, most of the so called financial advisors/planners/wealth managers, are really just brokers or sales people with very little experience or education in the financial planning or investment area. So how do you tell the difference? What is the difference?

Key questions to ask of your financial advisor:

Question #1 – Are you a Fiduciary?  This is pretty simple. Most important, get their answer in writing.   There shouldn’t be any dancing around this question.  Just a simple yes or no will do.  If it is not in writing, then it doesn’t mean a thing.  If you get an answer that sounds wishy washy, or is qualified with “sometimes”, or “only if you want us to be” or “don’t you trust me?”  I would keep looking for another advisor.  If I were giving advice to my daughter, I would tell her that if she is going to hire someone to invest her life’s savings, give it to someone who  is required by law to put her best interests first.

Stockbrokers are subject to the rules of Financial Industry Regulatory Authority (FINRA), a self-regulatory authority.  FINRA requires only that a stockbroker offer “suitable” investments to their clients.  This means that the products your clients are investing in may not necessarily be the best for their needs.

Fiduciaries are held to a much higher standard.  Registered Investment Advisors are subject to the rules and oversight of the Securities Exchange Commission (SEC).  As fiduciaries, we are required by law to put our clients’ best interests first.  We reduce or eliminate any and all conflicts of interest.  A fiduciary’s only compensation comes from a client and is not determined by the products he or she recommends.

What’s the big deal?

The difference between a fiduciary duty and the “suitability” standard can mean big money as well as the success or failure of your goals.

For example, if you give a fiduciary $50,000 to invest for your future, the fiduciary will invest it in the best available assets to help you reach your financial goals.  If you give a broker $50,000 to invest for your future, the broker will invest it in “suitable” assets from the brokerage firm he or she is working for.  This generates big commissions for the broker (out of your pocket) and the brokerage company funds often have higher annual management fees.  The $50,000 investment could end up earning more than $1 million over 30 years, and the fees charged by the broker could add up to over a hundred thousand dollars in lost earnings by retirement!

Question #2 – How do you get paid?  Commissions?  Fees?  Both?   This is pretty simple.  If a financial advisor receives commissions, they are likely NOT fiduciaries.  Again, you want a fiduciary ALL OF THE TIME.  To ensure this, get it in writing how the advisor gets paid, down to the specific $ amount they will get paid when you give them your hard earned cash to invest.

We recommend that you go with the advisor that is paid by fees, ALL OF THE TIME.  If you get a wishy washy answer, such as, “we get both fees and commissions”, or “depends on what you want”, or nothing… Again, if I was giving advice to my daughter, I would tell her she should work with a fee-only advisor that is required by law to put her interests first.

Go with FEE ONLY…ALL OF THE TIME.   Fees can be either hourly, project-based or a percentage of the investments managed (often called Assets Under Management).  All of these are considered FEE-ONLY.

WARNING:  If you hear the term, “Fee-Based” it means they get commissions and fees.  Nearly every firm out there is now calling themselves fee-based, because it sounds like “fee-only” and client’s think they are getting fee-only.  It is a misleading, yet effective way of marketing.

Question #3:  Do you provide comprehensive financial planning services, or primarily just investment management?  Investing is only one part of the financial picture.  We recommend you work with an advisor that is able to provide a comprehensive, holistic service that looks at all areas of your financial life, not just investments.  Many advisors claim to provide comprehensive services, but they really don’t.  By the time you figure out that your advisor doesn’t provide true financial planning, it is often too late.  The advisor has already cashed the commission check.   Get it in writing what services you will receive, when and how often.  Financial planning takes a lot of time and should be updated and reviewed on a regular cycle.  We meet with clients every 4 months and update their financial plan. We do this for a fee that is often less than what other advisors charge for investment management only.

Brown Wealth Management provides comprehensive financial planning services and investment management services on a fee only basis.   As Registered Investment Advisors, we are required by law to follow the fiduciary standard.