Investment Adviser vs. Broker: An Overview
Although their jobs might seem similar to anyone who is unfamiliar with these job titles, investment advisers and brokers perform very different roles in financial services. Below, we highlight the similarities and differences between an investment adviser and a broker.
Key Takeaways
- Investment advisers are paid a flat fee or percentage of assets under management (AUM) to advise clients on securities and/or manage portfolios.
- Brokers are paid commissions to execute trades or buy and sell assets for clients.
- Brokers and investment advisers are regulated by different bodies and require different qualifications for practice (e.g., FINRA regulates brokers and the SEC regulates investment advisers).
- Both professionals are legally prohibited from giving advice that conflicts with their clients’ needs.
Brokers
Before the advent of online trading, accessing a broker was traditionally a luxury reserved for the rich. Individual investors had very little or no direct access to the market and had to place their orders through a licensed broker (usually by phone). In return, brokers charged very high commissions.However, the advent of web-based discount brokerages has changed the job of the broker.
Now, individuals who wish to trade on the stock market no longer require a broker on standby to execute their buy and sell orders and can have direct access online for zero commissions. Although brokers still execute orders, many have expanded their services to personalized investment management to justify charging higher commissions.
These days, it’s not uncommon to see brokers dual-registered as investment advisers. Brokers may also be involved heavily as part of a sales team in private placements, initial public offerings (IPOs), or secondary issuances. Working alongside their firm's corporate finance departments, brokers may work to sell their clients on a hot new issuance or private deal to help a company raise capital. In return, the broker may receive a commission, shares,or warrants in the issuing company.
Investment Advisers
Investment advisers, on the other hand, work on a fee-based system of dispensing investment advice that caters to individual clients' needs. Oftentimes, they'll also manage investment accounts. For example, an investment adviser may work with a client to create an entire wealth management framework, including assisting them through tax, estate, and mortgage planning. Not to be confused with a financial adviser, investment advisers are registered with and regulated by the Securities and Exchange Commission (SEC) and/or a state regulatory body. Investment advisers are also known as asset managers, investment managers, and wealth managers.
Key Differences in Regulations
Investment advisers are also held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the Investment Advisers Act of 1940, which calls on advisers to perform fiduciary duties in regards to their clients’ accounts. Fiduciary duty, which is legally enforceable under the Advisers Act Sections 206 (1)/(2), prohibits advisers from “employ[ing] any device, scheme or artifice to defraud any client or prospective client.”
The standard also imposes upon the adviser the “affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts” as part of the adviser’s duty to exercise loyalty and care. This includes “an obligation not to subordinate the clients’ interests to its own.” Due to the importance of this fiduciary conduct, most investment advisers can make investment decisions for their clients without first getting the client's permission.
Prior to 2011,all investment advisers with $30 million or more assets under management (AUM) had to register with the U.S. Securities and Exchange Commission (SEC), while 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, defined broadly by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others” (which may also include investment advisers), must register with the SEC and a self-regulatory organization.
The best-known broker self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).
Key Differences in Testing and Licensing
Investment advisers and brokers also have different training and licensing requirements. Brokers have to pass the Series 7, otherwise known as the General Securities Representative Exam; the Series 7 also acts as a precursor to further exams in the securities industry. By contrast, future investment advisers are required to pass the Series 65 exam before they can dispense financial advice for a fee.
An additional distinction between the Series 7 and the Series 65 is that the Series 7 requires an individual to be sponsored by a firm prior to enrolling for the test. The Series 65 is also often used by certified public accountants (CPAs) to enter the investment advisory business. Unlike chartered financial analysts (CFAs) and certified financial planners (CFPs), the CPA designation does not meet the prerequisites to have the Series 65 exam waived.
What Is the Difference Between a Broker and an Investment Adviser?
A broker is a company or individual that is licensed to sell securities. An investment adviser, by contrast, provides advice to clients on managing their investments. Another difference is that investment advisors have a fiduciary duty to act in the best interests of their clients, while brokers have to follow a "best interest" standard. Though it sounds similar, it isn't as stringent as the fiduciary duty.
What Is an Investment Adviser vs. a Financial Planner?
Professionals in these two different types of jobs focus on money management. But as their name suggests, investment advisers focus on giving advice on investments and investment strategies, while financial planners assess a client's financial health and then create a plan to help them realize their goals. Financial planners can offer guidance on budgeting, taxes, insurance, and retirement and estate planning.
What Is a Broker-Dealer?
A broker is an individual or firm that buys and sells securities for the account of others. A dealer is an individual or firm that buys or sells securities for their own account. Hence a broker-dealer is in the business of buying and selling securities for others or themselves.
The Bottom Line
Investment advisers and brokers are two different types of professionals in financial services. They have different roles, are regulated differently, and operate under different testing and licensing regulations. It's important to understand these differences if you are looking to invest in the stock market and want to know if either is right to help you meet your goals.
