Broker Check

Financial Advisor vs. Traditional Broker

February 12, 2014

The significant differences between a financial advisor and a traditional broker could mean a lot to your portfolio.  Often people think they know the difference but have it completely backward.

Several years ago I was volunteering as an instructor for a class on a hobby of mine.  During a break, a discussion about investing arose.  Someone pointed out that I am an investment advisor.  The gentleman that was clearly steering the discussion bluntly ask “Are you a financial advisor or a broker?” “A financial advisor,” I said as we were called back into the class.  “Oh, then you can’t do all the things my guy does.  He’s a broker at …”  I didn’t have the time to enlighten him but I do have time for you.

There are effectively two types of financial services available to investors advice given by a Registered Investment Advisor (RIA) or a “financial advisor” and the recommendations given by a representative of a brokerage firm, also called a “broker or registered rep.”  Depending on your needs and circumstances either of these professionals may offer services appropriate for you.

From a regulatory perspective, financial advisors are usually held to a higher standard of client responsibility than traditional brokers, the advisor must act in the clients’ best interest.  A broker is held to a suitability standard. The products recommended by a broker need only be suitable for the investor.  The fiduciary responsibility of a financial advisor is to the client’s best interests.  The investments a financial advisor recommends must be suitable and in the best interest of the client.

Financial advisors often charge clients a fee based on a percentage of assets under management.  This fee is negotiated in advance.  They usually cannot receive other compensation from their clients without prior consent.  A broker is compensated on a commission basis and is paid by the client and sometimes by another company based on the product purchased.  Some products are only available on a commission basis.  For certain investments, a financial advisor may set up a separate account to allow for the purchase of these investments for the client.  Other products are only available for purchase at NAV (Net Asset Value) like a no-load mutual fund.  These investments are a good fit for a fee-based account with a financial advisor because the advisor is not compensated based on type asset in the account.  If a brokerage firm allows a broker sell these funds the broker would not be compensated for the activity.  This could create a conflict of interests with the client.

A broker holds a registration that allows them to offer specific products to the public.  The product lists are passed down from the brokerage firm.  The broker then finds clients to purchase these offerings.  A financial advisor operates in a Registered Investment Advisory firm.  The financial advisor holds a separate registration in order to act as an investment advisor to clients in ways that sometimes do not involve the sale of securities.  Although financial advisors primarily operate as such they may also have relationships with a brokerage firm to provide a broker relationship if that is a client’s preference.

The type of relationship you have is your choice but you should know what your options are when making that decision.

If you have questions about anything in this article or other topics of personal finance and investing please comment below or write me at