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Financial Advisers and Stock Brokers: What’s the Difference?

This article was written by in Financial Advice and Advisers. 7 comments.


You would think that the roles and responsibilities would be clear and there would be a strong line between individuals who call themselves financial advisers and those who call themselves stock brokers. The obvious answer is that advisers give impartial advice based on the best interest of the client and brokers sell products as a third party.

Advisers are sworn to put their clients’ interests ahead of their own, thanks to the Investment Advisers Act of 1940. This Act defines an adviser as, “Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The Act also precludes brokers from being considered investment advisers.

In that case, what is a broker? The act also provides this definition. A broker is, “Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank.” The key word is effecting, which astute readers will realize is not the same word as affecting. Brokers make the trades happen. Today’s brokers are “broker-dealers,” meaning they make the trades happen, and they sell financial products to customers for a fee.

While advisers must act in their client’s best interest at all times, brokers do not face this requirement. Brokers must understand their client’s complete financial picture and must direct them towards appropriate products.

Generally, investment advisers sell their services with a fee; perhaps hourly or per service, either flat or as a percentage of assets (to make financial advice in reach for those without millions of dollars to investment). Brokers should be earning a commission for each product that they sell, just like your car salesman.

Here’s where the line gets blurred. Brokers have been offering a product called a “wrap account.” Basically, the broker takes care of all the details, selecting investments, making the trades, and charging a flat quarterly or annual fee to the client. The theory with these accounts is it will reduce unnecessary trading by the broker, because she is not collecting a commission for each purchase or sale of a security.

In the past, fee-based services were held in the domain of only investment advisers, but the SEC granted an exception for wrap accounts. Recently, a court ruled that brokers who are involved with wrap accounts must register as financial advisers. This would hold these brokers accountable for making only investment choices best for the investor.

Brokers say that wrap accounts have saved clients billions in commissions. Even if that’s true, it doesn’t mean brokers are always making the best decisions for their clients. The New York Post cited a suit to bring wrap accounts to the public’s attention, citing an example:

Last December, then-New York State Attorney General Eliot Spitzer charged UBS with devising a system to lure unsuspecting clients, even when there were lower-cost and more suitable options available. The suit cited an 82-year-old woman who paid $24,000 in fees but only made one trade.

It’s difficult to know who to trust, and blurred lines between advisers and brokers don’t help the average person to make informed decisions.

Updated December 20, 2011 and originally published September 21, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 7 comments… read them below or add one }

avatar Kirk Kinder

Flexo is pretty much right on with his analysis. I would add a couple points. One, a broker can call himself a financial advisor. What you need to look for if hiring a planner is a registered investment advisor (RIA). You can tell if you are working with an RIA by asking if the planner is a fiduciary. A fiduciary has a legal obligation to put your interest first, above all others, including his own. All RIAs act as fiduciaries.

However, your work isn’t done if you find an RIA. Most RIAs still accept commissions. In fact, 70% of the average RIAs compensation comes from commissions. These planners call themselves fee-based, but you need to look at their form ADV to see how much of their revenue is from fees and how much from commissions.

I am a fee-only planner so I don’t earn any compensation from commissions. Obviously, I think this is the way to work with an advisor because you know you eliminated the biggest conflict of interest found in a planner relationship.

So I recommend finding a registered investment advisor who is fee-only. Of course, I am biased.

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avatar Deltablues

To be clear, ANYONE can call themselves a financial adviser, a wealth management specialist, or retirement counselor.

The title “financial advisor” means nothing.

You must be licensed to sell advice, securities (stocks, bonds, funds), or insurance.

Those duly licensed are legally titled “Investor Adviser Representative” (the business is registered as the investment adviser), “Registered Representative (RR)”, and “Insurance Agent (IA)”, respectively.

The shame is most “financial advisers” operate as all three. Don’t fall victim to the sales guys who are pretending to be objective “advisers”. If they are RRs or IAs they are most certainly NOT! Just ask, before you meet.

Hope that helps!

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avatar Pat

Simplified rules for investing need to be made available for unsophisticated investors who do not know what brokers or investment advisors are permitted to do, and what they aren’t.

The entire realm of status and relationships in the investment industry is obscured which prevents customers from account oversight, and favors fraud.

No wonder there is a bail out – that taxpayers must pay for.

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avatar Cameron Williams

Can anyone explain what purpose an RIA serves? If you have to have a Series 6/7/66 to execute trades, what does someone with a Series 65 contribute? I am interested in attaining the Series 65 because I don’t work for a firm who can sponsor me for the 6/7/66. Thanks for any input received.
Cameron

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avatar Kirk Kinder

Cameron,

The series 65 distinguishes an advisor who is required to act as a fiduciary. Those with a 7 or 66 are salesmen and are regulated as such. I am registered as a 65, and I place trades for clients. I just don’t make commissions. It has nothing to do with trading. The difference deals with regulation.

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avatar Darkhorse

You’re better off going to a trust department in a bank, percentage based fee (the better they do for you the better fee they take), held to a higher ethical standard,(prudent investor rule), plus the banks reputation depends on a well run department, and banks are all about community, and trust departments are subject to OCC examination. They tend to be a little more conservative in their investments but in times like we have been through and are going through now….thats your best bet.

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avatar Luttrell Josh

Thats Ignorant, the 66 is a combination of the 65 and 63. The Sec made the test to short-cut taking two test. People who get the 65 just cant pass the 66, so they use it as a escape goat. Good try though!

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