An Overview of Investment Adviser vs. Broker
Despite the fact that their employment may appear identical to the untrained eye, investment advisers and brokers play quite diverse roles in the financial services industry. The similarities and differences between an investment adviser (sometimes known as a financial adviser) and a broker are shown here.
To advise clients on securities and/or manage portfolios, investment advisers are paid a fixed fee or a percentage of AUM.
Brokers are compensated for executing trades or purchasing and selling assets on behalf of their clients.
Different regulatory agencies control brokers and financial advisers, and each demand different qualifications to practice (e.g., FINRA regulates brokers and the SEC regulates investment advisers).
Both experts are banned by law from delivering advice that is incompatible with the needs of their clients.
Until the advent of online trading, dealing with a broker was considered a privilege reserved for the wealthy. Individual investors had little or no direct access to the market and were forced to use a licensed broker to place their orders (usually by phone). Brokers charged exorbitant commissions in exchange. The introduction of web-based discount brokerages, on the other hand, has altered the role of the broker.
Individuals who want to trade on the stock market no longer need a broker on call to execute their buy and sell orders; instead, they can do so directly online for no commissions. While brokers continue to execute orders, several have expanded their services to include personalized investment management in order to justify higher commissions.
Brokers who are also registered as investment advisers are prevalent these days. Brokers may also play an important role in private placements, initial public offerings (IPOs), and secondary issuances as part of a sales team. Brokers may engage with their firm’s corporate finance departments to sell their clients on a hot new issuance or private deal in order to assist a company in raising funds. The broker may be compensated in the form of a commission, shares, or warrants in the issuing company.
Financial advisers, on the other hand, work on a fee-based structure to provide personalized investment advice and, in some cases, manage investment accounts. An investment adviser, for example, may work with a client to develop a comprehensive wealth management strategy that includes tax, estate, and mortgage planning. Investment advisers are registered with and regulated by the Securities and Exchange Commission (SEC) and/or a state regulatory agency, not to be confused with financial advisers. Asset managers, investment managers, and wealth managers are all terms used to describe investment counselors.
Regulations with Significant Differences
Also, unlike brokers, investment advisers are subject to a higher legal standard. Investment advisers in the United States are required to follow the Investment Advisers Act of 1940, which requires them to act in their clients’ best interests. 1 Fiduciary obligation prevents advisers from “employing[ing] any method, scheme, or artifice to defraud any client or prospective client,” as defined by the Advisers Act Sections 206 (1)/(2). 2
As part of the adviser’s obligation to exhibit loyalty and care, the norm imposes a “affirmative duty of ‘utmost good faith’ and complete and fair disclosure of material facts” on the advice. This includes “an commitment not to put the interests of its clients ahead of its own.” Because of the importance of this fiduciary responsibility, most financial advisers can make investment decisions for their clients without first obtaining their consent.
Before 2011, all investment advisers with $30 million or more in assets under management (AUM) were required to register with the Securities and Exchange Commission (SEC), while those with less than $25 million just needed to register with their state regulatory authority. The Dodd-Frank Act of 2011 raised the minimum assets under management required for SEC registration from $100 million to $110 million. 4
Brokers are required to register with the SEC and a self-regulatory organization, as defined by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others” (which includes investment advisers). The Financial Industry Regulatory Authority is the most well-known broker self-regulation group (FINRA).
Testing and Licensing: What’s the Difference?
Different training and licensing requirements apply to investment advisers and brokers. Brokers must pass the Series 7, commonly known as the General Securities Representative Exam, which serves as a prerequisite for other securities industry exams. Future investment advisors, on the other hand, must pass the Series 65 test, which is required before they can provide fee-based financial advice.
Another difference between the Series 7 and the Series 65 is that only the Series 7 needs someone to be sponsored by a company before taking the test. Certified public accountants (CPAs) frequently use the Series 65 to enter the financial advisory sector. The CPA designation, unlike that of chartered financial analysts (CFAs) and certified financial planners (CFPs), does not meet the requirements to have the Series 65 exam waived.