So you’re on the fence about getting some help with your finances and you don’t know where to start. In between help with your investments and wealth management, it seems as though there are plenty of options of certified individuals that can fit your needs. To an outsider looking in, brokers and investment advisers don’t look very different.
But there are, in fact, key differences between the two, and depending on your financial plans, it’s important to contact the right person for the right job. Here’s what you need to know about the differences between brokers and investment advisors and how each could help you.
Since the advent of online trading, brokers have seen massive shifts in their job requirements and descriptions. They were once only employed by the super-rich and were seen as a luxury, so much so that individual investors could hardly access the market. Back then, getting in touch with a licensed broker in order to access the market was done by phone.
Nowadays anyone can execute their own buy and sell orders for negligible fees online. Given this, many brokers have started expanding their services since they can no longer justify high commission fees for a service that is considered widely available and otherwise cheap.
As such, plenty of brokers today are also registered investment advisers and most may be involved as part of a sales team in initial public offerings, secondary issuances, or private placements. Because of this, you might find that brokers will offer try to sell their clients new issuances or private deals in order to help a company raise its capital since they work alongside the firm’s corporate finance departments. Naturally, they earn shares, warrants, or commissions for the deals that go through.
Things get a little more complicated with investment advisors which should not be confused with financial advisors though they are often referred to as financial advisors. Confusing, we know! The key difference between these two jobs is the fact that investment advisors are registered and regulated by a state regulatory body (sometimes) and the Securities and Exchange Commission (SEC).
Investment advisors also work on a fee-based system, helping their individual clients with tax, mortgage, or estate planning. Basically, they still help your entire wealth management framework.
Key Differences in Regulations
As investment advisers must adhere to the Investment Advisers Act of 1940, they must perform fiduciary duties (enforceable under the Advisers Act Sections 206 (1)/(2)). What this means is that they are prohibited from defrauding their clients though any artifice, scheme, or device.
Thanks to these regulations, they are held at higher legal standards than brokers. But are they allowed to make investment choices on your behalf? Even without permission? Yes, they are. However, investment advisers must work in good faith and cannot subordinate a client’s interests to his or her own.
Advisers with less than $25 million in assets under management (SUM) need to register with their state regulatory body, but those with $110 million or more are required to register with the U.S. Securities and Exchange Commission (SEC).
Meanwhile, brokers need to register with the U.S. Securities and Exchange Commission and a self-regulatory organization. As the Financial Industry Regulatory Authority (FINRA) is the most popular and well known such organization, most brokers register under it.
Key Differences in Testing and Licensing
As far as training and licensing goes, brokers and investment advisers also have to pass different exams. Brokers need to pass the General Securities Representative Exam, also known as Series 7, which also acts as a precursor to other exams in the securities industry. Meanwhile, investment advisers must pass the Series 65 exam.
In order to enroll in the Series 7 exam, a broker must be sponsored by a firm, a key difference between the two exams. Certified public accountants (CPAs) may take it also if they wish to enter the investment advisory business.
While brokers will be paid a commission in order to execute trades, buy or sell assets for clients, investment advisers are either paid a flat fee or a percentage of AUM. They are regulated by different bodies and thus require different qualifications, more often than not FINRA for brokers and the SEC for investment advisors.
Ultimately, neither are allowed to give advice that conflicts with a client’s needs.
Now that you know more about brokers and investment advisors you can make a better decision about which person to contact in regards to your specific needs!