By: Garrett Wells, CFP®
The terms “financial advisor” and “broker” are both commonly used in the financial services industry. While some people use the terms interchangeably, they actually describe two very different kinds of financial professionals.
It’s important to understand these differences so you hire the right kind of professional based on your specific needs.
How They’re Alike … and Different
Let’s start with what financial advisors and brokers have in common. Both are financial professionals who are tasked with being expert stewards of their clients’ financial and investment portfolios. However, they take different approaches to accomplishing this objective.
One of the main differences that distinguishes a financial advisor from a broker is how they’re paid. Financial advisors are compensated mainly by providing financial and investing advice to their clients, usually charging a fixed or hourly fee or a percentage of assets under management. Brokers (also known as registered representatives) are compensated mainly by commissions paid out on financial products they recommend to their clients.
Another big difference is the services provided. Financial advisors offer holistic guidance in every aspect of their clients’ financial lives, including financial planning, investment and tax management, and estate planning. For example, financial advisors will help clients construct an investment portfolio based on the client’s goals, time horizon and risk tolerance. Meanwhile, a broker’s scope of services is generally much narrower and limited to recommending specific investment securities for clients. Like a financial advisor, a broker should make recommendations based on the client’s circumstances.
Regulation and Credentials
Financial advisors and brokers are also regulated differently. Advisors are registered with the Securities and Exchange Commission (SEC) while brokers are members of the Financial Industry Regulatory Authority (FINRA), which is regulated by the Securities and Exchange Act of 1934.
Professional credentials and licensing are another thing that may distinguish financial advisors from brokers. Financial advisors usually earn designations like CERTIFIED FINANCIAL PLANNER® professional (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC) and Chartered Life Underwriter (CLU) while brokers must pass the Series 7 and/or Series 63 exam.
Suitability vs. Fiduciary Standard
Perhaps the biggest difference between a financial advisor and a broker is the standard to which each is held when offering advice. A broker’s advice falls under what is referred to as the “suitability” standard. This means the investment or financial product recommended must be suitable for the client’s situation.
A financial advisor is held to a higher standard when offering advice. Referred to as the “fiduciary” standard, this requires advisors to act in their clients’ best interests at all times. So if one financial product is suitable for a client but another product would be better, the advisor must recommend the product that’s better — even if it results in lower compensation for the advisor.
Note that not all financial advisors are fiduciaries. Only Registered Investment Advisors (RIAs) are held to the fiduciary standard. Many clients prefer to work with an RIA to ensure that they are receiving objective financial and investment advice that’s truly in their best interest, and that this advice has not been influenced in any way by how much money the broker or advisor could earn based on the recommendation.
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About Garrett Wells, CFP®
Mr. Wells joined Simon Quick in December of 2017. He is currently an associate on the client advisory team. He is responsible for supporting the Partners and Client Advisors in assisting with financial planning for clients, implementing investment plans, preparing investment performance reports, and coordinating client communications. Garrett completed the Financial Planning Certificate Program at Fairleigh Dickinson University and became a CERTIFIED FINANCIAL PLANNER™ practitioner in October 2020. Learn more about Garrett on LinkedIn.
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