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What’s the Difference Between a Financial Advisor and a Broker? Thumbnail

What’s the Difference Between a Financial Advisor and a Broker?

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.

Got More Questions?

Please contact us if you have more questions about the differences between a financial advisor and a broker. You can call us at (973) 525-1000 or send an email to info@simonquickadvisors.com.

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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.

DISCLAIMER

Simon Quick is an SEC registered investment advisor with offices in Morristown, New Jersey; Chattanooga, Tennessee; and Denver, Colorado. A copy of our written disclosure brochure discussing our advisory services and fees is available upon request. References to Simon Quick as being "registered" does not imply a certain level of education or expertise. No information provided shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such an offer or solicitation is prohibited by law or registration. Additionally, no information provided in this report is intended to constitute legal, tax, accounting, securities, or investment advice nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. It should not be assumed that future performance of any specific investment or investment strategy will be profitable, equal any corresponding indicated performance level(s), be suitable for your portfolio or individual situation, or prove successful.

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