People often use the two terms – investment advisor and broker interchangeably in the financial services industry. Yet, they have different job descriptions. And if you are planning to put your liquidity to use to make a profit, it’s essential you know the difference between an investment advisor and a broker.
However, clients in the financial services industry use the two terms interchangeably because experts sometimes register as brokers and investment advisors. Trust me, it’s not easy for non-financial experts to differentiate between an investment advisor and a broker.
The investment advisor has his separate job function, operation method, means of making money, and the requisite training and certifications that he needs to work. In like manner, the investment broker — though not an exact opposite to the investment advisor — has a different set of functions, methods of operations, and regulatory instructions that guide his practice.
Therefore, hiring the services of a professional money manager depends on your exact financial needs. What you want to achieve, will determine which among the two professionals you will work with.
Making the wrong choice can have a significant impact on your investment portfolios. Hence, if you need to hire the services of a professional money manager to manage your investments, this article is for you.
Here are some fundamental differences between an investment advisor and a broker.
The Main Differences
A Broker
A broker or stockbroker is responsible for researching, buying, and selling stocks, bonds, funds, and other related investments, on behalf of his clients (the investors).
Once the broker understands your investment needs and goals, he goes ahead to search for genuine opportunities. It could be stocks, bonds, or any other investment portfolio that meets your needs.
A broker always gets a commission to compensate for his troubles. But he may decide to receive payment per task or on a fee-based model. It depends on the type of services he provides.
Most brokers act as independent agents, and others work for stock brokerage firms. And in most cases, they prioritize loyalty to their company’s products and services. It doesn’t matter whether you are paying them a commission or not.
So, brokers may only provide suggestions to you based on their companies’ services and investment products. The reason for this is because every sale comes with a commission for the stockbroker. And some brokers may sound persuasive just to close an investment deal. So, be careful that they take care of you, and not just their commission.
Additionally, brokers need to obtain licenses and certifications before they can practice. And the Securities and Exchange Commission regulates their activities.
An Investment Advisor
An investment advisor or financial advisor provides comprehensive financial advisory services and guidance to individuals and businesses. Unlike the stockbroker, an investment advisor’s services go well beyond researching, buying, or selling financial assets. His main job is to advise his clients on which investment is perfect for them.
An investment advisor sits down with an investor and plans out their financial goals and needs. They also research available investment opportunities that match the investor’s goals. If you hire an investment advisor, they will provide you with a comprehensive plan that focuses on a strategy that drives your goals.
Unlike brokers, financial advisors are smaller enterprises or independent individuals who focus on providing financial advisory services. They don’t buy and sell financial assets.
Although they’re regulated just like the stockbroker, they are under different stiffer guidelines and business practices. Their certification and credentials set them apart from stockbrokers.
Remuneration And Scope of Work
Ordinarily, Investment advisors charge their clients on a commission-only basis and take an upfront fee for their advisory services.
However, this is becoming less common nowadays, as most advisors prefer to receive a fixed fee payment. This is similar to the subscription model; you pay for some time and enjoy quality financial advisory services until the next payment is due.
Advisors may also charge on a per-hour basis.
A typical advisor offers the following services:
- Estate planning
- Risk cover and investment management
- Foreign exchange transactions
- Tax management
- Local and offshore investing and
- Pre and post-retirement planning
Differences In How The Broker And Investment Advisor Work
If you’re seeking a suitable financial service expert to manage your investment needs, it’s also important to note the following:
- A broker will most likely recommend the company’s services or products he’s associated with or affiliated with. Even though there are other investment options, brokers will always recommend their services. On the other hand, an advisor is not particularly loyal to any product or company; hence, you can expect to get unbiased, holistic investment advice.
- While a broker may focus on researching, investing, and managing your financial assets, An advisor provides you with investment insights across multiple ranges of products and services.
- The licensing, registration, and training requirements for an investment advisor differ very much from that of brokers. Brokers will have to pass the General Securities Representative Exam (Series 7) before earning a license to operate professionally. This exam is the most basic of certification exams in the securities industry. An investment advisor must pass the Series 65 Exam (Uniform Investment Advisor Law Examination) before he can dispense financial advice to clients.
- The investment advisor is under more legal scrutiny than the broker. In other words, more regulatory requirements guide the activities of investment advisors, unlike brokers.
Wrapping Up
Although some people use the terms ’investment advisor’ and ‘broker’ interchangeably, they have different job descriptions. As an investor seeking excellent investment opportunities, it is best to understand the differences between an investment advisor and a broker before making a hiring decision.
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Tycoono Media Inc. and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. Please refer to our disclaimer for more information.
