The terms financial advisor and broker may seem interchangeable to some investors. Both financial advisors and brokers are financial professionals. The main differences lie in the types of services offered and in the way they are compensated by their clients.
A broker is an individual or firm that acts as an intermediary between their clients and one or more security exchanges. The broker buys and sells stocks and other securities on behalf of their clients on these exchanges.
Brokers and brokerage firms are typically affiliated with a broker-dealer. Brokers are typically compensated through transaction fees such as commissions earned for facilitating trades for clients.
While the term broker typically conjures an image of a person, brokers can also take the form of online brokers. Investors can submit their trades and the online broker will execute them within their account. Some of these online brokers may be discount brokers who offer low or in some cases no transaction fees.
The more traditional full-service broker often works at a full-service brokerage firm. These brokers were often referred to as stockbrokers in the past.
If you have a 401(k) or employer retirement plan, it's highly likely that you are using a broker to facilitate your investments.
A financial advisor provides their clients with financial advice in a variety of financial areas including investments, retirement, estate planning, and other aspects of the financial planning process. Financial advisors or advisory firms will generally be registered Federally with the SEC (Securities and Exchange Commission) or at the State level. Registered advisors are required to pass the Series 65 exam administered by the NASAA (North American Security Administrators Association) or one or more of several other exams.
Many financial advisors operate on a fee-only basis, meaning that they are compensated for the services and advice they provide and not for selling financial products.
Most Financial Advisors offer a wider offering of services when compared to traditional brokers. Some of these services include:
Many financial advisors have also earned the Certified Financial Planner (CFP) designation. The CFP has a number of requirements, including:
The CFP is considered to be the gold standard of professional designations for financial advisors.
This aspect can be very confusing for investors looking for the right type of financial professional for their needs.
Brokers are generally compensated by sales commissions or sales charges, called loads, from the sale of various financial products. This might include stocks, bonds, mutual funds, ETFs, and other types of securities. Additionally, they will also receive compensation from the sale of annuities and life insurance if applicable.
Many financial advisors adhere to a fee-only model. This means that the client pays the advisor for the advice they provide. There are a number of variations of this model, including:
When discussing compensation with a financial professional you are considering working with, or one with whom you have an existing relationship, ask questions about ALL ways in which they are compensated for working with you. Be sure to fully understand the broker or advisor’s compensation structure and any potential conflicts of interest this can lead to.
Financial advisors who are registered with the Securities and Exchange Commission, in many States, and those who are CFPs are held to a fiduciary standard. This means that they must put the interests of their clients first.
Brokers and others who work through broker-dealers are generally held to lower standards in terms of their duty to their clients. The suitability standard states that advice and product recommendations must be suitable for someone in the client’s approximate situation, but not necessarily for the client’s specific, exact situation.
The regulatory situation is evolving in terms of the duty of care that both financial advisors and brokers must adhere to. Again, be sure to ask any advisor or financial professional that you are considering working with if they are a fiduciary and if they will put this in writing. If they refuse, this again is a red flag.
Canty Financial is a fee-only registered advisor who works with clients as a fiduciary. We are transparent about fees and all aspects of our dealing with clients. We encourage client questions and will always provide full disclosure as to our fees, our compensation, and why we are recommending a particular investment or course of action.
Please feel free to reach out to us if you have any questions about your investment accounts, taxes, or financial planning. We are here to help.
Bill Canty, CFP®, CPA
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor