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Broker-Dealer vs. Investment Advisor:  What’s the Difference?

Deciding what to do with your money can be an overwhelming prospect.  What should you invest in?  What’s the current financial climate?  How much is it going to cost?  Is it worth the risk?  Should you buy, sell, or hold?

These are all important questions to consider especially when there are large sums of money involved.  Luckily, there are financial professionals ready and waiting to help guide investors through the process of how best to allocate their funds, and field questions or concerns that their clients might have.

When choosing between a broker-dealer and an investment advisor, it is important to understand the differences between the two.  Investors should select a firm or investment professional who is going to provide them with the kinds of services and knowledge they need to make the best decision for themselves and their money.

Broker-Dealer

A broker-dealer (B/D) is a firm or individual who buys and sells securities.  They can sell or buy securities for a client (broker) or for their own organization or through the firm accounts in which they are acting as principal (dealer).  Hence the term broker-dealer.

However, this is not the full extent of their job.  They also collect data for their client’s investment profile to, among many other things, determine the client’s risk tolerance, buy and sell investment inventory to offer to clients, and provide investors with useful advice and recommendations on what to do with their funds.

Broker-dealers are investment professionals who are registered with the Securities and Exchange Commission (SEC) and members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).  Financial representatives are required to pass a qualifying exam and must be licensed by the state in which they are doing business.

What Services Does a Broker-Dealer Offer?

When making the decision to work with a broker-dealer, it’s important to understand what kinds of services they can offer you, and just as importantly, what they cannot.  The key function of a broker-dealer is to make recommendations to a client based on their knowledge of current market trends and the client’s financial objectives and risk tolerance.  A broker-dealer cannot trade in an account without explicit consent from the investor themselves.  These financial professionals are here to help guide the conversation, but ultimately a client must give explicit instruction as to whether or not they want to buy, sell, or trade any of their investments.  At that time, a B/D will make the requested changes only to the accounts in question.

Broker-dealers can buy and sell a variety of products such as securities, stocks, bonds, mutual funds, as well as certain services like limited account monitoring and the aforementioned investment advice.

Additionally, there are two types of broker-dealers.  Clients looking for a more hands-on approach may opt for a full-service brokerage firm that can buy and sell securities.  Other investors may opt for an online discount broker that only executes trade transactions.  Discount brokers put the bulk of the responsibility and burden of knowledge on an investor, rather than offering a financial professional to help steer the process.

How Broker-Dealers Make Money

Broker-dealers can handle millions or even billions of dollars a day between all of their clients.  Broker-dealers make their money by charging a commission or mark-up/mark-down fee for each transaction they complete on a client’s behalf.  Each time an investor decides to buy or sell a security, a B/D will (and must) clearly disclose the all fees associated with the service.  These fees vary by product, service, and even account type. 

When using a broker-dealer to buy, sell, or hold securities, it’s important to remember that they are providing an immediate and time-sensitive service, and will charge accordingly.  By law, all investment professionals, especially broker-dealers, must act in the best interest of their clients and are required to disclose all of their fees, and explicitly outline the services that they are providing so that an investor can trade confidently, and with explicit consent.

Learn More About Financial Disclosures

Broker-Dealer Conflicts of Interest

Being any sort of financial professional comes with a strict code of ethics that must be adhered to by law.  As previously mentioned, broker-dealers are there to make recommendations to investors and to address concerns and answer questions with full transparency.

In the past, financial professionals may have been given incentives to sell products, or meet quotas.  Ultimately, even though broker-dealers are there to make recommendations to investors, they make money from transactions.  That means that selling you a product, just like any other merchant, is in their best interest.  Recent legislation demands that broker-dealers, even faced with this dilemma, ensure that they are doing what’s best for their client first, and their bottom lines second.

Investment Advisor

An investment advisor is a financial professional who manages a client’s portfolio for a percentage of the client’s total assets.  They differ from a broker-dealer in that they owe a fiduciary duty to their clients.  Similarly to broker-dealers, they are responsible for putting their clients’ interests ahead of their own.

Having a fiduciary duty means that financial advisors are obligated to act in the best financial interest of their investors, and are legally answerable to his or her clients.

 Advisors must be licensed to sell investment products and have a registered investment advisor license.

What Services Does an Investment Advisor Provide?

Investment advisors can offer a wide range of services, including items like debt management, budgeting, retirement and healthcare planning, and investing.   Typically, the investment advisor practices discretion in client’s accounts, making investment decisions to buy, sell, or hold for the client.

Investment advisors also practice account monitoring.  Account monitoring typically happens at set intervals decided by both the agent and the client.  Account monitoring allows an IA to watch your portfolio and make changes based on highlighted strengths and weaknesses.

How Investment Advisors Make Money

Investment advisors may take a couple of different approaches when collecting payment for their services.  Some may collect fees based on different products.  Others may offer a flat rate.  Most commonly, though, an IA will take a cut based on a  percentage of your assets.

As a client’s assets grow, so does that of the firm or the agent, which could result in a conflict of interest.  The more money or assets deposited in an IA account, the more fees charged.  An advisor will make their percentage of assets whether the client makes or loses money.  The advisor will make their percentage even if no transactions are completed within the account.

Questions to Consider When Making Your Choice

Ultimately, the choice is up to the investor as to what sort of agent they want to use when it comes to their finances.  Here are a couple of questions that potential investors might find useful when making their decision.

  • What kind of services do I need?
  • How do I want to pay for these services?
  • What level of advice am I interested in receiving?
  • Do I want account monitoring?
  • Is the agent/firm I’m working with able to provide me with the kinds of products and services that I need?
  • How many clients do they serve?

An experienced financial professional will be ready to field any question you may have for them.  Be prepared to have a candid conversation about what you’re comfortable with, and what your expectations are for the relationship.  The more they can learn about you, the more able they will be to help you grow and maintain your wealth.

The commentary is limited to the dissemination of general information pertaining to Carty & Company, Inc. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Carty is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation. Carty & Company is a registered broker-dealer, member FINRA and SIPC.