Money Mondays: Investment Brokers vs. Advisors

Written by admin   // July 19, 2010   // 0 Comments

by Mellody Hobson, Special to

Question: My wife and I are trying to find a financial professional to help us with our investments. I noticed that some are referred to as brokers and others as financial advisers. Is there a difference? Paul, Atlanta, GA

Answer: I’m glad Paul has asked this question because many investors – including those who claim to be very savvy – are unaware that there actually ARE differences between brokers and financial advisers.

The easiest way to think of it is that a financial adviser, as you would expect, offers advice and guidance related to your personal financial situation and then helps you to manage your investments.

A broker, on the other hand, mainly just affects transactions in various different investments based on a general understanding of your background.

More specifically:

– Financial Adviser: A financial adviser assesses each individual client’s financial goals and risk tolerance and uses this information to develop a portfolio of investments based on those objectives.

As life changes occur, such as age, children, job or salary, the adviser will work with the client to adjust their investments.

In addition to the investment component, a financial adviser may also help with budgeting, insurance planning, tax planning and estate planning or refer you to another professional with specific expertise in a given area.

– Broker: A broker provides more limited investment advice on stocks, bonds and mutual funds and effect transactions in their clients’ brokerage accounts based on direction from the client.

Brokers generally do not offer financial planning services, such as tax and insurance planning, nor do they construct comprehensive portfolios based on their clients’ individual situations.

The differences seem fairly clear, so why is it so confusing for people?

Over the last few years, the delineation between the two professions has become blurred as traditional brokerage firms have expanded their core business to include financial advisory arms.

Moreover, many traditional brokers have morphed into quasi-financial advisers because their clients are looking for more in terms of service and advice.

In this scenario, financial advisers are affiliated with a particular brokerage firm, and often times they may be compensated for what they sell and are limited to offering only those investments offered by their employer.

In contrast, independent financial advisers bring a different perspective to the investment decision-making process in that they are compensated differently and not necessarily constrained by certain products.

That is, these financial advisers are only beholden to their clients and have the ability to recommend a broad array of investments.

You mentioned compensation. So, how are brokers and financial advisers usually paid?

Similar to a salesperson, brokers earn a commission on the purchase or sale of securities in their client’s accounts. For example, if your broker recommends you purchase IBM stock, you will pay your broker a commission on that purchase.

Financial advisers tend to charge their clients a fee based on the percentage of assets under management, including any financial planning advice they provide.

And while there are situations where financial advisers may charge commissions (either to you) or receives commissions (from a third party for recommending that investment to you), I tend to prefer the fee-based approach. That way, you know the financial adviser is paid based on the growth of your money, not on the products they sell to you.

That said, before working with any financial professional, be sure that all pricing arrangements are clearly spelled out within your account agreement.

So, which one is better – a broker or financial adviser?

One is not necessarily better than the other. The type of financial professional you choose ultimately depends upon the level of financial help you need.

If you are looking simply for a financial professional to buy or sell stocks on your behalf or recommend specific stocks, then a broker may be appropriate for you.  However, if you are in need of continued financial advice, a financial adviser may the right choice.

Either way, it is important that you choose someone you trust and are comfortable with. You also should look into their reputation and track record.

Are there certain certifications that you need to look for?

Any individual who is professionally purchasing or selling securities on behalf of clients (which would include brokers and financial advisers) needs to be licensed, generally holding what is called a Series 7 (general securities license) AND a state license (Series 63, 65 or 66). Beyond those licenses, there are no certifications required to take on the title of “financial adviser.”

However, there are certain certifications and designations which some financial advisers hold, including  Certified Financial Planner (CFP), Certified Public Accountant-Personal Financial Specialist (CPA-PFS), Charter Financial Consultant (ChFC) and Master of Sciences in Financial Services (MSFS).

All of these certifications require additional education and ongoing training. Depending on your goals, you may want to look for an adviser with one of these designations, particularly if you are looking for a wide array of services such as tax planning, estate planning and insurance.

Are there resources that can help you find financial advisers?

In addition to asking your friends and family, you can go to the National Association of Personal Financial Advisors’ (NAPFA) Web site at for a directory of fee-based advisers. Also, the Financial Planning Association at maintains a registry service you can use to find the names of members in your area.

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