Let’s take a closer look at brokers and Registered Investment Advisers.
Brokers—registered representatives of a brokerage firm—are sales-oriented agents whose job is helping customers trade stocks and other securities. They are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. FINRA protects investors by maintaining the fairness of the U.S. capital markets.
Registered Investment Advisers are regulated by the Securities and Exchange Commission (SEC) whose mission is to protect investors by enforcing federal securities laws, and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. Under SEC rules, Registered Investment Advisers have a fiduciary duty to their clients. They must put the investors’ interests above their own.
And therein lies the difference: An adviser has a regulatory fiduciary responsibility to you, while a broker’s loyalty may be with his firm.
A broker is not held to the same fiduciary standard as an investment adviser; therefore, they are only required to recommend “suitable” investments based on your investing objectives, risk tolerance, tax status and financial position. Costs and conflicts of interest are not disclosed because the broker is not acting as a fiduciary. Brokers often receive commissions on your transactions; therefore, this is where the interests of a broker could supersede those of the client.
On the other hand, a Registered Investment Adviser does not sell a product; they sell a service—financial advice coupled with the fiduciary responsibility to put your interests first. Advisory firms must recommend the best investment for the client. They are not obligated by a particular bank, brokerage firm or insurance company. Advisory firms can provide straightforward portfolio direction that is designed to be in the client’s best interest. Advisers can only charge fees in three ways: a percentage of assets under management, on an annual basis, or on an hourly or "flat fee" basis.
While there is a difference between brokers and advisers, one is not better than the other. Many registered representatives are now also Registered Investment Advisers and have moved toward fee-based billing. You may also find you need both—an adviser to help you develop a portfolio that will grow to meet your financial goals and a broker or custodian to place the stock trades for you.
Next week, I’ll take a closer look at the alphabet soup of designations in finance.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.