Adviser or broker: key differences every investor must know

Volatile market swings create emotional minefields for many. Investors aren’t sure what to do to safeguard their money and often the people they assume can be trusted don’t have the customer’s best interest in mind.

In the financial arena, most professionals carry one of two designations: broker or registered investment adviser. Both deal with financial and investment products and it’s a safe bet that most people assume they do essentially the same job.

There is, however, a significant difference. Registered investment advisers are held to a fiduciary standard while brokers must comply with a suitability standard. 

The suitability standard gives advisers the most wiggle room: It simply requires that investments must fit clients’ investing objectives, time horizon and experience.

In contrast, the fiduciary standard requires advisors to put client interests ahead of their own.

For instance, faced with two identical products but with different fees, an adviser under the fiduciary standard would be compelled to recommend the one with the least cost to the client, even if it meant fewer dollars in the company’s coffers — and his or her own pocket.

According to investopedia.com, an investment fiduciary maintains a position of trust. There are consequences for betraying that trust. Fiduciaries who violate regulations are subject to disciplinary action that can include loss of licenses, fines and even imprisonment. As a result, most make a sincere effort to protect the financial interests of clients.

Broker versus Registered Investment Adviser

In actual practice, here are some of the major differences between a broker and a registered investment adviser:

• The adviser must disclose conflicts of interest and operate with full transparency. That means he is required to tell you if he is being paid a commission or an ongoing fee from a recommended investment product.
• Once a broker sells you a product, he bears no responsibility for monitoring or advising you on that investment. A registered investment adviser must review and analyze your investments, explains analyst Brett Carson in an article for U.S. News and World Report.
• Registered investment advisers are regulated by the Securities Exchange Commission or by state securities regulators. Brokers are regulated by the Financial Industry Regulatory Authority.
• Some financial professionals actually carry both designations. They have a broker/dealer license and a registered investment license. In those cases, it is perfectly acceptable for a client to ask which capacity he is fulfilling in any given situation.

The fiduciary standard appears to have the upper hand in terms of providing a benefit for underlying clients. Given the strict rules for investment fiduciaries, there is little question that the fiduciary standard protects individual and institutional investors more than the suitability standard. However, even fiduciaries  cannot guarantee market performance or prevent loss.

During times of market turmoil, it can be hard for investors to know what to do and whom to trust. Understanding that a financial fiduciary is required to act in the best interest of his clients should help alleviate some of those concerns and help you feel good again about investing your money.

Jeff Junior – President, Trajan Wealth
Jeff Junior has spent nearly two decades in the financial services profession helping individuals and couples in or nearing retirement better understand and prepare for the challenges associated with the ever-changing financial landscape. He holds his Series 65 and Life & Health licenses, and has a proven track record of helping clients successfully align assets with objectives to leverage and manage investment portfolios that will weather market fluctuations. A well-known speaker in the greater Phoenix area and an active member of the National Association of Insurance and Financial Advisors (NAIFA), Jeff frequently hosts public educational workshops in the community on a variety of financial and retirement topics