Key Differences between Brokers and Independent, Registered Investment Advisors

 While stockbrokers frequently provide financial advice, they generally do not have the fiduciary duty, that is, a legal responsibility, to their clients and may not make decisions that are solely in their customer’s best interests.  Independent advisors are considered fiduciaries and are required to act in the best interest of their clients at all times.

 Independent advisors provide their clients with a Form ADV Part 2 & 2B that fully discloses how the advisor does business and obtains the client’s informed consent to any conflicts of interest that may exist in the advisor’s business.  Brokerage firms, on the other hand, are not required to provide their customers with any comparable type of disclosure.

 Independent advisors charge clients a fee negotiated in advance and can not earn additional profits from their clients without their client’s consent.  In fact, most advisors charge a fee based on assets under management, so their interests are generally aligned with the interest of the client.  Put another way, the better their client’s portfolio performs, the more the advisor is paid because the portfolio is larger.  Brokerage firms may generate increased revenue even if their customer’s assets decrease.  In other words, there is no correlation between the performance of the customer’s portfolio and the fees paid to the brokerage firm.

 Independent advisors, except in extremely limited circumstances which would be fully disclosed, invest their client’s assets in securities from which the advisor will not personally profit.  However, brokerage firms often earn significant profits by selling brokerage owned securities to their customers.  

 An independent advisor’s main responsibility is to the client.  Brokerage firms may engage in other business activities such as investment banking or underwriting, which may focus a firm’s interest and attention away from the customer. 


  Read the Fine Print

The truth is, there is a considerable amount of confusion in the investment community regarding the issue of fiduciary responsibility.  In 2005, the Securities and Exchange Commission (SEC), the agency responsible for administering federal securities laws in the U.S, passed a rule requiring brokerage firms to disclose a statement that begins:

                           “Your account is a brokerage account and not an advisory account.  
                                   Our interests may not always be the same as yours...”

However, finding this disclosure may be a challenge, as it is often printed as a microscopic paragraph or buried in a stack of paperwork.  


  Sign on the Dotted Line

There is a straightforward way to determine whether or not your advisor is a fiduciary and thus required to act in your best interest.  Simply type up a document that states your financial advisor will assume fiduciary responsibility for all of your accounts.  Then, schedule a visit to see your financial advisor.  If both your financial advisor and their compliance department are comfortable signing this statement, it is safe to assume your financial advisor is acting in your best interest.  However, if your advisor is not willing to sign the statement (or their compliance department will not allow them to sign it), you might want to pause and think hard about your decision to work with this particular advisor.  Whether you choose to continue in the advisory relationship or ultimately seek a new advisor, it is important for you to know how your investments are going to be handled.  Make sure the advisor (or firm) you entrust your portfolio with is willing to accept fiduciary responsibility, and put your interest ahead of their own, before you enter the relationship.  This may help save you from any unwelcome surprises down the road.     


  How to Check an Advisor's Background

If an advisor works for a Registered Investment Advisor (RIA), you will need to go to the Securities and Exchange Commission’s (SEC) website to do a search on the firm.  The SEC web address is http://www.sec.gov/investor/brokers.htm.

If an advisor works for a brokerage firm, you will need to go to the Financial Industry Regulator Authority (FINRA) website to do a search.  The FINRA web address is http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm.

              Click HERE for detailed instructions on how to check an advisor’s background.