What’s the Difference Between a Broker, Investment Adviser, and Financial Planner?

March 20th, 2012 by

Different investment professionals can provide you with different products and services. It’s important to know the differences between a broker, an investment adviser and a financial planner.


In a nut shell:

Registered Reps (your broker) are responsible for making sure that the products they recommend are suitable for you. For example, a broker is not supposed to sell risky investments to someone that is living on a tight fixed income. However, they are not required to give you the best advice. If there are two similar products (like high growth mutual funds), they are under no legal obligation to sell you the best one. In practical terms, they will often promote the product which pays them the highest commission.

Registered Investment Advisers/ RIAs (your financial adviser) are required to provide you their best advice. Because of this difference, many financial advisers will charge you just for their time (like a lawyer). Their fees can range from $100 – $500 per hour. In other words, the word discount and financial adviser don’t belong in the same sentence.

The term “Financial Planner” is a loosely used term with no legal meaning.


Brokers (broker-dealers)

A broker-dealer, to use the full definition, is a person or a company that buys and sells securities (stocks and bonds, for example). As a broker, securities are bought and sold for customer accounts.  As a dealer securities are bought and sold for their own accounts.  As a broker-dealer, it is both. Generally, broker-dealers must be members of FINRA (Financial Industry Regulatory Authority) and register with the SEC (Securities and Exchange Commission). People working for broker-dealers are called registered representatives. They must pass a qualifying examination, as well as registering with FINRA and being licensed by a state securities regulator.

Broker-dealers may be “full-service” charging more per transaction but usually with more service and investor advice, or “discount”, where the price per transaction is cheaper, but investors must investigate possible investments by themselves. Registered representatives must base any recommendation of an investment on suitability concerning your financial situation, your acceptance of risk and your explicit financial objectives. The kinds of investment products they can sell are determined by their level of qualification.


Investment advisers

Investment advisers, whether companies or individuals, earn money by advising customers on securities. To use this title, investment advisers must be registered with either a state securities regulator or, if they manage client assets of $25 million or more, with the SEC. People advising customers on behalf of, and working for, investment advisers are called investment adviser representatives. “FINRA BrokerCheck” allows you to make checks on individual representatives.

Investment advisers may offer specific investment advice and financial planning, and manage investment portfolios. With the additional requisite licensing, they may also act as brokers.


Financial planners

Out of the three categories, the one for financial planners is the one requiring the least credentials and having the least regulation. It is also one with a wide variation in the services offered, from selling a limited range of products to complete financial planning assistance. Because no regulation exists for financial planners as such, individuals are only regulated if they also act as a broker or an investment adviser, for example, or according to the financial products they sell. It is therefore important for you to understand if and how such a person can help you with different financial aspects of your life, and if you should expect to see credentials in connection with any particular products or solutions being proposed.

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