Financial Advisor or Broker? Key Differences You Should Know.

* This original article was published on KTAR.com 

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 advisers 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.

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.

© 2024 Trajan® Wealth LLC. Nothing in this blog is intended as investment advice, nor is it an offer to buy or sell any security. Please consult your financial advisor for questions about your personal financial situation. All investments involve risk, including the potential for loss. Trajan Wealth clients and employees may have a position in any of the securities mentioned. Portfolio holdings and other data are subject to change at any time and without notice. Additionally, the above links provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Trajan Wealth, L.L.C., of any of the products, services or opinions of the corporation or organization or individual. Trajan Wealth, L.L.C., bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. These materials are for informational and educational purposes and are not designed, nor intended, to apply to any person’s individual circumstances. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Please consult with your legal and/or tax advisor before making any tax-related decisions.

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