What’s The Difference Between a Broker and an Advisor?
As you are researching your wealth management options, you will see a number of names for those who can help you invest, including brokers and advisors. While on the surface they may seem interchangeable, these two types of investment professionals approach the practice very differently and will provide you with vastly different experiences. Let’s break it down.
What Do They Have In Common?
This is where it can get confusing. Brokers and advisors both offer investment advice, provide investment options, and manage accounts. Because they both represent their clients’ wealth management needs, it can seem as though they are basically the same. However, how they go about this can be vastly different.
What Are Their Legal Responsibilities?
Brokers are bound by suitability. In other words, they are obligated to recommend investment options they consider suitable for clients.
Advisors, on the other hand, are held to a fiduciary responsibility. This means they are legally obligated to recommend investment options that are in their clients’ best interest. They must always put clients’ interests above their own.
How Are They Paid?
Brokers are paid by a commission on the investment products they sell. This can lead to entangling conflicts of interest, with certain biases influencing their decisions.
Fiduciary advisors are generally fee-only. In this structure, they charge a specific fee for the work they provide, untethered to any products or investment options they recommend. This frees them to truly work in the best interest of their clients and provide complete and thorough advice.
How the Decisions Are Made?
This flowchart sheds light on the intrinsic differences between advisors and brokers. With brokers, investment decisions are ultimately driven by the financial services firm, and the products and services they represent. With advisors, those decisions are governed by clients, and their ultimate investment goals.
You can also see that in the broker model, every other factor comes before the client, while in the advisor model, the client comes before everything else. This is where the real difference is found. When you start with the client’s needs being primary, every interaction and decision that trickles down from that is impacted.
Advisors provide investment solutions that are informed by the market and various fund options, but are driven by clients’ ultimate goals, and charge a fee for those services. This model, on the whole, is more comprehensive, more long term, and more flexible to fit the lifetime needs of a client. That’s why we at Tobias Financial Advisors hold unwaveringly to the fiduciary standard model.