"Broker" vs. "Advisor"

An investment advisor has a fiduciary obligation to its clients to act in their best interests, and that obligation remains active throughout the advisor-client relationship. A broker simply needs to make suitable recommendations at the time of purchase or sale of investments.


If you know what you want to invest in and just need a professional to facilitate the transactions, a broker is a good choice. If you have time to enter the transactions and conduct your own due diligence, then an online or discount broker is an even better choice.


If you are not sure what to invest in, or how to evaluate the types of investments you want, or if you want personal financial advice to complement or guide your investments, an investment advisor is a good choice.


(UPDATE February 2015, in light of President Obama's push to bring "brokers" up from the "suitability" standard to the "fiduciary" standard)...


As the owner and sole employee of a Registered Investment Advisor-type firm, I am always serving in the advisory capacity with a fiduciary responsibility to my clients.  When I was a "financial advisor" at Morgan Stanley and then A.G. Edwards/Wachovia Securities/Wells Fargo Advisors, I was serving in a broker capacity with merely a suitability requirement, unless I was using the firms' "advisory" products that required me to adhere to the fiduciary standard.  I did the latter most of the time, and some clients understood that while others did not (even when I tried to explain the difference), and that is hopefully the real issue the Administration is now trying to address.  I hope they are not simply going after financial professionals in general.


An example of how the brokerage and advisory roles differ, and how different financial services professionals could/may/do operate, here's a little story from my early years (spoiler alert:  I did the right thing but got paid a lot less)...


A client came looking to invest $600k in an annuity, which is a complicated insurance product with investment features.  Morgan Stanley, my employer at the time and where I was serving in a brokerage capacity, offered variable annuities and fixed annuities, the latter having more guarantees, the former having more upside potential.  Either one was suitable for the client, but the fixed annuity was the better fit.  Morgan Stanley presumably made more money on the variable annuity products, as they paid us 40% of the commission on those, compared to just 10% of the commission on the fixed annuity products.


The client liked both ideas and left it up to me.  With either product, the commission was NOT taken out of the investment directly--the client's $600k would all be in the account on Day Two.  In a way, my choice was $9600 paycheck or $2400 paycheck.  Based on the suitability standard governing brokerage employees like me, I could have sold the variable annuity and made more money.  But I believed the fixed annuity was a better fit for the client.  So that is what I recommended and sold, and I left $7200 on the table despite no requirement to do so...


If the government is trying to make it so more financial professionals have a higher standard to uphold, I can live with that.  If new regulations are going to make it harder for "advisors" already subject to the fiduciary standards to find and keep clients, I will be unhappy--for myself and the mass-affluent and emerging-affluent Americans who really need my kind of help.