How Do Registered Investment Advisors and Brokers Differ?


The differences between brokers and registered investment advisors can be quite confusing. Brokers will often call themselves financial advisors even though they are registered brokers.

The responsibility of a broker is to recommend only suitable investments for a client, but those recommendations do not necessarily need to be the best investments. Brokers generally earn a living through commissions on financial products they sell.

For example, if a broker can earn a greater commission on an investment or receive an incentive to sell one investment instead of another, the broker may recommend doing so even though he or she could suggest a better choice with a lower commission and better record of performance. These actions may be in conflict with what may be best for a client.

On the other hand, the SEC requires a registered investment advisor to act as a fiduciary, which means he or she needs to recommend investments in the best interests of each client, meaning investments which help a client to reach his or her financial goals. Registered investment advisors are fee-based and often charge clients an amount based on a percentage of the assets under management. This fee-based arrangement helps to align an advisor’s incentives with those of the client as the financial advisor can only grow his or her income if the client’s portfolio increases in value.

Most of the big Wall Street firms act as brokers. A few that you might be familiar with are Goldman Sachs, Morgan Stanley-Smith Barney, Bank of America-Merrill Lynch, Credit Suisse and William Blair.

Again, that is not to say that there are not many good brokers. It is, however, important to understand the responsibility of your financial advisor and be sure that his or her incentives are correctly aligned with yours.

Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.

Susan Carr-Templeton

About Susan Carr-Templeton

Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 20 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.