Investment Adviser vs. Broker: An Overview

Although their jobs might seem similar to an outsider, investment advisers and brokers perform very different roles in financial services. Below, we highlight the similarities and differences between the investment adviser (also called the financial adviser) and the broker.

Brokers

Before online trading, accessing a broker was traditionally a luxury reserved for the rich. Individual investors had very little or no direct access to the market and had to place their orders through a licensed broker (usually by phone). In return, brokers charged very high commissions. However, the advent of web-based discount brokerages has changed the job of the broker.

Now, individuals who wish to trade on the stock market no longer require a broker on standby to execute their buy and sell orders and can have direct access for as little as pennies in commissions. Although brokers still execute orders, many have expanded their services to personalized investment management to justify charging higher commissions.

These days, it’s not uncommon to see brokers dual-registered as investment advisers. Brokers may also be involved heavily as part of a sales team in private placements, initial public offerings (IPOs), or secondary issuances. Working alongside their firm’s corporate finance departments, brokers may work to sell their clients on a hot new issuance or private deal to help a company raise capital. In return, the broker may receive a commission, shares, or warrants in the issuing company.

Investment Advisers

Investment advisers, on the other hand, work on a fee-based system of dispensing investment advice catered towards individual client needs and oftentimes, manage investment accounts. For example, an investment adviser may work with a client to create an entire wealth management framework, including assisting the clients through tax, estate, and mortgage planning. Not to be confused with a financial adviser, investment advisers are registered with and regulated by the Securities and Exchange Commission (SEC) and or a state regulatory body. Investment advisers are also known as asset managers, investment managers, and wealth managers.

Key Differences in Regulations

Investment advisers are also held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the Investment Advisers Act of 1940, which calls on advisers to perform fiduciary duties in regards to their clients’ accounts. Fiduciary duty, which is legally enforceable under the Advisers Act Sections 206 (1)/(2), prohibits advisers from “employ[ing] any device, scheme or artifice to defraud any client or prospective client.”

The standard also imposes upon the adviser the “affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts” as part of the adviser’s duty to exercise loyalty and care. This includes “an obligation not to subordinate the clients’ interests to its own.” Due to the importance of this fiduciary conduct, most investment advisers can make investment decisions for their clients without first getting the client’s permission. 

Prior to 2011, all investment advisers with $30 million or more assets under management (AUM) had to register with the U.S. Securities and Exchange Commission (SEC), while advisers with less than $25 million needed only to register with their state regulatory body. In 2011, the Dodd-Frank Act increased the minimum assets under management for SEC registration to $110 million.

Brokers, as defined broadly by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others” (which may also include investment advisers), must register with the SEC and a self-regulatory organization. The most well-known broker self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).

Key Differences in Testing and Licensing

Investment advisers and brokers also have different training and licensing requirements. Brokers have to pass the Series 7, otherwise known as the General Securities Representative Exam; the Series 7 also acts as a precursor to further exams in the securities industry. On the other hand, future investment advisers must pass the Series 65 exam, which is a requirement before they can dispense financial advice for a fee. 

An additional distinction between the Series 7 and the Series 65 is that only the Series 7 requires an individual to be sponsored by a firm prior to enrolling for the test. The Series 65 is also often used by certified public accountants (CPAs) to enter the investment advisory business. Unlike chartered financial analysts (CFAs) and certified financial planners (CFPs), the CPA designation does not meet the prerequisites to have the Series 65 exam waived.