Personal finance

What Is the Difference Between an Investment Adviser and a Broker?

A comparison between investment advisers and brokers
Investment advisers and brokers play extremely diverse functions in the financial services industry, despite the fact that their occupations may appear to be comparable to an outsider. The investment adviser, often known as the financial adviser, and the broker are contrasted and compared below.

  • For advising customers on securities and/or managing client portfolios, investment advisors are either with a fixed fee or a percentage of AUM.
  • Brokers receive commissions for carrying out deals and purchasing and selling assets on behalf of clients.
  • Separate organizations govern brokers and financial advisers, and different credentials are needed to practice each (e.g., FINRA regulates brokers and the SEC regulates investment advisers).
  • Legally, neither professional is allowed to offer guidance that is incompatible with the requirements of their clients.


Prior to online trading, using a broker was a privilege only available to the wealthy. Individual investors were required to make their orders through a registered broker because they had little to no direct access to the market (usually by phone). Brokers demanded large commissions in return. However, the role of the broker has changed as a result of the development of online discount brokerages.

Now, anyone who wants to trade stocks can do so directly online for no commissions and without the need for a broker to be available to execute their buy and sell orders. Brokers continue to fulfill orders, but many have diversified their offerings to include individualized investment management in order to charge greater commissions.

Brokers who are also registered as investment advisers are rather frequent these days. In secondary issuances, IPOs, or private placements, brokers may play a significant role as a member of the sales team. Brokers may strive to sell their clients on a hot new issuance or private deal to help a company obtain funds by collaborating with their firm’s corporate finance departments. A commission, shares, or warrants in the issuing company may be given to the broker in exchange.

Investment consultants

On the other hand, investment advisers follow a fee-based structure to provide advice tailored to the needs of each customer and frequently oversee client accounts. For instance, an investment advisor might collaborate with a client to develop a whole framework for wealth management, including aiding them with tax, estate, and mortgage preparation. Investment advisers are registered with and subject to regulation by the Securities and Exchange Commission (SEC) and/or a state regulatory agency, not to be mistaken with a financial adviser. Asset managers, investment managers, and wealth managers are other names for investment counselors.

Important variations in regulations

Additionally, investment counselors are subject to stricter legal requirements than brokers. Investment advisers in the US are bound by the Investment Advisers Act of 1940, which requires them to act in their clients’ best interests when it comes to their accounts. The Advisers Act Sections 206(1) and (2), which are legally enforceable, forbid advisers from “employ[ing] any device, scheme, or artifice to defraud any client or potential client.”

As part of the adviser’s obligation to exhibit loyalty and care, the standard also imposes on the adviser a “affirmative responsibility of ‘utmost good faith’ and complete and fair disclosure of material facts.” This includes the “duty not to put the interests of the clients ahead of its own.” The majority of investment advisers can make investment decisions for their customers without first gaining the client’s consent due to the significance of this fiduciary behaviour.

Before 2011, all investment advisers managing $30 million or more in assets (AUM) were required to register with the U.S. Securities and Exchange Commission (SEC), whereas advisers managing less than $25 million merely needed to register with their state regulatory authority. The minimum assets under management requirement for SEC registration was raised to $110 million in 2011 by the Dodd-Frank Act.

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

The main variations between testing and licensing

Additionally, the training and licensing requirements for brokers and investment advisers differ. The General Securities Representative Exam, often known as the Series 7, is required of brokers and serves as a prerequisite for additional exams in the securities sector. On the other hand, in order to provide financial advice for a charge, future investment advisers must pass the Series 65 exam.

The fact that only the Series 7 needs someone to be sponsored by a company before registering in the test is another difference between the Series 7 and the Series 65. Certified public accountants (CPAs) frequently use the Series 65 to start their careers as financial advisors. The CPA credential does not satisfy the requirements to have the Series 65 test waived, in contrast to chartered financial analysts (CFAs) and certified financial planners (CFPs).

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *