SEC Explains Differences Between Brokers and Investment Advisors

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

SEC arbitration

SEC Explains Differences Between Brokers and Investment Advisors

October 7, 2019

The Securities and Exchange Commission (SEC) put together a video series to help investors understand the differences between investment advisors and brokers.

The series was hosted by SEC Chair Jay Clayton and it can be found here.

Clayton said the differences are found in two main areas: the types of services each provides and how each gets paid.

“A broker makes recommendations,” Clayton said, “that is they will recommend that you buy, sell, or hold a specific investment and the broker can then complete the transaction.”

With a broker, the client has to make the decision.

Jay Clayton, SEC Chairman
Jay Clayton, SEC Chairman

An investment advisor, Clayton noted, “generally manages your account. The advisor can advise you to buy, sell, or hold the securities and the advisor can make some of or all of those decisions for you.”

As such, an investment advisor has more decision-making power than does the broker.

Brokers and investment advisors also get paid in different ways, Clayton noted.

“Let’s say a broker recommends that you buy or sell some stock and you agree,” Clayton said, “when the broker completes the transaction, she will usually receive a fee, called a commission.”

Discount brokers, like E-Trade, charge far less fees, “but in that case, you wouldn’t typically receive a personalized recommendation.”

Broker receive a commission for each transaction, whether a buy or sell order.

Meanwhile, investment advisors get fees which are based on the total value of an account, Clayton said.

“You will hear that called an asset based fee,” Clayton said. “The advisor’s fee is usually paid at pre-set times, like once every quarter.”

Clayton said fees are structured differently because of the differences in services each provides.

“Brokerage services are generally more transactional and time specific; advisor services are generally more focused on your portfolio and your account over time,” Clayton said.

Clayton noted that neither he nor the SEC was recommending one- an advisor or a broker- over the other.

“How do I know whether a broker or investment advisor is right for me? That is the most common and hardest question I hear, particularly without knowing more about your specific situation,” he said.

The decision comes down to a set of factors:

  • How often the investor wants to buy and sell securities
  • How involved the investor wants to be in the decision making process
  • Whether the investor wants someone to manage and monitors the portfolio
  • Whether the costs line up with the services provided

“Do you want someone managing your account on an ongoing  basis based on your broad financial goals and needs and movements in the markets. If so, an investment advisor may be best for you, or do you plan to buy a few stocks, bonds, mutual funds, or ETFs and hold them for the long-term, with a few adjustments over the years. In that case, a broker may be best for you,” he noted.

Clayton also concluded, “before trusting your money with a broker or investment advisor, it is important that you know whether the person is registered with the SEC or a state securities regulator.”

The reason for this, Clayton said, “because if they are, that means they have to follow certain important rules that are designed to protect you and your money. If your financial advisor is not registered with the SEC or a state regulator, you don’t receive those important protections.

Investor.gov provides a list of registered brokers and investment advisors.

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