Investment broker vs. investment advisor: who should you choose?
What’s the difference? Which is better?
Let me try to clear up some of the confusion. In the investing world, there are two standards of care that can be given by financial service providers: the fiduciary standard and the suitability standard. Before we look at the differences between brokers and advisors, let’s first define the two standards.
The fiduciary standard – Your financial service provider must advise you without conflicts of interest and for your sole benefit as the client they serve, always putting your interests above their own. The fiduciary standard of care was established by the Investment Advisors Act of 1940‡.
The suitability standard – Your financial service provider must make recommendations consistent with your best interests and in line with your investment objectives and tolerance for risk. Suitability rules are established by the Financial Industry Regulatory Authority (FINRA)‡.
Some believe that there should be a uniform standard of care. In the wake of the 2008 financial crisis, legislators in Washington D.C signed the Dodd-Frank Act‡ into law in July 2010. Part of the act directs the Securities Exchange Commission (SEC) to study the need for establishing a new, uniform standard of care for the investment industry. To this day, multiple agencies, industry groups and regulators continue to debate what that standard should be, and there are plenty of arguments for and against a uniform standard. The debate has been going on for years with no resolution. Here’s why: there is not just one right answer.
On its surface, a uniform standard makes perfect sense. In reality, consumers of financial services may need a provider operating under either or both standards and many providers are able to act as both, depending on the needs of the client.
Now, let’s take a look at the difference between advisors and brokers.
Investment advisors provide a fiduciary standard of care. They give advice on what to invest in and will typically charge a fee for their advice on an ongoing and fully-disclosed basis. It could be either a flat fee or a percentage of your investment assets. Investment advisors are regulated by the SEC and the states in which they do business.
Investment brokers and agents
Investment brokers and insurance agents provide a suitability standard of care. They sell financial products like stocks, bonds, mutual funds, life insurance and annuities. Brokers and agents typically charge a commission on the product they sell or are paid a commission by the product manufacturer. Investment brokers are regulated by FINRA and the states in which they do business. The states also regulate the insurance industry.
So which is better, broker or advisor?
Again, there is no right answer. For example, perhaps you need help with planning for retirement and have a nest egg to invest, but don’t have the time or inclination to invest the money. An investment advisor that can do the planning, choose investments, monitor your portfolio and make changes along the way may be a good choice for you.
Or, maybe you know that you want to buy or sell a stock, bond, mutual fund, buy life insurance, an annuity or even add gold or silver to your portfolio. A broker or agent can help you make the transaction.
Who should you choose?
Depending on your situation and needs, it could be one or the other or both. When searching for a provider, look for a person or firm by clearly communicating your needs:
- your expectations for service,
- asking what you will receive,
- when you’ll receive it and
- how much it costs.
Many financial firms can provide both brokerage and advisory services, so there are many providers to choose from with varying products, services and service levels. Like anything else you buy, shop around, ask questions and take your time to find the right fit.
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DISCLOSURE AND IMPORTANT CONSIDERATIONS:
UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.
UMB Financial Services Inc * is a wholly owned subsidiary of UMB Financial Corp and an affiliate of UMB Bank, n.a.
This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.
All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.
All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.
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Mr. Ellis is the president of UMB Financial Services, Inc., UMB’s securities broker/dealer subsidiary, and UMB Insurance, Inc. He is responsible for strategic planning, products and services, personnel and financial management. He joined UMB in 1996 and has more than 25 years of experience in the financial services industry. Mr. Ellis volunteers his time to not-for-profit organizations needing advice on investment policy and governance issues.