There’s a ton of cash tied up in the global stock market and knowing where to get help investing their money is a big advantage for Main Street investors.
All told, global stock exchanges hold a capitalization of $85 trillion in U.S. dollars at the beginning of 2020, although that figure is taking a monumental hit amid the coronavirus crisis. In 2009, that figure stood at just $25 trillion.
With all that money on the line, it pays for regular investors to know where to find the right money manager to steer them to portfolio success. Most often, that means choosing between an investment advisor and a stockbroker, who each bring some unique talents to the market investment table.
Which one you choose can have a significant impact on your investment portfolio and your overall financial health going forward.
Here’s a deep dive into the realm of both the registered investment advisor and the stockbroker. Let’s see which one makes sense for your unique investment needs.
Investment Advisor and Broker Defined
Both financial advisors and stockbrokers earn their keep by being expert stewards of their clients’ investment portfolios. They just do so in different approaches and money management philosophies.
What an Advisor Does
An investment advisor provides comprehensive financial guidance to individuals, organizations, and businesses that goes well beyond simply picking stocks, bonds and funds. The advisor typically earns an official professional credential that designates their expertise in financial management and sets them apart from stockbrokers.
For example, an advisor may obtain a Certified Financial Planner designation, meaning that advisor has met the CFP’s Board’s professional expertise criteria in key areas like education, examination, investment management experience, and professional ethics.
Professional designations also exist for accounts, retirement specialists, and fund specialists.
Included under the financial advisory title are these responsibilities:
Investment management. Not only do investment advisors pick stocks, bonds, funds, and other investments, they also build an investment model that steers the client to financial security over the long haul, using tools like asset allocation, investment diversification, and “milestone” investment strategies that optimize a client’s lifecycle realities through his or her 20s, 30s, 40s, 50s, and 60s – right up to and through retirement.
Tax management. Investment advisors also create and implement tax strategies designed to keep more cash in their clients’ pockets and less in Uncle Sam’s pocket. Usually working in tandem with professional accountants, investment managers can implement tax-friendly investment strategies like 401(k)s, IRAs, health savings accounts, tax harvesting, charitable giving, and capital gains tax moves on investments that lighten a client’s tax burden.
Estate planning. Financial advisors also work with estate planning attorneys to design effective estate planning strategies to protect a client’s assets after they’re gone. Using effective estate planning tools like trusts, living wills, durable power of attorney, and life insurance, investment advisors create an environment where a client’s assets are protected after death and can be passed down to families and charities with the minimal financial loss.
How an Investment Advisor Is Paid
Investment advisors are paid in a variety of ways, with client payment options expanding as the advisory industry adapts to changes in technology, service delivery, and consumer demand:
By commission-only. This option is dwindling, but some investment advisors still get paid on a commission-only basis.
A commission-based payment model means a client pays an upfront fee to gain investment and financial advice.
For example, if an investment advisor recommends investing $10,000 in a mutual fund that charges a 3% commission, the client pays a commission fee of $300 and leaves $9,700 to invest in the fund. The investment advisor gets a cut of that percentage for recommending the fund.
By fee-only. Increasingly, fee payment options are growing more prevalent, as investors (especially younger ones) prefer to pay in a fixed “subscription model” for financial advice, much like they do with subscription services like Netflix NFLX or Apple AAPL News+.
Typically, investment advisors who charge on a fee-only basis are self-employed or work for a Registered Investment Advisor firm, and don’t work for a major money management firm. When you pay on a fee-only basis, you’re paying on a yearly or (increasingly) monthly basis to get ongoing professional money management advice.
There are multiple fee payment options for investment clients to consider.
For example, an investment advisor may charge on a “pay as you go” hourly fee, where you pay, say $75 per hour, for specific time spent with a financial advisor. Or, an investment advisor may charge a flat fee for a specific menu of services, like portfolio management or estate planning, where the client may pay several thousand dollars in exchange specific and ongoing investment advice over a specific time.
What a Stockbroker Does
A stockbroker’s job charter is usually much narrower in scope than an investment advisor’s.
A stockbroker buys and sells stocks, bonds, and funds, among other investments, on behalf of clients. The broker is usually paid via commission for doing so, but can also charge on a fee-based model depending on the services provided.
While a broker can act as an independent agent and work on a self-employed basis, most stockbrokers work for money management firms like Charles Schwab, SCHW TD Ameritrade, AMTD or online-only brokerages like E*Trade. ETFC
Like an investment advisor, a stockbroker has to tailor his or her investment advice on a client’s unique financial circumstances, like long-term financial goals, risk tolerance, age, and budget. Once a stockbroker reviews a client’s investment needs and discusses the client’s goals and timelines, that stockbroker can start research stocks, bonds, and funds that meet the client’s needs.
Again like an investment advisor, a stockbroker must earn a professional designation to provide specific investment management services.
For instance, a stockbroker who wants to buy stocks, bonds and funds on behalf of clients must earn a Series 7 and Series 63 license recognized by the federal government. In doing so, the broker must pass stringent financial market comprehension tests to earn a professional designation as a licensed stockbroker.
How a Stockbroker Gets Paid
By and large, stockbrokers are paid by commission generated by executing investment trades on behalf of clients.
There are significant variances on how much a broker can charge clients, based on the level of services they offer.
For example, the commission varies between discount and full-service stockbrokers.
- A discount brokerage firm typically charges on a limited basis – usually for executing a trade for a client for a nominal fee. Discount brokerage services often charge as little as $5-to-$10 for trade execution, which includes services for holding the stock on the client’s behalf and other operational services.
- A full-service brokerage fee will charge more for added services, like for full-service money management, much like a financial planner. Full-service brokers may charge $100-and-up for trade execution, but costs accumulated for through market research and regular meetings with clients added into the mix.
Brokerage clients will also likely be asked to make a minimum deposit in a brokerage account before they can start levering trading services. Depending on the level of service you’re getting from a broker, that down payment can be as little as zero for a discount broker or $10,000 for a full-service broker.
A Word on Suitability Vs. Fiduciary
Investment advisors and stockbrokers are regulated differently by the U.S. government – specifically by the U.S. Securities and Exchange Commission.
Stockbrokers. A stockbroker, often known as a registered representative, is regulated more lightly than an investment advisor. He or she must clear a “suitability” standard that means the investments they recommend and trade are suitable for their clients.
For years, that standard has created controversy in the financial services industry, as a suitability standard is widely viewed as being laxer, regulation-wise, with brokers being able to put their interests above their clients in recommending specific investment products.
Investment Advisors. Investment advisors are held to a more strict standard by the U.S. government. They must clear a “fiduciary” standard based on the Investment Advisers Act of 1940.
That statute defines a fiduciary as someone who “occupies a special trust and confidence when working with clients” and who “acts ethically” with a client.
The Takeaway on Brokers Vs. Investment Advisors
Choosing between a stockbroker and an investment advisor is a highly personal matter, based on a money management client’s unique financial needs.
In broad terms, choosing an investment advisor means you’re signing up for a more comprehensive money management experience, which will likely result in higher costs and fees.
Selecting a stockbroker usually means you’re getting more limited money management services, depending on the type of brokerage services offered.
Making a qualified choice between an advisor and a broker requires thorough research and careful planning – and a candid look at your own financial and investment needs.