Registered Investment Advisors and Brokers: What is the Difference?

By: Rob Carpenter

Fiduciary Vs. Suitability 

There are two primary groups that offer investment advice and services to clients – investment advisors, such as BWFA, and investment brokers who generally work for broker-dealers. The key distinction between these two groups is one that is often not understood by the investing public. Registered Investment Advisors such as BWFA are required to adhere to a fiduciary standard, while brokers must only meet a suitability standard.

Black’s Law Dictionary describes a fiduciary relationship as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.” Law.com defines a fiduciary as “a person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.”

In short, as your fiduciary it is our ethical AND legal responsibility to act in your best interest at all times. Our loyalty must be exclusively to you, our clients, and we must act only in ways that will best help you achieve your financial goals. We must put your interests above our own and declare any conflicts of interest that may arise.

This is a very different standard than the suitability standard under which brokers operate. A broker’s loyalty is to the broker-dealer for whom he works, and not necessarily to his client.

His investment recommendations must be suitable, but don’t necessarily have to be best for the client or consistent with the investor’s objectives.

The suitability standard allows a broker to put his interest, or the interest of his employer, above yours when making investment recommendations.

You can be assured the portfolios that BWFA’s advisors construct to meet your goals put your interests above all else. Our only thought when selecting investments for your portfolio is how those investments are going to help you achieve your financial objectives.

Advice Vs. Transactions

Since brokers are paid by commissions on products sold, they face pressure to execute transactions. For brokerage firms that market their own investment products, that pressure can be intense, because brokers are the prime distribution channel for selling those products.

On the other hand, Fee-Only advisors such as BWFA receive compensation only from their clients for the advice and service they provide. Advisors have no incentive to push one product over another or to do unnecessary trading in client accounts. Being paid only by our clients reduces or eliminates the conflicts of interest inherent in a relationship with a broker, whose compensation is tied to commissions from the products he sells.

Transparency Vs. Disclosure

Though brokers often provide lengthy disclosure documents, it’s difficult to determine how they receive their compensation.

As a Fee-Only advisor, BWFA adheres to a high standard of transparency.

We receive no other compensation. In addition, the custodian holding client assets issues an independent report of client investment holdings and transactions, including fees, in monthly account statements. Clients can easily compare their BWFA statements with the custodian’s statements.

Advisors earn client trust through sound advice and an open, fiduciary relationship. BWFA is committed to always serving our clients’ best interests and helping them reach their financial goals.