Asset Managers: Brokers Or Advisors?

Investment advisors, brokers, and asset managers are professionals who help clients manage their money and investments. However, there are distinct differences in their roles, regulations, and how they are compensated. This paragraph will explore the key distinctions between these financial professionals and how they serve their clients.

Investment advisors are legally bound to act as fiduciaries

In the United States, investment advisors must adhere to the Investment Advisers Act of 1940, which calls for fiduciary duties regarding their clients' accounts. This act prohibits advisors from defrauding their clients and imposes an "affirmative duty of 'utmost good faith' and full and fair disclosure of material facts" as part of the advisor's duty of loyalty and care. This means that investment advisors cannot subordinate their clients' interests to their own. Due to the importance of this fiduciary conduct, most investment advisors can make investment decisions for their clients without first obtaining the client's permission.

Registered Investment Advisors (RIAs) are legally bound to act as fiduciaries. They are closely regulated and are required to register with the Securities and Exchange Commission (SEC) if they manage a certain amount of assets. The SEC also regulates investment advisors, who are also known as asset managers, investment managers, or wealth managers.

Fiduciaries are generally required to disclose any potential conflicts of interest and provide advice that aligns with the client's goals and financial situation. They must also act with prudence and ensure that their advice and recommendations are suitable for their clients, considering their financial situation and needs.

It is important to note that not all financial advisors are fiduciaries. Some financial advisors may be brokers or broker-dealers, who are not held to the same fiduciary standards as investment advisors. Brokers are typically compensated through commissions, while investment advisors are usually paid through fees. As such, brokers may recommend products that increase their commissions rather than those that are in the best interests of their clients.

To ensure that you are working with a fiduciary, it is essential to ask the advisor directly and verify their credentials and registration with regulatory bodies like the SEC. You can also look for certifications such as CFP (Certified Financial Planner) or AIF (Accredited Investment Fiduciary), which often indicate a fiduciary standard. Examining the advisor's fee structure is another way to assess their fiduciary status, as fiduciaries typically operate on a fee-only or fee-based structure rather than commission-based payments.

Brokers are not fiduciaries

Investment advisers and brokers are two distinct types of professionals in financial services. While they might sound similar to the untrained ear, they perform very different roles and are regulated differently.

Brokers are not held to the same fiduciary standards as investment advisers. A fiduciary is legally bound to act in their client's best interest and must disclose any conflicts of interest. They are required to place their client's interests above their own and must exercise "utmost good faith" and full transparency. This means they cannot recommend or make trades that may result in higher commissions for themselves or their firms.

Brokers, on the other hand, are only required to meet a "suitability standard". This means they must believe that their recommendations and transactions are suitable for their client's needs, but they are not legally bound to put their client's interests first. Brokers are typically incentivized to sell products and can earn commissions or mark-ups on securities, including their own proprietary financial products.

The distinction between fiduciary duty and suitability standard is important because it determines whose interests come first. With investment advisers, you can be sure that their advice and recommendations are based solely on what is best for you. With brokers, there may be a conflict of interest as they could be motivated by potential sales commissions or other incentives.

Furthermore, brokers do not have to disclose all potential conflicts of interest, whereas investment advisers are required to do so. This lack of transparency can make it difficult for clients to know if they are getting a sales pitch or genuine help.

The recent Regulation Best Interest (Reg-BI) ruling has blurred the lines between brokers and investment advisers, as it requires brokers to act in the best interest of the customer when making recommendations. However, this is still not as stringent as the fiduciary standard, which requires advisers to always act in the best interest of the client throughout their relationship, not just at the time a recommendation is made.

In summary, brokers are not fiduciaries and are therefore not legally bound to put their client's interests first. This key difference between brokers and investment advisers is important for anyone seeking financial advice or services to understand.

Investment advisors can provide advice on portfolio management, asset allocation, and market analysis

Investment advisors are financial professionals who provide investment advice and guidance to their clients for a fee. They are also known as financial advisors or asset managers.

In terms of portfolio management, investment advisors assist clients in selecting, creating, and managing a diverse portfolio of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They provide ongoing advice on buying, selling, or holding investments, ensuring that the portfolio aligns with the client's risk appetite and financial objectives.

Regarding asset allocation, investment advisors guide clients on how to distribute their investments across different asset classes, such as equities, fixed income, and alternative investments. They help clients understand the potential risks and returns associated with different asset classes and make informed decisions to balance their portfolio.

When it comes to market analysis, investment advisors offer insights into market trends and performance. They monitor the client's investments and provide updates, ensuring they remain aligned with the client's overall investment strategy. Advisors also consider market conditions and trends when making investment recommendations, helping clients capitalise on opportunities and manage risks effectively.

It is important to note that investment advisors have a fiduciary duty to act in their clients' best interests. They must prioritise their clients' needs and provide advice that is tailored to their unique circumstances. This fiduciary responsibility ensures transparency and minimises potential conflicts of interest.

Brokers execute trades in securities such as stocks and bonds

While asset managers and brokers may sound similar, they are quite different roles. Brokers execute trades in securities such as stocks and bonds for clients, while asset managers manage investment portfolios. For example, a mutual fund is managed by an asset manager, but if you wanted to buy a stock or another security, you would do that through a broker.

When you place an order to buy or sell stock, you might not consider where or how your broker will execute the trade. However, the way your order is executed can impact the overall costs of the transaction, including the price you pay for the stock. Trade execution is usually seamless and quick, but it does take time, and prices can change quickly, especially in fast-moving markets.

A broker has a duty of "best execution" and must evaluate the orders received from all customers to determine which competing markets, market makers, or electronic communications networks (ECNs) offer the most favourable terms of execution. The opportunity for "price improvement" is an important factor for brokers to consider when executing customer orders. While price quotes are only for a specific number of shares, and investors may not always receive the price they saw on their screen or the price their broker quoted over the phone, they can place a limit order to buy or sell a security at a specific price.

Brokers are paid commissions to execute trades or buy and sell assets for clients. They are defined by the SEC as "any person engaged in the business of effecting transactions in securities for the account of others".

Investment advisors must register with the SEC or state securities authorities

Investment advisors in the US are regulated by the Securities and Exchange Commission (SEC) and/or a state regulatory body. They are also known as asset managers, investment managers, and wealth managers.

Investment advisors are divided into three categories based on their regulatory assets under management (RAUM). RAUM is a specialised calculation of the assets over which they provide investment advice. Small advisors with less than $25 million of RAUM, mid-sized advisors with between $25 million and $100 million of RAUM, and large advisors with greater than $100 million of RAUM.

Small and mid-sized advisors are typically registered with and regulated by one or more state securities authorities, while large advisors are registered with the SEC and primarily subject to federal regulation. However, SEC-registered investment advisors must still comply with state antifraud prohibitions, and states may license and register representatives of SEC-registered investment advisors.

There are several exceptions to the general rule based on RAUM. For example, mid-sized advisors that are not required to be registered with the state securities authority or are not subject to examination by said authority must register with the SEC. Advisors to investment companies registered under the Investment Company Act of 1940 must also register with the SEC, regardless of their RAUM.

Other exceptions include advisors that would be required to register in 15 or more states, internet-only advisors, and advisors with their principal office located outside the US. Additionally, advisors that serve as pension consultants for plans with an aggregate of $200 million or more in assets may register with the SEC.

It is important to note that unlicensed and unregistered individuals commit much of the investment fraud in the US. Therefore, it is crucial to verify that an investment advisor is registered with the SEC or the relevant state securities authority before making any investment decisions.

Frequently asked questions