INVESTMENT ADVISERS VS. BROKERS: KNOW THE DIFFERENCE!
Investment advisors have a fiduciary duty to act in the best interests of their clients at all times. Brokerage firms generally are not fiduciaries to their customers and therefore do not make decisions that are solely in their customers’ best interests.
Investment advisors cannot trade with their clients as principal except in extremely limited circumstances. Brokerage firms and Banks often earn significant undisclosed profits by trading as principal with their customers.
Investment advisors charge clients a fee negotiated in advance and cannot earn any other profits from their clients without the clients’ prior consent. Most investment advisors are paid an asset-based fee, so their interests are aligned with their clients. Brokerage firms’ revenues may increase even if the customer’s assets shrink.
Investment advisors manage money in the best interests of their clients. They do not engage in other business activities like investment banking or underwriting, which brokerage firms do. These other businesses may cause a brokerage firm’s interest or attention to focus on other areas of the firm outside of their retail brokerage business and customers.
Investment advisors provide their clients with a Form ADV that describes exactly how the investment advisor does business and obtains the client’s consent to any conflicts of interest that do exist in the investment advisor’s business. Brokerage firms are not required to provide customers with any comparable type of disclosure.