Broker-Dealer vs. Investment Adviser: Key Differences Explained

Investing in the stock market can be complicated, and some investors seek help with the process. While every investor turns to a broker-dealer, some investors also turn to investment advisers. These two roles are fundamental in the stock market but have several differences. Knowing how each entity works can help you decide which one you need for your investments. 

What is a Broker-Dealer?

A broker-dealer is a financial firm or individual that trades securities on your behalf. You have to tell the broker-dealer which orders you want to place, and then the broker-dealer will handle the rest. The Vanguard Group Inc. and Fidelity Investments are two of the many broker-dealers available. These brokers can also engage in their own trades, but customers decide which stocks, exchange-traded funds (ETFs) and mutual funds go into their accounts.

What is an Investment Adviser?

An investment adviser is a professional or firm that handles the investments for you. Advisers buy and sell assets on your behalf through a fund and hope to achieve a target outcome. You can work with an investment adviser who aligns with your goals, such as dividend income or growth investing, depending on your preferences. Investment advisers can also provide personalized advice that can help you make better investments.

Comparing a Broker-Dealer with an Investment Adviser

Wondering whether you should make most of your stock trades through a broker-dealer or investment adviser? Here are some of the ways that these two entities compare.

Services Offered

A broker-dealer offers generalized products and features. The broker-dealer can implement trades for you and offer valuable research and investment products. You can use these resources to learn more about individual stocks, gain experience and become a better investor. Broker-dealers give you several resources, perform tasks as requested and have an approach where you have to figure it out.

Investment advisers take a different approach. Advisers guide you throughout the process, and some make all of your investments for you. Investment advisers charge higher fees for their services, but you don’t have to analyze individual stocks. You can approach an investment adviser with a goal and receive personalized guidance or an optimal fund. They help you with your financial planning so your portfolio contributes to your long-term goals. Investment advisers work with you instead of embracing the broker-dealer’s figure-it-out-by-yourself approach. 

Compensation Structure

Broker-dealers have more affordable compensation structures. These entities only charge a small fee for each trade. Some trades, such as buying and selling stocks, are free. But you will have to pay a fee for each option trade you make. You can keep fees low or nonexistent if you only buy and sell stocks, ETFs and mutual funds.

Investment advisers have more fees because they are taking the time to help you with money management and portfolio growth. Advisers are similar to long-term consultants, and some of them directly influence your portfolio allocation. Investment advisers will charge fees based on their hours worked or a fixed fee. 

If an investment adviser trades assets within your portfolio and monitors performance, you will also get charged a percentage of the assets they manage. For instance, if you have a $100,000 portfolio, and your investment adviser charges a 1% fee to manage your portfolio, you will have to pay the adviser $1,000 for that year. ETFs and mutual funds refer to this as the expense ratio. If the ratio stays fixed, you will pay more money if your portfolio’s size increases. Investment advisers do not earn commissions on trades.

Regulatory Framework

Broker-dealers and investment advisers are both regulated under securities laws. Broker-dealers must register with regulatory authorities like the Securities and Exchange Commission (SEC) and must comply with regulatory requirements. Broker-dealers must maintain suitability standards and must provide disclosures to retail investors about their relationships with clients.

Investment advisers must also register with the SEC or state securities authorities. Only advisers who manage more than $100 million worth of assets must register with the SEC. Investment advisers and firms have a fiduciary duty to serve their clients’ best interests. The Investment Advisers Act of 1940 laid out many of the rules that govern investment advisers. 

Investing Strategies

Broker-dealers focus on executing trades on behalf of their clients. These entities provide tools that can improve your research and help you arrive at better investment opportunities. Broker-dealers make transactions more efficient and give customers the confidence that trades will go through at the best possible price.

Investment advisers take a more proactive role. They provide financial planning advice and ongoing guidance to help you create an optimal portfolio. The portfolio aligns with your long-term goals and has an intended purpose within your financial plan. Some investment advisers manage investors’ money through funds and do market research for them. These advisers regularly adjust a client’s investments to achieve the portfolio’s objectives.

Legal Obligations

Broker-dealers are obligated to give traders the best possible price for their trades and to execute them as soon as possible. They must also comply with regulations surrounding conflicts of interest, client disclosures and handling client funds and securities.

Investment advisers are also legally obligated to serve in the client’s best interests. This fiduciary duty involves providing the most practical investment recommendations, avoiding conflicts of interest and disclosing any potential conflicts. Investment advisers are held to a higher legal standard than broker-dealers.

Build Your Portfolio with the Right Resources

Broker-dealers and investment advisers both serve people who want to grow their portfolios. While broker-dealers let you make trades and provide resources that can help, investment advisers offer personalized guidance and can manage your funds for you. Both entities can help you earn higher returns for your money, but investors must consider their financial objectives before deciding which one is right for them.

Frequently Asked Questions