5 Reasons Brokers and Advisors Are Not Made Equal

Don’t be fooled if you’re told the labels “Advisor” and “Broker” are roughly synonymous. The differences between these two terms are broad and very important. Here’s why:

1. Fiduciary Status – Brokers must act in the best interest (“best interest” standard) of the client at the time the recommendation is made (this is more of a transactional relationship), and the broker needs to take into consideration only the brokerage accounts available (not the overall relationship). Advisors are held to the higher “fiduciary” standard, meaning they must always act in their client’s best interest.
2. Conflicts of Interest – Brokers are mainly compensated by commissions paid out on investment products they recommend to their clients. They can offer proprietary products and the broker-dealer can place material limitations on the menu of products the broker can offer. If that seems like an inherent conflict of interest, that’s because it is! A fee-only advisor is agnostic to the investment products used when managing assets.
3. Compensation Structures – Since broker compensation is often tied directly to a product recommendation or sale, there can be a natural incentive to recommend products with higher commissions as long as there are other factors about the product that reasonably allow the broker to believe it is in the best interest of the client. Advisors are compensated mainly by an agreed upon fixed fee that is not tied to any investment product. A fee-only advisor does not sell products.
4. Services Provided – A broker’s scope of services is generally much narrower and limited to recommending specific investments to clients, with some offering educational services. Advisors offer holistic services extending beyond investment recommendations, including social security analysis, pension election analysis, insurance reviews, tax planning, and financial planning.
5. Disclosure vs. Transparency – Broker disclosures are often long, lengthy, hard-to-read legal documents that even a financial professional would have difficulty understanding. Brokers must identify and at a minimum disclose conflicts of interest (note this does not apply to associated persons of the broker-dealer). Advisors adhere to higher standards of transparency and are legally required to provide their clients with their Form ADV, which is a disclosure brochure explaining the structure of their firm, what services they offer, and what they charge. Advisors must eliminate and disclose conflicts of interest and fairly manage unavoidable conflicts in the client’s favor.

CFP® professionals are committed to acting in your best interest. That’s why It’s Gotta Be A CFP®. Reach out to one of our Certified Financial Planner™ professionals if you would like to discuss how BFSG can help.

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