Do Your Hiring Homework: Learn the Differences Between Brokers and Advisers
One is required to put your best interests first. The other isn’t.


If you asked the average person on the street if there’s a difference between a financial adviser and a broker, most would tell you they’re one and the same.
Somehow, though, over the past few years, the words have become synonymous. And that is 100% wrong.
You’d think with all the money involved, investors would be clearer on the roles and responsibilities of their financial professionals. Instead, they too often hand over their life savings to the person who promises the best returns.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are just some of the differences:
An adviser, or, more specifically, a Registered Investment Adviser, is held to the “fiduciary standard.” He offers impartial guidance and puts his client’s best interests ahead of his own. His compensation is usually fee-based; he might get paid per hour or service, but most likely he’ll get a percentage of your portfolio — say 0.25% per quarter, or 1% annually.
A broker, in most cases, sells products and makes trades happen. He is held to a “suitability standard,” which means he must provide options that suit the client’s needs, but those choices might not be the least expensive or the best match for the client’s goals.
A broker’s compensation is commission-based. If he invests your money into a stock, for example, he might get 5% on the front end. If the stock goes up, great. But if it goes down, he’s already been paid. And he’ll make money again when he sells you on the next thing.
There are pluses and minuses to both arrangements. A broker, for example, can often provide valuable insights and advice about the market.
But if you want a financial professional who’s truly looking out for you long-term, remember: A fee-based adviser is actually paid on performance. He makes more money when you make more money.
So, for example, if a client invests $250,000, and the adviser helps double that to $500,000, he doubles his income as well.
As a fiduciary, he’s helping select investments that best meet his clients’ risk tolerance and achieve their financial goals — not the products that come with the highest compensation on the front end or that his boss wants him to push, as a broker might do.
To take it a step further, let’s look at some of the other costs that can come with working with a broker.
If you’re in the retail world of investing — if you’re just a common investor who is working with one of the big brokerage houses out there — you’re likely paying some costs that you aren’t even aware of.
Let’s say you’re a do-it-yourselfer and you decide to invest in a bunch of mutual funds. Your “expense ratio” could be made up of several fees: an administration fee that could range from 0.2% to 0.4% annually, an asset management fee that could be anywhere from 0.5% to 1%, a 12b-1 annual marketing or distribution fee, etc.
Put them together, and add in trading costs that could be another 1%, and you easily could be paying 2% to 4% and not even know it.
Contrast that with the institutional side, where you’re working with a licensed financial adviser who is a fiduciary. Your “wrap fee” will essentially encompass all costs, including the adviser’s fee, the institutional money managers who actively oversee the account and unlimited trading costs. You won’t be nickeled-and-dimed every time there’s a purchase or sale.
And all those savings could have the potential to turn into better returns — which is the goal, right?
It’s difficult enough to know who to trust with your hard-earned savings without all the confusion over terms, fees and compensation.
Make sure you stay schooled in the vocabulary and the math required to make smart investment decisions. Your future self will thank you.
Kim Franke-Folstad contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Anthony Pellegrino is one of the founders of Goldstone Financial Group (www.GoldstoneFinancialGroup.com), an SEC Registered Investment Adviser. He is a fiduciary and holds a Series 65 securities license and an Illinois Department of Insurance license. Anthony co-hosts the "Securing Your Financial Future™" television show airing on CBS Sunday mornings following "Face the Nation."
-
S&P 500 Hits New Highs as Rally Resumes: Stock Market Today
Tech stocks were the biggest gainers on Wall Street today, with Nvidia and Dell making notable moves.
-
The Shutdown Standoff Is Heading for Its Next Big Test
A key mid-October deadline could intensify the shutdown fight in Washington, and the fallout could soon hit workers and your wallet.
-
Preferred Bank Stocks: The Investment Retirees (and Others) May Be Missing Out On
Most large banks issue preferred stocks that pay out fixed dividends, often with higher yields than bonds. Should you make room for them in your portfolio?
-
Don't Let Your Equity Compensation Trip You Up: A Financial Expert's Guide
Stock options, RSUs and other executive perks can come with some serious strings attached. To avoid a nasty tax surprise, you need a plan.
-
The Spendthrift Trap: Here's One Way to Protect Your Legacy From an Irresponsible Heir
A spendthrift clause in an estate plan can protect an inheritance from a financially irresponsible child's debts and poor decisions.
-
Adapting to AI's Evolving Landscape: A Survival Guide for Businesses
Like it or not, AI is here to stay, and opting out could be disastrous for your organization. Instead, focus on what you can control and be flexible, as AI is still evolving.
-
Striking Gold (or Gas): A Financial Pro Unpacks the Nuances of Energy Investing
Investing in the energy industry, particularly oil and gas, involves understanding the facts about how projects generate returns through cash flow and long-term asset building, while also being aware of the risks.
-
Escaping the New Golden Handcuffs: A Financial Expert Has a Plan for Today's Executives
Feeling stuck in your job? It could be your complicated compensation package, but it also could be where you live, your family or even how you view yourself.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have Millions
Private market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It Helps
Saving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.