Financial Planning

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.

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.

About the Author

Anthony Pellegrino, Registered Investment Adviser

Founder, Goldstone Financial Group

Anthony Pellegrino is one of the founders of Goldstone Financial Group (, 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."

Most Popular

Refunds for $10,200 Unemployment Tax Break to Begin This Month
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Month

The IRS will start issuing automatic refunds sometime in May to people eligible for the unemployment benefit tax exemption.
May 1, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
10 Dividend Growth Stocks You Can Count On
dividend stocks

10 Dividend Growth Stocks You Can Count On

What should investors prioritize in dividend growth stocks? A history of aggressive payout expansion, and the ability to generate enough cash to keep …
May 3, 2021


Estate-Planning Your Stuff with T. Eric Reich
Empty Nesters

Estate-Planning Your Stuff with T. Eric Reich

What to do with the house, the vacation house and the china? We talk with a financial adviser who's got some wise counsel. Also, who makes up the so-c…
May 2, 2021
Veteran Financial Advice to the NFL's New "Overnight Millionaires"
Brandon Copeland

Veteran Financial Advice to the NFL's New "Overnight Millionaires"

As the NFL Draft looms, contributing editor and NFL linebacker Brandon Copeland offers guidance to those about to receive a boatload of …
April 26, 2021
33 States with No Estate Taxes or Inheritance Taxes

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
April 23, 2021
What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021