The differences between broker and investment advisor

Heidi Moore Jan 28, 2011

The differences between broker and investment advisor

Heidi Moore Jan 28, 2011


Tess Vigeland: Let me ask you a question: broker or investment advisor? What’s the difference? If you know — then good for you. But it’s a safe bet lots of you think the titles mean the same thing.

The Securities and Exchange Commission is looking to remedy that, and it issued a report this week that could change the way many of us get investing advice. We thought this was a great subject for our new New York Bureau Chief Heidi Moore to tackle. So she’s here with us and Heidi, there’s a big difference here, isn’t there? Advisor? Broker?

Heidi Moore: Yes, in many ways they are very different. But they won’t tell you that. So an investment advisor is somebody who you talk to about your financial plans, and most importantly, who has a duty to give you the best advice for you. That’s called a fiduciary duty. A broker is a person who just sells you things: sells you stocks, or bonds or mutual funds. And brokers do not have to act in your best interest. They can act so that you give them the best commission possible.

Vigeland: Why haven’t brokers had this responsibility to their clients, versus to themselves?

Moore: Well it doesn’t benefit them. It benefits them to sell things, but who would impose it on them? So far, people haven’t thought about this issue. And now the SEC has looked at a landscape of the financial crisis, when a lot of people ended up in investments they didn’t want to be in, and they didn’t know the implications of it. And they’re saying maybe one way to repair it is to impose this duty on brokers.

Vigeland: OK. So what steps is the SEC looking to take then? Would they actually say that a broker has to have the same fiduciary duty as an investment advisor?

Moore: They would. The brokers would get a break, however. Investment advisors have a whole set of other regulations, things that they can say in public and so on that they have to meet with. Brokers wouldn’t have to had that; they would just have to promise that they would be acting in your best interests.

Vigeland: Now this was part of the Dodd-Frank Act, the financial reform act that was passed last year. But from what I can tell, the act doesn’t really say you have to do this, but it says, address it somehow.

Moore: This is the flaw in most of Dodd-Frank. A lot of it has been left up in the air. It’s particularly difficult with this issue, because most investment advisors are very small, and most brokers work with very big companies. So the question is: who will make sure that they do meet this duty if you do impose it? You have three options: you have the Securities and Exchange Commission, which governs out of Washington; you have the state regulators, who have a lot of time on their hands and who recently grabbed a little bit more regulatory power over finance.

Vigeland: But the downside there is that then you get 50 different levels of regulation.

Moore: Exactly. You could also have what Wall Street calls an SRO — a self-regulatory organization, where the brokers would represent themselves in an organization that would then allow you as a customer to arbitrate any of your claims against them. But the question is, would they do as good a job?

Vigeland: And given that they haven’t regulated themselves up to now, why would they start?

Moore: That’s exactly the question.

Vigeland: So unless and until there is a decision on all of this, what’s the advice to people who, again, perhaps didn’t realize that there was a difference between their broker and their financial advisor?

Moore: Well the most important piece of advice is to ask the question. You have to ask what their conflicts of interest are, how they get paid, and whether the advice that they’re giving you is done with a fiduciary duty.

Vigeland: It’s just hard to imagine a broker is going to say, ‘No I actually have no fiduciary responsibility to you.’

Moore: They’ll probably avoid it. But they still have to answer the question.

Vigeland: All right. Thanks Heidi.

Moore: Thank you Tess.

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