Understanding the different roles of financial professionals is critical when planning your financial future. In this article, we’ll explore the key differences between investment advisers, brokers, and financial advisors, providing clarity on their roles, responsibilities, and the standards they adhere to. By the end, you’ll have a comprehensive understanding of these important financial professionals and the legal obligations they have toward their clients.
Understanding the Distinct Roles
Investment Adviser vs. Broker vs. Financial Advisor
While the terms “investment adviser,” “financial advisor,” and “broker” are often used interchangeably, they actually refer to distinct roles with specific legal and regulatory implications. We should first clarify that throughout this article, we will refer to investment “advisers” with an “e” instead of an “o”. This is because the laws that regulate this type of financial professional spell it this way. In general:
-
Investment Advisers: An investment adviser is a legal term regulated by the Securities and Exchange Commission (SEC) and/or a state regulatory body and defined as a person or firm that provides advice, reports, or analyses on investments for a flat fee or percentage of assets under management (AUM).
-
Brokers: A broker is a financial professional that is regulated by the Financial Industry Regulatory Authority (FINRA) and defined as a person or firm that buys and sells (“trades” or “exchanges”) investment products for a commission.
-
Financial Advisors: A financial advisor is defined as a person that provides advice to help achieve financial goals (including retirement planning, tax advice, and insurance recommendations), executes trades in the market, and more depending on the licenses and experience of the specific professional. They can be monitored by either regulatory body depending on the licenses and certifications they have as well.
A point worth noting is that financial advisors have traditionally been used as a general term that can encompass various financial professionals. In fact, you may see this term used interchangeably with investment advisers and brokers alike. However, FINRA regulations now state that the professional must have a Series 65 license, among other licenses, to call themselves a financial advisor.
Understanding these differences is essential, especially when issues arise related to professional conduct or compliance with regulatory standards.
Legal and Regulatory Differences Between Investment Advisers, Brokers, and Financial Advisors
One of the most significant differences between investment advisers, brokers, and financial advisors is the legal and regulatory standards they must adhere to. Their regulations are separated the following ways:
-
Investment Advisers: Investment advisers are held to a fiduciary standard, which means they are legally obligated to act in their clients’ best interests at all times. This standard requires them to put their clients’ needs above their own and to disclose any potential conflicts of interest.
-
Brokers: Brokers are held to Regulation Best Interest (Reg-BI), which requires the broker to only make recommendations that are in the best interest of their client after considering reasonably available alternatives.
-
Financial Advisors: Financial advisors can be a variety of financial professionals, including a broker or investment adviser. This means that depending which they are currently acting as (or potentially both) will determine which of the rules they must abide by.
These differences can significantly impact the advice you receive and the potential for conflicts of interest. A financial advisor or broker whose standard of care is Regulation Best Interest might suggest a higher-cost mutual fund that is good for the client, but not the most cost-effective option, resulting in higher fees for the client but a better commission for the advisor.
Learn more about Regulation Best Interest in this video:
We Have Recovered Over
$350 Million for Our Clients Nationwide.
Investment Adviser Responsibilities: What Does an Investment Adviser Do?
Investment Strategies and Portfolio Management
In order to help us define the difference between an investment adviser, broker, and financial advisor, let’s dig deeper into what makes an investment adviser unique. Investment advisers play a key role in helping clients develop and implement effective investment strategies tailored to their unique financial goals, risk tolerance, and time horizon. The investment adviser responsibilities include offering a range of services, such as:
-
Portfolio analysis
-
Asset allocation
-
Security selection
-
Ongoing portfolio management
For example, an investment adviser might work with a client nearing retirement to shift their portfolio from growth-oriented stocks to more conservative, income-generating investments.
They also provide regular portfolio reviews and rebalancing to ensure the investment strategy remains aligned with the client’s objectives as market conditions change. Additionally, investment advisers are expected to explain complex financial concepts to their clients, ensuring transparency in the management of investments. This comprehensive approach to portfolio management sets investment advisers apart from other financial professionals who may focus more on product sales (brokers) or general financial planning (financial planners).
The Difference in Requirements: Investment Adviser, Broker, or Financial Advisor
Investment Adviser Requirements and Certification
Becoming an individual investment adviser (IAR) involves meeting specific educational, examination, and registration requirements. Aspiring investment advisers must follow one of these two paths:
-
Pass the Series 65 Uniform Investment Adviser Law Examination and/or Series 63 Uniform Securities Agent State Law Examination (depending on the state)
-
Pass both the Series 7 General Securities Representative Examination and the Series 66 Uniform Combined State Law Examination
The Series 65 exam tests knowledge of state securities regulations, ethical practices, and investment strategies, ensuring that advisors are qualified to provide sound advice and act ethically.
The Series 7 focuses on general securities knowledge, while the Series 66 combines state law and investment adviser regulations. These exams cover topics such as laws, regulations, retirement planning, and portfolio management, demonstrating a commitment to professionalism and adherence to regulatory standards. In addition to passing the required exams, candidates must also meet education requirements, which typically include a bachelor’s degree, although specific coursework in finance or economics is not mandatory.
This rigorous process ensures that investment advisers are well-prepared to provide high-quality advice to their clients.
Broker Requirements and Certification
Becoming a broker involves a similar process as IARs, but with different tests administered by FINRA. These required tests also depend on what an employer requires, which is even more important for brokers because they must be sponsored by a FINRA-member brokerage firm to take them. They requirements are as follows:
-
Pass both the Series 7 General Securities Representative Examination and the Series 63 Uniform Securities Agent State Law Examination
-
(Optional depending on employer) Pass the Series 3 National Commodities Futures Examination or the Series 31 Futures Managed Funds Examination
The Series 3 and Series 31 focus on commodities and managed futures, which are often a requirement by brokerage firms. Some firms even require brokers to become an RIA, which would require another set of tests for them to take through FINRA.
Financial advisors are different in that they might take any combination of exams between brokers or investment advisers (IARs). However, they usually follow the path of IARs, as their focus is traditionally on advice and not on buying/selling investments.
RIA vs IAR: What Are Their Roles?
Understanding the differences between a Registered Investment Advisor (RIA) and an Investment Adviser Representative (IAR) is essential, especially if you have concerns about the conduct of your advisor. An RIA refers to the firm registered with the SEC or state regulators, while an IAR is an individual who provides investment advice on behalf of the RIA.
The decision to register with the state or the SEC depends primarily on the amount of assets under management (AUM). Investment advisers managing less than $100 million in assets must register with the state. Those managing $100 million or more must register with the SEC. This distinction is significant because it determines which regulatory body oversees the advisor’s activities and which set of rules they must follow.
State registration often involves more direct oversight and may include on-site examinations, while SEC-registered advisors typically face less frequent but more comprehensive audits. If you’re unsure about the registration status of your advisor or have experienced misconduct, reach out to Meyer Wilson for legal assistance in addressing potential regulatory violations.
Our lawyers are nationwide leaders in investment fraud cases.
Conclusion
The distinctions between investment advisers, brokers, and financial advisors are significant, encompassing differences in regulatory standards, scope of services, requirements, and legal obligations to clients. These differences can have substantial implications, especially when misconduct occurs.
It’s necessary to be aware of the legal obligations of financial professionals and the options available to you if you experience issues with their conduct. If you believe you may have been a victim of investment fraud or misconduct, contact us at Meyer Wilson to learn how we can support you in seeking justice and recovering your losses.
We Are The firm other lawyers
call for support.
Frequently Asked Questions
How can I verify the credentials of an investment adviser or financial advisor?
To verify the credentials of an investment adviser or financial advisor, you can check the advisor’s registration status with the SEC or state regulatory agencies. This can be done by accessing the SEC’s Investment Adviser Public Disclosure (IAPD) website, where you can review the advisor’s Form ADV for disclosures on fees, services, and any disciplinary history. Additionally, consulting state securities regulators can provide further assurance of the advisor’s legitimacy.
How does an RIA differ from a financial advisor?
A Registered Investment Adviser (RIA) is often the same thing as a financial advisor – just a different way of titling the role. RIAs are registered with either the SEC or state securities regulators and are held to a fiduciary standard, meaning they must act in your best interests. They typically focus on providing investment advice and portfolio management services. To call themselves financial advisors, an individual must have the same licensing as an RIA.
Recovering Losses Caused by Investment Misconduct.
