An advisor and a broker might seem roughly the same for somebody with little financial knowledge. However, the roles performed by both of these are very different.
It is important to know the difference for anybody starting with their financial journey.
A Broker vs An Advisor
The main difference between a broker and an advisor is that a broker is an intermediary through which financial goods may be sold or bought. In contrast, an advisor may guide and inform you about which or what type of financial investments to make.
A broker can be considered an intermediary through which you may purchase any financial good like stocks, real estate, cryptocurrencies, government bonds, etc.
An advisor offers paid advice to an individual or an organisation about the types of financial investments, the performance of these types of investments or the performance of a single stock, real estate property, a digital asset like an NFT, etc.
Comparison Table Between a Broker and an Advisor
| Parameters of Comparison | A Broker | An Advisor |
| Services | A broker acts as an intermediary while making financial investments. They may help you purchase stocks, real estate, mutual funds, cryptocurrencies, NFTs, etc. | Advisors have tougher testing and licensing processes. Advisors must pass Series 65 before they can start giving advice for a fee. |
| Payment Type | Brokers take a commission-based fee. They are paid a certain percentage of the value of a sale made through a broker. | Advisors have tougher testing and licensing processes. Advisors must pass Series 65 before they can start advising a fee. |
| Fiduciary Duties | Brokers may or may not perform fiduciary duties. | Advisors must perform fiduciary duties. |
| Testing & Licensing | Advisors are paid an hourly or flat fee based on the percentage of assets under management. | In the United States, brokers must pass Series 7, otherwise known as the General Securities Representative Exam. |
| Portfolio Decisions | A broker cannot alter your portfolio without first asking for your permission. | An advisor can alter your portfolio before first asking for your permission. |
What is a Broker?
A broker may be an individual or an organisation that acts as an intermediary while making financial investments.
The financial investment may be of any type, including but not limited to stocks/shares of a company, a portfolio of stocks, mutual funds, cryptocurrency, real estate, government bonds, pension schemes, etc.
It is a long and tedious process for the common man to get a license to purchase any financial investment.
Wanting to diversify your investments by making multiple types of investments only multiplies the painful process.
Hence, brokers can act as intermediaries, so you do not have to get a license to start investing in your financial journey.
Brokers earn on a commission basis as a fixed percentage of the value of total sales made.
This sometimes leads to brokers incentivising sales, which may not always deliver the best results to their clients and might prove counterintuitive to their client’s goals.
Brokers were earlier a luxury that was only available for the rich. However, as time passes and multiple companies have started popping up, you can make financial investments just after a few taps on your mobile phone with a minuscule investment amount.
Many apps have been launched in the market in the past few years, making the process as easy as pie. These apps act as brokers and allow you to purchase anything from stocks in a company to cryptocurrencies.
With the help of such apps, it has also become easier to invest in foreign stock markets, buy fractional shares and buy/sell your assets with a single click of a button within seconds.
What is an Advisor?
An advisor is an individual or an organisation offering paid advice to financial investors or even larger companies and organisations.
Advisors also assist their clients through tax, estate and mortgage planning.
Advisors are held to higher legal obligations than brokers. Advisors are required to perform fiduciary duties regarding their client’s accounts.
Brokers can choose whether or not to be fiduciary. It is mandatory for an advisor.
As part of their fiduciary duties, they are legally obligated to fully and fairly disclose all material facts to their clients.
This standard imposes an “affirmative duty of utmost good faith” upon advisors. Hence, they must always work towards their client’s best interests.
Advisors also cannot earn commissions as it may reflect conflicts of interest. They are obligated to earn a flat fee that may be charged by the hour or a one-time fee. It is dependent on the value of assets under management.
Contrary to brokers, who only require minimum information about their clients to start making purchases for them, advisors require a deeper understanding of their clients to understand their financial goals so that they can advise them accordingly.
Main Differences Between a Broker and an Advisor
- The type of service offered by a broker and an adivsor. A broker acts as an intermediary to purchase financial assets. An advisor offers paid advice about financial investments.
- Brokers take a percentage of the value of the financial assets bought or sold through them as commission. Advisors are not allowed to take commissions due to conflicts of interest. They take a flat one-time or hourly fee as a percentage of assets under management.
- Brokers have the choice of whether or not to become a fiduciary. Advisors are obligated by law to act as fiduciaries.
- In most countries, advisors face a tougher and more challenging testing and licensing process than brokers, as they have to perform fiduciary duties.
- An advisor can legally alter your portfolio without your permission as part of their fiduciary duties. A broker cannot do so.
Conclusion
Before hiring any professional, doing some of your due diligence and research is necessary.
As you start your financial journey, it is important to know the difference between the services offered by a broker & an advisor and the type of payment they accept.
References
- https://www.sciencedirect.com/science/article/abs/pii/S0148296319306423
- https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8683.00111
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