There are two main types of investment professionals to consider ̶ “registered representatives” (more commonly referred to as brokers) and “investment adviser representatives” (often referred to as financial advisors or investment advisors). They each have different types of credentials, may play different roles for different investment accounts, and are compensated in different ways.
Your investment professional may be both a registered representative (broker), as well as an investment adviser representative, depending on the role that he or she plays in providing investment services throughout your financial life.
Brokers, registered representatives
Many investment professionals are brokers (i.e. registered representatives). These professionals are licensed primarily through the brokerage firms they work for. Individual brokers are regulated by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization for the securities industry.
Brokers are licensed to buy and sell specific types of securities products on behalf of their clients, depending on the type of license that they hold. At minimum, brokers are required to help clients choose investment products that are “suitable” for their needs. In other words, products that match a given client’s investor profile – his or her age, risk tolerance, time horizon, etc.
Starting in 2017, federal regulation now requires all financial professionals, including brokers, when advising on qualified retirement accounts (such as 401(k) plans and individual retirement accounts) to adhere to a “fiduciary standard,” meaning that any investment advice they provide about retirement accounts must be in the “best interests” of their clients. The best-interest standard became effective in June 2017, but additional procedural, administrative and disclosure requirements are scheduled to take effect on July 1, 2019 (during that time the Department of Labor is conducting a review of the impact of those additional requirements).
When you work with a broker, you are responsible for the decisions: the representative only buys or sells securities that you authorize them to. In most cases, the broker is paid with a one-time commission or sales charge for each product they buy or sell on your behalf. So the amount of their compensation is directly tied to the product they buy or sell. There is no separate fee for advice.
Bottom line: If your investment needs are pretty straightforward, and you don’t have a huge amount of investable assets to manage, a broker or registered representative may suit your needs just fine. Working with a registered representative can be a more economical way to go than working with an investment adviser representative, who provides a more in-depth and ongoing level of investment advice.
Investment adviser representatives
The regulation and standards for investment advisers are different, as are the services they provide. As a result, they are paid differently, as well.
Investment adviser representatives, who are regulated by the Securities and Exchange Commission. (SEC) have always been held to the fiduciary standard.
When you work with an investment adviser, you are still ultimately in charge of how your investments are allocated and managed, but typically, the day-to-day management of your assets is handled by the adviser, the adviser’s firm, or third-party investment firms with whom the adviser’s firm has agreements, depending on the terms of the advisory program you have invested in.
These activities may include rebalancing or changing the way your assets are allocated based on your age or investment horizon, or in response to market conditions. Your investment adviser representative will communicate with you on an ongoing basis, because the management of the assets in an advisory relationship is a continuous process.
Another key difference between a registered representative and an investment adviser representative is that you pay the investment adviser representative an ongoing fee for his or her advice and services, instead of commissions on each investment product bought or sold, as you would with a broker or registered representative. The fee is usually a percentage of the assets under management (AUM), and as your investments grow, the adviser’s fee grows, too.
Bottom line: If you have a larger amount of wealth to manage, or your investment needs are more complex, an investment adviser representative might be the right choice for you.
Ready to find the right investment professional?
If you’re ready to start working with an investment professional, it’s important to understand the products and services that are being offered and the different obligations of brokers/registered representatives and investment adviser representatives. And don’t be afraid to ask questions about how they are compensated and what standard they are held to for the products and accounts you are investing in.
No matter which type of investment professional you choose, it’s essential to find someone you feel comfortable with — who takes the time to understand your needs, preferences and goals when it comes to managing your finances.
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