Do You Know the Difference between a Stockbroker and an Investment Advisor? The SEC Knows

By Stephen J. Silverberg
New York Elder Law Attorney

Few understand the difference between an investment advisor and a stockbroker.

The difference is substantial. An investment advisor is a fiduciary; this means they have a legal and ethical duty of primary loyalty to their clients. The interests of their clients are paramount. Investment advisors receive a fee based on a percentage of the value of the account. The interests of the client and investment advisor are aligned and conflicts of interest eliminated.

A broker has few obligations of an investment advisor. They are not fiduciaries. A broker’s primary loyalty is to themselves and their commissions. They have no legal requirement to disclose the total cost of buying an investment. The potential for conflicts of interest exists; a broker may recommend an investment because it pays them a higher commission. With most retail investment firm, you are dealing with a broker.

Historically, says The Wall Street Journal, brokers were paid mostly to execute trades for their clients. For years, they have been permitted to call themselves financial advisors, with no disclosure requirements.

On June 5 the Securities and Exchange Commission adopted Regulation Best Interest (“RBI”).  By a three to one vote, the SEC commissioners approved the RBI, along with other regulatory actions intended to enhance disclosures and clarify certain advisors’ responsibility to put their clients’ interests before their own, disclose conflicts of interest (such as hidden commissions) when they make an investment recommendation.

But is it enough to protect investors?

The SEC says it will give investors more information about complex pay incentives and other practices that can influence a broker’s financial advice but won’t change Wall Street’s commission-based sales model.

Critics say it falls short of eliminating conflicts of interest, particularly commission-based pay or other financial arrangements. Supporters say it is higher than the current standard.

Bottom line: discover if the person managing your financial accounts is a broker or an investment advisor. Understand how they get paid, so you can understand whose interest comes first.

About the Author
Stephen J. Silverberg is nationally recognized as a leader in the areas of estate planning, estate administration, asset preservation planning, and elder law. He is a past president of the prestigious National Academy of Elder Law Attorneys (NAELA), and a founding member and past president of the New York State chapter of NAELA.