While many people may use the terms stockbroker and financial advisor interchangeably, these two designations are not the same. In most cases, the difference has to do with the fiduciary responsibility they have to protect their clients as well as the licensing requirements. In general, stockbrokers are paid based on trades that are made on your behalf while financial advisors may be paid either on a set-fee basis or may earn their fee based on the value of your portfolio.
Stockbroker’s Fiduciary Responsibility
Fiduciary responsibility is the care that someone must take when they are managing money on your behalf. In the case of stockbroker, their responsibility is to pass the “suitability” standard meaning that any investment advice they provide to a client must be suitable for that client. This may seem like it is a fairly low standard of care that must be exercised but this is not necessarily true.
An example of this would be when a stockbroker recommends a trade that involves options to a client and they follow through. In general, there must be a specific level of disclosure made about the risks associated with options trading and there must be a financial suitability disclosure made. If the broker fails to take these steps, they have violated their fiduciary responsibility.
Financial Advisor Fiduciary Responsibility
There are two specific types of professionals who use the term “financial advisor”. One may make certain stock, bond, insurance or mutual fund recommendations to their clients and the other may actually be able to sell the products they recommend. In both cases, the financial advisor’s fiduciary responsibility is to ensure they disclose conflicts of interest and to act in the best interest of the client. However, this can get a bit complicated when the financial advisor also sells products.
The complication comes in when the financial advisor is also earning a commission based on the investments their clients make. This difference is important because they may recommend investments because they will earn a commission versus because it is in the best interest of the client.
There are also specific licensing differences but these typically do not have a direct or negative impact on you as a client. Both stockbrokers and financial advisors can violate the trust that is placed in them by their clients. There are some activities that neither can participate in including:
- Churning – those who have a financial interest in the outcome of your investments may not repeatedly change your investment positions for the sole purpose of generating commissions.
- Failing to test for suitability – the responsibility of anyone handling your finances is to ensure that purchases are consistent with the client’s objectives.
- Unauthorized portfolio changes – the practice of changing a client’s portfolio positions without their approval.
Whether you are dealing with a stockbroker or a financial advisor, they are accountable to you when they violate the rules. Keep in mind when you have a difference with your stockbroker, you will most likely have to use a mediation or arbitration process to settle those differences. However, when your financial advisor has violated your trust or violated other acceptable practices, you have the right to seek assistance from an attorney who can help for your rights.