Stockbrokers vs. Financial Advisors: Can You Tell the Difference?

When you seek advice about your investments, you want to know that the person advising you is not biased towards a certain product. To find out if this is so, you need to look at the way brokers and financial advisors are paid. A broker is paid a commission on the financial product that he sells, therefore he will always want to sell his clients that one - or those, as the case may be, whether it is the best thing for the client or not. While this doesn't seem fair, it is so long as the investor knows the difference. Some investors don't care about that part; they just want to invest their money.

A financial advisor on the other hand, is not usually paid a fee on any product he sells, so his advice is more likely to be fair and unbiased. Furthermore, the financial advisor is legally obliged to put his client's interests before his own. The financial advisor is paid either by a flat rate or a percentage of what you make - or a combination of both, rather than by the owner of the product he sells you.

The trouble often comes because a broker can call himself a financial planner and it is up to the client to find out if he's really only a broker. To do this you must ask him if he is registered as a financial planner - or if he is a fiduciary.

Add to this is the problem of so-called 'wrap-accounts' where a broker takes over the role of a financial advisor; he chooses the investments, does the trading and charges his fee whether it's a flat fee or a percentage. One time only a registered financial advisor could offer a wrap account, then the law changed and brokers found a legal loophole. Now the broker who deals with wrap account must call himself a financial advisor whether he's registered on not. At least that holds him accountable to put his clients interest above his own.

So even if you decide to save yourself the fees of a financial advisor and go with the broker, that doesn't mean they will always put your interests above their own. They can still sell the products that they get a commission from. This may or may not mean bad news for you personally. There was the case of the old woman who paid out $24,000 for just one trade. You don't want that to happen to you. And it is possible to find a fee-only financial advisor to reduce your costs.