What are the differences in how brokers
and investment advisors are paid for
their services. Both brokers and
investment advisors can give you advice
on whether to buy, sell, or hold specific
securities but they are typically paid
in very different ways. Let's say a
broker recommends that you buy or sell
some stock and you agree. When the broker
completes the transaction she will
usually be paid a fee called a
commission. So, for example, if your broker
recommends that you buy a stock and you
want to invest $5,000 you might pay a
commission of $50 to $100 when the broker
completes the purchase for you. You
should know that broker commissions can
vary widely so make sure you understand
how much you are paying. If you don't
need advice on which securities to buy
or sell you can use a discount broker to
buy or sell the securities online for a
lower commission usually only a few
dollars, but in that case you wouldn't
typically receive a personalized
recommendation from a financial
professional. Brokers generally get paid
a commission each time you decide to buy
or sell. An investment advisor on the
other hand is usually paid a fee that is
based on the total value of your account.
You will hear that called an asset-based
fee. The advisors fee is usually paid at
preset times like once every quarter. For
example, if you have an investment
advisory account with a value of $50,000
you might pay an annual fee to the
investment advisor of 1.5% or
$750 a year. The differences in the
way brokers and investment advisors
charge fees are because of the
differences in the services that we just
talked about. Brokerage services are
generally more transactional and time
specific, and investment advisor services
are generally more focused on your
portfolio or account over time.
That's why it is really important that
you understand both what level of
service you want and how you will pay
for that service.
How brokers and investment advisors are
paid creates conflicts that you should
understand. With brokers paid on
commission you only pay for transactions
you authorize, however it is in the
brokers' financial interest for you to
buy and sell securities for them to earn
commissions. With investment advisors
paid an advisory fee based on the value
of your account, the advisor generally
gets paid more if your account grows so
in that key way your financial interests
are aligned with the advisor.
However, the advisors fee usually won't
change based on the number of securities
you buy or sell so you should consider
if the advisor provides the level of
portfolio management and monitoring
services you need before you agree to
pay for those services. Brokers and
investment advisors may charge other
types of fees and may have other
financial incentives that may conflict
with your interests and you should ask
about them. For example, both brokers and
advisors may receive payments from
others for recommending particular
investments. These payments can give the
financial professional an incentive to
recommend one product over another. Our
rules governing brokers and investment
advisors recognize that these conflicts
exist and clearly prohibit both brokers
and investment advisors from putting
their interests ahead of your interests.
But knowing that your financial
professional can have these types of
conflicts and asking him or her about
them can help you make better choices.
