If you need help in setting up and managing your investment portfolio, you have many options to choose from – including whether to choose a broker or a fiduciary advisor.
What is the difference? It boils down to the standards they follow.
Fiduciaries are held to a "fiduciary standard" – meaning that they are obligated to give advice and recommendations that are in your best interests and above their own. They must also make any disclosures upfront regarding conflicts of interest, as well as fully disclosing their qualifications, what services they provide, and how they are compensated, among other things.
Brokers are required to give you advice and recommendations that are suitable for your situation, but not necessarily the best advice – otherwise known as the "suitability standard." They do not have to disclose conflicts of interest or how they are paid. They may prefer to steer you toward a particular vendor of financial products if they receive higher compensation from that vendor – and there is nothing inherently wrong with that, as long as that product fits your needs.
Just because a broker does not have a formal fiduciary responsibility does not necessarily mean your money is safer with a fiduciary. Fiduciaries can be wrong in their advice just as anyone else can.
Financial advisors can be called by a dizzying array of titles, and it is not obvious which titles belong to fiduciaries. Ask an advisor what standard they hold to and ask to see certifications and registrations.
Fiduciaries often have an advanced financial planning certification, such as CFP (Certified Financial Planner) or CFA (Chartered Financial Advisor), and will be registered with the SEC (Securities and Exchange Commission) or appropriate state regulatory agency. Brokers are typically members of FINRA (Financial Industry Regulatory Authority), a self-regulatory agency.
Which one is the best for you? That depends as much on you and your needs as it does the financial advisor.
- Level of Advice Sought– Are you looking for advice on a single or relatively simple situation, such as dealing with an IRA rollover, or are you looking for a longer-term advisory relationship? The former may be more appropriate for a broker; the latter, for a fiduciary.
On the other hand, a single but very complex situation may be better suited to a fiduciary. An experienced broker may be just as capable of handling the situation, but the training a fiduciary goes through to achieve certifications makes them more likely to be able to handle the complexities.
- Size of Account – Fiduciaries are more likely to have a higher minimum account requirement – $100,000 is not uncommon. Brokers typically have a lower threshold, if any.
- Cost and Services – Fiduciaries are typically paid a percentage of the assets they manage for you, while brokers are paid commissions on all your trades. If you are an active investor, and your fiduciary charges a fee of 1% or less on these assets, the odds are that the fiduciary will cost less over time. Time is the key here. In the short run, a broker will cost less, while over a longer time horizon, fiduciaries can be very cost effective, while providing you with a higher degree of service. Inquire about fees early in your conversation with a fiduciary. If he or she is charging you more than 1%, you may wish to keep shopping for an advisor.
- Range of Financial Products – Brokers are typically limited to selling the financial products authorized by their firms. Fiduciaries, on the other hand, have no obligation or connection with any particular financial product. Having said that, a broker may have exactly what you need – just with fewer alternatives.
- Level of Understanding/Action– How well do you understand financial products? The less in-depth understanding you have and the less inclined you are to handle tasks like rebalancing your portfolio, the more likely it is that fiduciary services will be worth the extra cost.
In either case, it is important to understand the qualifications, services, potential conflicts, and fee structures of any financial planner your choose, regardless of the type. Do your homework and choose a financial advisor that you feel comfortable with, and you should be fine.