An advisor and a broker might seem to be roughly the same for somebody with little to no financial knowledge. However, the roles performed by both of these are very different.
Summary
It is important to know the difference for anybody who is starting out with their financial journey.
A Broker vs An Advisor
The main difference between a broker and an advisor is that a broker is an intermediary through which financial goods may be sold or bought whereas an advisor may guide and inform you about which, or what type of financial investments to can make.
A broker can be thought of as an intermediary through which you may purchase any financial good like stocks, real estate, cryptocurrencies, government bonds etc.
An advisor offers paid advice to an individual or an organisation about the types of financial investments, the performance of these types of investments or the performance of a single stock, real estate property, a digital asset like an NFT etc.
Comparison Table Between a Broker and an Advisor
| Parameters of Comparison | A Broker | An Advisor |
| Services | A broker acts as an intermediary while making financial investments. They may help you purchase stocks, real estate, mutual funds, cryptocurrencies, NFTs, etc. | An advisor is somebody who offers paid advice to their client, who may be an individual or an organisation about their financial investments. |
| Payment Type | Brokers take a commission-based fee. They are paid a certain percentage of the value of a sale made through a broker. | Advisors are paid an hourly or flat fee, based on the percentage of assets under management. |
| Fiduciary Duties | Brokers may or may not perform fiduciary duties. | Advisors must perform fiduciary duties. |
| Testing & Licensing | In the United States, brokers have to pass the Series 7, otherwise known as the General Securities Representative Exam. | Advisors generally have tougher testing and licensing processes. Advisors have to pass Series 65 before they can start giving advice for a fee. |
| Portfolio Decisions | A broker cannot alter your portfolio without first asking for your permission. | An advisor can alter your portfolio before first asking for your permission. |
What is a Broker?
A broker may be an individual or an organisation that acts as an intermediary while making financial investments.
The financial investment may be of any type, including but not limited to stocks/shares of a company, a portfolio of stocks, mutual funds, cryptocurrency, real estate, government bonds, pension schemes, etc.
It is a long and tedious process for the common man to get a license to be able to purchase any kind of financial investment.
Wanting to diversify your investments by wanting to make multiple types of investments only multiplies the painful process.
Hence, brokers can act as intermediaries so that you do not have to get any sort of license to start investing in your financial journey.
Brokers earn on a commission basis, as a fixed percentage of the value of total sales made.
This sometimes leads to brokers simply incentivising sales, which may not always deliver the best results to their clients and might prove counterintuitive to their clients’ goals.
Brokers were earlier a luxury that was only available for the rich. However, as time passes and multiple companies have started popping up, you can make financial investments just after a few taps on your mobile phone with a minuscule investment amount.
Many apps have been launched in the market in the past few years which make the process as easy as pie. These apps act as brokers and allow you to purchase anything from stocks in a company to cryptocurrencies.
Through the help of such apps, it has also become way easier to invest in foreign stock markets, buy fractional shares and buy/sell your assets with a single click of a button within seconds.
What is an Advisor?
An advisor is an individual or an organisation that offers paid advice to individual financial investors or even larger companies and organisations.
Advisors also assist their clients through tax, estate and mortgage planning.
Advisors are generally held to higher legal obligations than brokers. Advisors are required to perform fiduciary duties in regard to their clients’ accounts.
Brokers can choose whether or not to be fiduciary. It is mandatory for an advisor.
As part of their fiduciary duties, they are obligated by law to fully and fairly disclose all material facts to their clients.
This standard imposes upon advisors “affirmative duty of utmost good faith”. Hence, they must work towards their clients’ best interests at all times.
Advisors also cannot earn commissions as it may reflect conflicts of interest. They are obligated to earn a flat fee that may be charged by the hour or a one-time fee. It is generally dependent on the value of assets under management.
Contrary to brokers, who only require minimum information about their clients to start making purchases for them, advisors require a deeper understanding of their clients to understand their financial goals so that they can advise them accordingly.
Main Differences Between a Broker and an Advisor
- The type of service offered by a broker and an adivsor. A broker simply acts as an intermediary to purchase financial assets. An advisor offers paid advice about financial investments.
- Brokers take a percentage of the value of the financial assets bought or sold through them as commission. Advisors are not allowed to take commissions due to conflicts of interest. They take a flat one-time fee or an hourly fee as a percentage of assets under management.
- Brokers have the choice of whether or not to become a fiduciary. Advisors are obligated by law to act as fiduciaries.
- In most countires, advisors face a tougher and more challenging testing and licensing process as compared to brokers as they have to perform fiduciary duties.
- As part of their fiduciary duties, an advisor is allowed by law to alter your portfolio without first having to ask for your permission. A broker simply cannot do so.
Conclusion
Before you hire any professional, it is necessary to do some of your own due diligence and research.
As you start your financial journey, it is important to know the difference between the services offered by a broker & an advisor and the type of payment they accept.