Brokers and Investment Advisers – How They Get Paid


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.

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