Be careful who you trust with your money.
It’s a piece of advice that seems so commonsensical that it hardly needs to be said aloud. All of our lives, we’re warned by our parents, teachers, friends, and advisors to be careful with money, especially when we’re saving for the future.
According to a recent Charles Schwab survey on modern retirement, most people (69 percent) start saving for their post-career life in their twenties and thirties. The same study also found that aspiring retirees saved an average of $920,000. Who among us would choose to risk losing almost a million dollars — a lifetime of savings?
You might be surprised. Despite having good intentions and a cautious mindset, countless savers trust their hard-earned retirement funds to financial professionals who aren’t obligated — or interested — in putting their financial interests first.
Why? The answer comes down to a misunderstanding of terms.
If you were to ask the average person what the difference is between a financial advisor and a broker, they would probably accuse you of asking them a trick question and say that the two words are one and the same. The two words have achieved near-synonymy in recent years, with most non-finance conversationalists using them interchangeably.
But this conflation is a dangerous mistake. A financial advisor and a broker are different professionals with entirely different goals.
Financial Advisor vs. Broker
A financial advisor — or, more specifically, a Registered Investment Advisor — is held to the fiduciary standard. They are required by law to offer impartial guidance and put the client’s financial interests ahead of their own.
An advisor’s compensation structure typically aligns an advisor’s motivations with their clients’, as well. While these professionals can technically be paid by the hour or service, they usually receive a percentage of a client’s portfolio. Generally, this portion comes to about 0.25 percent per quarter or 1 percent annually. This arrangement means that the advisor’s earnings only rise when yours do.
Brokers, in contrast, do not need to adhere to a fiduciary standard. They only need to abide by a suitability standard — i.e., provide options that technically suit the client’s needs. However, they do not need to offer products that fit the client’s ideal budget and goals.
Moreover, because brokers tend to earn on commission, they’ll make more money off your account than financial advisors do. If a broker were to invest your money in a stock, you might be charged five percent upfront. If the stock goes up, you benefit. But if it goes down, the broker has already been paid and will be paid again when he sells you on another product.
What Does the Difference Mean for You?
I don’t mean to say that brokers can’t be useful. Their position in the industry gives them invaluable insights into the market, which, in turn, allows them to provide savvy advice on investing decisions. It’s certainly possible to form a long-lasting and lucrative connection with a broker; many people do so!
But if you want to work with a financial professional who truly has your best interests at heart — one who takes your financial goals and risk tolerance into consideration when offering products — you should opt for the fiduciary advisor. You worked hard for your retirement accounts; why would you hand them off to someone who doesn’t value them as much as you do?