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Financial advisor vs broker: the key differences

The main role of the advisor is to help a client clearly understand their financial goals.

Some people use the terms “financial advisor” and “broker” interchangeably and most investors are under the impression that they are the same, but they are in fact vastly different.

It’s very important that you understand the difference between the two especially when putting your trust into an individual who will take charge of your financial needs and plan.

What is the main difference between a financial advisor and broker?

Broker:

A broker is generally an individual that is a tied agent to one company. What this means is that they will be limited to only provide advice and investment products that are linked to that company only.

Financial advisor:

A financial advisor has a vast and more open-architecture platform where they can provide advice over several different investment companies that is in the best interest of the client. A financial advisor’s job is to be able to sit down with an individual, plan out their financial goals and needs, and then provide the investor with a holistic financial plan that focuses on a strategy that meets their needs.

Brokers are mostly large corporations, where financial advisory firms are small, independent business.

Although most brokers would say they have numerous products that can be suitable for the needs of an investor, they will generally favour the products of the investment company they work for, as there are often incentives paid which then drives sales of in-house products.

How are brokers remunerated and do they provide an ongoing service to clients similar to that of financial advisors?

Brokers are remunerated by commission based on the amounts of products sold and not necessarily the advice provided. This, in my opinion, is not providing any value to the client needs as once the sale has been done that is generally where it ends.

What are some of the disadvantages of dealing with a broker?

  • Not advisable to have your eggs in one basket and this is, unfortunately, the strategy of a broker, as they only provide in-house risk and investment solutions for individuals.
  • If there was any negative news that could impact the investment company, it could massively affect your investment portfolio.
  • Due to brokers being driven by the number of sales they make, it’s possible that the product they offer is not always in the best interest of the client.
  • Extremely limited or no after-sale services.

What can a financial advisor offer vs a broker?

The main role of the advisor is to help a client clearly understand their financial goals. When putting together a financial plan we are there to assist with understanding the objectives of the client, then put together a strategy to help the individual reach and achieve those goals.

An advisor can offer advice in a wide range option such as:

  • Pre and post-retirement planning;
  • Local and offshore investing;
  • Risk cover;
  • Cash desk deposits and forex transactions;
  • Tax assistance; and
  • Employee benefits.

What are the advantages of having a registered financial advisor to manage your portfolio?

  • A financial advisor manages relationships from a holistic perspective across multiple financial topics and provides a range of services and product solutions.
  • The advisor is an investment professional who assists clients with financial decisions.
  • Advisors are not tied to one product provider and can offer solutions via several different product provider and investment platforms.
  • Once a client has been assisted, they provide ongoing wealth management to that client by ensuring follow up meetings.
  • Category II advisors like Global & Local are able to provide that extra advantage of actively managing a client’s portfolio and when necessary making the relevant changes in the best interests of the client.
  • Advisors provide the peace of mind that they will always be available should you have questions relating to your portfolio.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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Hi Michael,
I also moved independent because of all the negatives you have stated of being tied.

I am not sure if broker is the right term for an tied-adviser, most people think of brokers as independents, I think you could of used the term agent rather (PSA vs RFA)

I don’t want to sound to critical here,I completely agree I give my clients much better value as an IFA, but I feel you have exaggerated the difference in value between an independent and a tied-adviser almost to comical levels there.

Just my 2cents,
Regards
Daniel J Matthee

I concur. Tied FA’s are really sales people. I’m not a salesman. Therefore I intend making a move soon from Tied to IFA.

With respect to the writer who means well, this article is not a true reflection of definitions. The reference to ‘Broker’ is about to be changed in any event.

I too respectfully disagree. Independance of advice or quality of advice isn’t based on the ability to use multiple companies nor their product holdings for that matter.

If independence of advice is sought after one should look at advisors with a CFP designation as a base for choosing.

I am part of the “tied agent” grouping that you refer to and though I might not have the vast overview of all people practicing some form of advice in the field I have noted a few behavioral challenges when someone becomes “untied” if you will.

Internally we get audited on the type of business we write as well as the quality of business. Not from a commission point of view but from an advice point of view.

There is a level of performance management from big corporates that cause many of tied agents to turn independent. Leading to mass churning of benefits or replacing of policies. This, in most cases, is not to the benefit of clients.

I fundamentally believe in choice, and with that comes the choice of every advice giver to choose where they see themselves fulfilling their ambitions.

However, I do find it equally important that clients should not unjustly be impacted in their choice of advice professional based on the unfounded stereotype that tied advisors are somehow automatically inferior to the independent advisors.

In agreement.

Would be interesting to get the Stats as follows:

1. From the Ombud to see where most complaints are coming from.
2. From FSCA and the Compliance officers regarding adherence to compliance standards.

The ‘tied’ space is much more regulated by the Assurors to ensure compliance.

In my opinion this article is a bit one sided and having more products to sell does not change the holistic advice that must still be provided to the client.

It is like comparing a General Practitioner doctor to a doctor that specialized in a specific field. You go to the Specialist due to his/her expertise in a specific subject and a GP to do a general assessment and then possibly refer you to a Specialist. The Specialist is “tied” and the GP is “untied”, but both have a specific job to do.

The job of an Advisor is to advise a client in addressing his/her needs and requirements and this should not change due to the fact that the Advisor is tied or untied. The only difference is in the shopping cart of products available to offer to a client and you must distinguish between the performance of an investment and the advice given by an Advisor. The performance of an investment is as a result of various factors (compostion, risk, external market impact and the list goes on….). An Advisor is not a Fund Manager, he /she merely utilizes the historic performance data and future predictions to decide on the best composition to propose to a client.

Whether you are tied or untied, there is a responsibility on each and every Advisor to actively manage their clients and to regularly engage and review their portfolios where necessary.

The global industry is moving more towards the tied model due to the fact that Advisors should not be wrongly incentivized to favour a certain product provider (sell a product to drive commission instead of focusing on the holistic advice). The product houses are being challenged to be more competitive on their offering and to ensure that the basket of products that the Advisors are able to sell in a specific segment is appropriate and competitive.

And how does one measure the quality of the advice – “advisor alpha”?

End of comments.

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