5 Huge Differences Between A Fiduciary And A Broker (part 1)

5 Huge Differences Between A Fiduciary And A Broker (part 1)

April 11, 2022

Fiduciary. Broker. Same thing, right? Wrong. In a series of blog posts, Fiduciary Financial Partners is here to help clarify the key points of difference.

"Look. I've worked tirelessly for decades to accumulate the kind of life savings that came with a lot of sacrifice in the form of working weekends. I missed a child's soccer game or ballet recital as a result of it too.

For all I've been through to this point, I don't want to take on a ton of risk. I definitely don't want to run out of money.

Still, with everything else in my life that I'm responsible for, from my family to my people at work, I really don't want to totally be in charge of my finances. After all, that's what you're supposed to help me manage and what I'm paying you for, right?

Now you're telling me that this is not off my plate and never will be. If you just told me that you were a broker who couldn't manage my finances and I'd have to choose all my investments myself, we could've saved each other a lot of time.

Where do I go from here?"

Sound familiar? It's the voice of frustration we hear all the time from investors who have painfully realized that their broker may be able to provide some investment guidance…but on a more limited basis compared to a fiduciary.

Only in the event that someone is licensed as both a broker and fiduciary can they potentially "change hats" between the two, but that raises fairly big questions about whether you're getting a sales pitch or genuine help that places your interests first.

How do you really know which hat they're wearing at any given time? The answer: You don't. And this is your money we're talking about.

Fortunately, Fiduciary Financial Partners can help by taking a closer look at the five biggest ways you can distinguish a fiduciary from a broker – which you'll want to get clear on before you sit down with either one.

1) Independent advisors are always fiduciaries. Brokers may or may not be.

An independent, fee-only advisor is legally bound to be a fiduciary. The "advisor" part of that phrase is very important. A fiduciary can advise. They can recommend. They can say, "We're going to make a trade for you because it's what you should be doing based on your investment strategy and needs." This is part of adhering to a fiduciary standard that must be legally followed.

Much of this is backed by the Investment Advisers Act of 1940, which states that a financial professional who offers investment advice and charges a flat fee for that advice must be considered a registered advisor. Further, in April 2005, the Securities and Exchange Commission (SEC) ruled that certain broker-dealers are "not to be deemed investment advisors."1

Brokers, as long as they have a relationship with you through a brokerage account where they do not offer investment advice, are not held to the same standard as independent advisors. We've seen a lot of variations on the title of "Broker," which has to make the matter more confusing for investors: Wealth Manager, Financial Advisor, Financial Consultant and Registered Representative are the most common. All of these titles may sound like they are in the realm of being considered licensed fiduciaries but they typically are not.

Only a broker who is dually licensed as both a broker and advisor can actually answer the question, "Are you a Fiduciary?" with a "yes." As we'll explain, that's not necessarily the best of both worlds either.

Watch closely – the hats can change fast.

In their book, "The Investment Answer," authors Daniel Goldie and Gordon Murray astutely point out a troubling "hat changing" issue.2 Let's say that a broker is dually licensed to handle investment advisory accounts, also making him a fiduciary.

So as a fiduciary, he has to put your interests first, right? Yes – when he's giving you investment advice. However, since he's also a broker, he can then switch into sales mode, talking up investment products his firm is pushing harder to sell than others.

If he's both a broker AND a fiduciary…how are you supposed to be able to tell the difference?

Therein lies the gigantic issue.

Is he giving you a sales pitch or is he genuinely trying to help you? You can't tell. You've already got a million things to worry about between your life at work and at home – now you have to tear your hair out trying to distinguish whether someone is acting in your best interests or their own?

If you want to be crystal-clear on this, simply ask any financial professional the following three questions:

  • Are you a broker?
  • Are you a registered representative?
  • Do you have a Series 6 or 7 License?

No matter what kind of other license they may have, a Series 65 License must be held as a determining qualification of fiduciary duty.

Yet, even if a broker operates as a fiduciary as well, we see a great potential conflict of interest in an environment where designations can switched on and off to suit a broker's compensatory needs before your own.

By working with a fiduciary who is not a broker, you are selecting a financial professional who simply does not risk any such conflict.

2) A fiduciary must act in your best interests first. A broker doesn't have to.

This is what's referred to as a "fiduciary duty" and there's no gray area here – it means that financial professional is legally bound to solely act in your best interest, based on your investment goals such your timeline for retirement.

No fiduciary can recommend an investment that isn't the very best fit for those goals. If there is a reasonable amount of risk with an investment, for example, he must disclose that risk in accordance with the law. If a conflict of interest exists between the fiduciary and a potential investment based on a past or present relationship, he must disclose that as well. He must provide language in all communication that makes all details of potential transactions abundantly clear.

Contrast this with a broker, who can tout certain financial products that aren't necessarily the best ones for your needs. A good broker could give some information about a product that seems like a suitable and fair fit, which it may very well be – but it may not be the very best fit due to other sales motivations the broker has (there's more to come on this selling structure, which is another key point of difference).

In the continuation of this post, we'll shed light on three more crucial differentiators between a fiduciary and a broker, including how they manage your investments, how they're paid and more. Don't miss it.

At Fiduciary Financial Partners, we act on your best interests while advising you on the mix of investments that match your needs. We're not paid on commission and have no fine print to hide on fees. It's a true relationship in every sense.

With decades of experience, our team at FFP has been the go-to resource for investors who want to not only plan for retirement but for many years into it. If you're ready to have a conversation with someone who does more than broker transactions, let's talk about our point of difference today at 630.780.1534 or click here to schedule a call.

  • "Certain Broker-Dealers Deemed Not To Be Investment Advisers";
  • "The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future," Daniel C. Goldie and Gordon S. Murray

Fiduciary Financial Partners, LLC is a Registered Investment Adviser. This blog is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Fiduciary Financial Partners, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Fiduciary Financial Partners, LLC unless a client service agreement is in place.