[This post is the first in a series of three that discusses the role of stockbrokers, investment advisors and financial planners.]
The world of finance and investing can be quite complex, and many people often seek the expertise of a professional to assist them in making those important decisions. Now, we enter the world of “financial professionals—stockbrokers, investment advisors, and financial planners. Because of the range of services that can be provided by these different individuals, it can be confusing to know who to seek for advice. Below, I will help explain the different role each player takes in the financial world, and help you find the right professional.
According to the Securities and Exchange Act of 1934, a broker is defined as “any person engaged in the business of effecting transactions in securities for the account of others.” Therefore, a stockbroker is merely a person who helps an individual, or institution, effect trades for their account. When these trades take place, the stockbroker is compensated through a fee and/or commission. These trades must be “suitable” investment suggestions—meaning they are in accordance with a client’s investment objectives, risk tolerance, portfolio, and overall financial situation. While the above requirement must be met, stockbrokers do not have any fiduciary responsibility to act in your best interest.
In terms of regulation, a broker must be registered with the Securities and Exchange Commission (SEC) and be a FINRA member. They must also pass the Series 7 and 63 tests, which qualify them to be a general securities representative. They must also be employed by or associated with a broker-dealer firm.
Our next blog post will explain what an Investment Advisor (IAR) is.