The Differences in an Investment Adviser, Broker and Dealer
Trying to figure out the best investments to make is challenging enough without having to try and figure out the differences between an investment adviser, investment broker and investment dealer. While these types of positions are governed by different laws and, at times, different government oversight agencies, U.S. Securities and Exchange Commissioner Elisse B. Walter noted in 2009 that "they often provide practically indistinguishable services to retail investors and direct them to the same products." Retail investors are the people who are investing for savings and retirement rather than investing as a major function of their careers.
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Adviser
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An investment adviser is defined in the Investment Advisers Act of 1940 as "any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in . . . securities." The law exempts from the definition different professions where someone may offer financial advice, but it isn't the person's primary job. These include bankers, lawyers, and publishers.
Broker-Dealers
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Investment brokers and investment dealers are different names for the same job. Often, you will see it called broker-dealers. The Investment Advisers Act of 1940 defined a broker-dealer as someone whose investment advice is incidental to a brokerage business, and who gets no special compensation for the advice. This definition was enacted when broker-dealers charged a fixed commission. Changes introduced by Congress in 1975 forced broker-dealers to start using fee structures like an adviser. With this change, the line began to blur between broker-dealers and advisers.
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Differences
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There used to be distinct differences between broker-dealers and advisers. Broker-dealers were able to carry customer accounts and earned a commission on transactions they handled, while advisers only advised clients on what to do with their accounts, for which the advisers earned a fee for their service. Changes in regulations and legislation over the years have allowed the job functions of advisers, brokers and dealers to creep into each other's realms to the point where today they are virtually indistinguishable, at least from the view of a typical investor.
Melding
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Since broker-dealers and advisers have reached a point where they are seen as the same thing, Walter feels it is time for a change. The SEC wants to have all three job titles under one regulatory umbrella, and it is considering ways in which that can be accomplished, since the decision is not entirely up to them. Walter feels that regulations should apply based on what the job does, not what the job title is. This is consumer friendly. "As a corollary, I also believe strongly that retail investors should not bear the burden of understanding distinctions between financial professionals that have become increasingly less relevant over the years," she said. Until all of the involved agencies can reach an agreement on how to handle the transition, the jobs remain different.
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