When choosing someone to manage your investments, you need to ensure that the individual is the right one for the job. After all, your future security is on the line. One choice you have to make is whether to work through a trust company as your investment manager or as a broker.
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A trust company acting as an investment manager focuses on long-term financial planning, fiduciary responsibility, and tailored portfolio guidance, while a broker primarily executes investment transactions and earns commissions. Investment managers are generally held to a fiduciary standard; brokers are typically held to a suitability standard.
When you’re choosing someone to help manage your investments, the role, compensation structure, and legal obligations of that professional can significantly impact your outcomes and long-term alignment with your financial goals.
What is Their Scope of Work?
The first area where an investment adviser and a broker differ is in the scope of the work. As mentioned earlier, brokers are more transaction-based. Their primary goal is to sell products that will help you reach your financial goals. While brokers may provide advice and consult with their clients, most of their work consists of buying and selling investment products.
Investment managers, on the other hand, are focused on giving advice. They will provide financial services, but they also offer planning and investment guidance to their clients. They take the time to look at the entire financial picture, factor in the goals of the client, and set a plan that will help the client reach them. In some cases, investment managers may partner with other financial professionals in an effort to help their clients achieve their goals.
How are Their Fees Structured?
These two roles also differ based on how the individual is compensated. A broker is typically paid by commission. For every financial product sold, the broker receives a percentage of the sale. This can create a conflict of interest, because the broker may choose to offer only those products that bring the highest commission.
Conversely, investment managers use fee-only or fee-based compensation models. While fee-based advisors can receive commissions from products they sell, they also earn compensation from fees paid directly by clients. Fee-only advisors do not sell financial products; therefore, they’re motivated to present options with low fees, tax efficiency, and other features that prioritize your needs and goals.
How are They Held Accountable?
Finally, the way the professional is held accountable for decisions made is different. A broker is legally required to recommend investments based on “suitability.” This means that the investments must be deemed suitable for the client and the client’s goals. Legally, this allows the broker to present those products that bring the highest commission to them, just as long as they are suitable.
Investment managers, on the other hand, are required to act as a “fiduciary.” This means they legally must act in the best interests of the client with “undivided loyalty.” If an advisor is not providing the right guidance to a client, the client can hold them legally responsible for poor investment advice.
Both brokers and investment managers are licensed professionals who have a place in the investing landscape. Depending on your investment needs, either option can deliver the desired results. At Caldwell Trust, we can help you determine whether an investment manager or broker is best to work with. Contact us today to start reaching your financial goals.
