Wednesday’s Word: Investment Adviser

Law IACBy Hector Rojas, Spring 2017 Student Intern

Investing is risky, frightening, and stressful. Most of us have no idea how to invest or what to invest in. We aren’t familiar with the different kinds of investment vehicles available to us.  Nor do we understand the risks associated with certain investment products. Thus, most of us seek a professional who can walk us through this process.  One such professional is an investment adviser.  Another is a broker.  Do you know the difference?

Breaking it down: what is an investment adviser?

Under the Investment Advisers Act of 1940 (“IAA”), an investment adviser is defined as: “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”

What is the difference between an investment adviser and a stockbroker?

After reading the above paragraph, you may still be confused as to what an investment adviser is. You may be thinking to yourself, “isn’t that what a stockbroker does?” If you are thinking this then you are on the right track because a stockbroker and an investment adviser are similar in that they both provide investment advice and buy and sell stocks as well as other securities on behalf of their clients. The biggest difference between the two, and the most important difference for investors is the duties these professionals owe to their clients and the standard of care they must follow.

Under the IAA, all registered investment advisers owe a fiduciary obligation to their clients. This blog has previously defined fiduciary duty as: “the obligation an individual has to manage another person’s money or property in a way that best looks out for the interests of the person whose money or property the individual is managing.” Thus, investment advisers owe a fiduciary duty to their clients and are obligated to put their client’s interest before their own and are prohibited from giving investment advice that may conflict with their client’s needs.

A broker, which this blog has previously defined here, sometimes owes a fiduciary standard, depending on the state where he is providing advice, or offers a different obligation to their clients.  Despite the state by state differences between whether a broker owes a fiduciary duty to his clients, all brokers do owe a responsibility to their clients.  According to the New York Times, all “brokers are governed by the ‘suitability rule,’ which requires them to have “reasonable grounds for believing that the recommendation is suitable.” Essentially, brokers are governed by the Financial Industry Regulatory Authority’s suitability rule.  So long as a broker has a reasonable ground for believing that the recommendation is suitable after conducting due diligence into your profile and situation.


If you get anything from reading this article I hope that it is that before you seek out advice from any professional, may it be an investment adviser or broker, I hope you take the time to do your research on the individual to learn if they are someone you can trust to manage your nest egg which you have worked so hard for. Remember, at the end of the day, you must ensure that you are diligently protecting your own interest.

To research a broker or investment adviser you are considering working with, click here and here.