Broker-Dealer vs. Investment Adviser: Key Differences

What each one does

FINRA says broker-dealers are in the business of buying and selling securities on behalf of their customers (as broker), for their own accounts (as dealer) or both. Individuals who work for broker-dealers register with FINRA, pass a qualifying exam and are licensed by the state securities regulator.

Investor.gov describes an investment adviser as a firm or person that, for compensation, engages in the business of providing investment advice to others about the value of or about investing in securities. FINRA adds that the fee is, in most cases, generally based on the value of the assets in the account.

Who registers where

With few exceptions, broker-dealer firms must register with the SEC and be members of FINRA. Investment advisers generally register with either the SEC or a state securities regulator. For mid-sized advisers, SEC rule 275.203A-1 sets a buffer: an adviser with at least $100 million but less than $110 million of assets under management may, but is not required to, register with the SEC, and need not withdraw an SEC registration unless it has less than $90 million. The rule has exceptions and other categories of adviser exist, so check the rule text for any particular firm.

Standard of conduct

Regulation Best Interest covers a broker-dealer's recommendation to a retail customer. The Advisers Act fiduciary duty is broad and applies to the entire adviser-client relationship. The next page in this series, suitability vs. fiduciary vs. Reg BI, covers the detail.

Some firms and people are both. FINRA notes that with a dually registered professional it is important to find out which hat the professional is wearing.

Worked example: where does the adviser register, and what does an asset-based fee cost?

Part 1 applies the 17 CFR 275.203A-1(a)(1) buffer to three mid-sized advisers (the rule's exceptions and the other adviser categories are not modeled). Part 2: an adviser charges an asset-based fee of 1.00% a year on a $500,000 account. The fee rate is illustrative, not a market figure.

• $105 million is in the band from $100 million up to $110 million, where SEC registration is allowed but not required.
• $95 million: an adviser already registered with the SEC has slipped below $100 million but is not yet below $90 million, so it need not withdraw.
• $85 million: below $90 million, the withdrawal exemption no longer applies.
• Fee example: $500,000 x 1.00% = $5,000 a year ($1,250 per quarter if billed in equal quarterly parts).
• An asset-based fee scales with the account: the same rate on twice the assets is twice the fee.

Common exam traps

• Firm versus person: a broker-dealer is the firm; the registered representative is the individual. An investment adviser can be a firm or an individual.
• Advice for compensation is what makes someone an adviser. The test is the activity, not the job title.
• Do not say all advisers register with the SEC. FINRA says advisers register in most cases with either the SEC or a state securities regulator.
• Dual registrants wear two hats. Which standard applies depends on the capacity in which they are acting.
• The fee basis differs in typical exam stems: advisers are commonly paid on assets under management, as FINRA describes.

Practice and related pages

• Series 65 practice: investment adviser registration
• Series 63 practice: broker-dealer and agent registration
• Series 63 vs. Series 65
• Series 65 practice questions
• Series 63 practice questions
• Suitability vs. fiduciary duty vs. Reg BI