How are Investment Advisers and Brokers different?

It is common to hear the terms investment adviser and broker on the lips of financial analysts and experts or come across them in articles and journals on finance.

But what do they really mean? What’s the job description of an investment adviser or broker? If someone says he is a broker or investment adviser, what’s their day-to-day work activities like? And why do we need these people in today’s finance world?

Brokers and investment advisers offer similar services in the financial world.

While brokers can be likened to sales agents who specialize in selling securities in the exchange markets, investment advisers are more of consultants who are skilled in offering expert advice on managing the wealth and investment decisions of clients.

Brokers and investment advisers are core to the activities of the financial market.

Especially to neophytes in the market as they provide insightful market information, dedicate their time and resources in ensuring client’s investments bear fruits especially for those who don’t have time to monitor the market and they handle the transactions of both retailers and institutions.

What is a Registered Investment Adviser?

An investment adviser can be described as an individual or firm paid to offer investment recommendations or research about securities either through management of client’s assets or through writing.

As explained earlier, an investment adviser is likened to a consultant in a field who is well-read and has the necessary qualifications and requirements to offer advice as an authority in that field.

The work of an investment adviser doesn’t end at offering advice on the assets and securities of a client.

It involves keeping close tabs on the performance of the client’s investments and ensuring they align with the client’s investment goals.

Registered Investment Advisers (RIA) as they are referred to have to abide by certain standards.

These standards are set by the Security and Exchange Commission in Nigeria.

The SEC is the regulatory agency for Investment Advisers in Nigeria.

Registered Investment Advisers whether working as individuals or with a firm are usually paid on commission according to the amount of investment assets they are managing.

What is a Broker Dealer?

A broker is someone who trades orders and executes securities.

By this, we mean a broker is a licensed intermediary between a buyer and seller of securities in the exchange market. A broker dealer is a financial entity that executes trades on behalf of their clients for a fee.

Broker dealers are present in many industries including insurance, real estate and of course, investing.

Investment brokers act as middle-men between investors and the securities exchange market. Broker dealers come in various sizes depending on the number of trades they facilitate.

To register as a broker dealer in Nigeria, one has to fulfill the requirements of the Securities and Exchange Commission in Nigeria.

These requirements include; evidence of payment of application fee, processing fee, registration fee, sponsored individual fee (for sponsored individuals).

Applicants are also expected to complete SEC form 3, form SEC 2 and 2D, a minimum paid capital of N300,000,000 etc.

Further, brokers-dealers must also fulfil the requirements of the exchange like NGX (Nigerian Exchange formerly known as Nigerian Stock Exchange) or LCFE (Lagos Commodities & Futures Exchange) depending on which securities they deal in and must follow guidelines and rules published by the Exchange.

There are 3 major SEC recognized exchanges in Nigeria i.e.: NGX, LCFE and AFEX (AFEX Commodities Exchange Limited).

These exchanges have their own rules and requirements for their trading members and brokers.

NGX member brokers offer Stocks, Derivatives, Bonds and ETFs trading to their clients.

While LCFE and AFEX brokers deal in Commodities like Wheat, Coffee, Sugar, Oil & Gas, Minerals including Gold, Copper etc.

How are Investment Advisers Different from Brokers

While it seems to the layman that there isn’t much difference between the investment advisor and broker, an expert will draw out the demarcation line between the two jobs.

The difference between brokers and investment advisers’ hinges on their jobs in the market, how they earn, required qualifications and regulatory bodies.

It was explained earlier that a broker is akin to a sales rep who specializes in selling securities while an investment advisor is more of a consultant who charts an investment path for individuals and organizations who want to manage their wealth.

Brokers are required to fulfill all the requirements of the Nigeria Securities and Exchange Commission and the same for Investment Advisers.

While brokers earn on commission fee from the securities sold, financial advisers charge their clients payment fee for their services.

In most cases, financial advisers charge according to the amount of assets a client has.

Another difference between advisers and brokers is that while brokers do not care about the trajectory of the security sold i.e., brokers are responsible for the protection of the stock market and market transparency in general.

What happens to individual stockholders is not the problem as their job is not to offer advice to an investor.

In most cases, your business with a broker ends on the successful purchase or sale of a stock.

On the other hand, investment advisers try to protect the different individuals whose asset or investment they manage as he is required to protect individual investors under him from loss.

In Nigeria, to qualify as a broker, one has to register with the Nigerian Securities and Exchange Commission (SEC) and fulfill all requirements and abide by the rules stated in the NGX rule book.

The commodities exchange LFCE also has requirements for being a broker, which includes not being below 21years old, not being declared bankrupt in the past, not being convicted of any offence etc.

For being a registered financial adviser in Nigeria, you need to be registered with the SEC in accordance with rule 96 of the SEC of which includes but not limited to having a net worth of at least N500,000.

Choosing Between Investment Advisers and Brokers

Having known all there is to know about investment advisers and brokers, which would you patronize if given a choice?

In my honest opinion, I’ll choose an investment adviser as a new investor.

Firstly, the proliferation of online trading platforms has almost rendered the job of a broker obsolete.

A broker is merely an agent that connects the buyer of securities to the market.

With the introduction of online trading platforms, traders can access the market anywhere and anytime around the world without needing a broker.

Online trading platforms are automated and are connected to worldwide markets/exchanges through Internet unlike traditional brokerages who work over phone.

These platforms offer speed and wide investment options over traditional brokers.

These platforms though still have to be licensed as a trading member/brokerage firm at an exchange or sub-licensed through a market maker/dealer.

Secondly, while an adviser is concerned about the client’s investments and works to protect it against loss, a broker is not bothered about the fate of the client’s trading activities after collecting his fees as they only act as an intermediary between market and the client where clients have to research and invest themselves.

Thirdly, as an amateur entering into the murky waters of the financial market, guidance is more than important and thus is what financial advisers bring.

Most brokers will only have you buying as much securities as possible without guiding you on which is profitable.

This is done since they’re actually held to a lower standard compared to investment advisers. And also, for them to claim more fees.

In reality, brokers are not responsible to offer you investment advice as per exchange rules and their only incentive is the commission they get on the sale of securities.

An investment adviser on the other hand is required to offer you the best-tailored investment advice.

It is the best bet for those working full-time and don’t have time to research the markets but wish to earn passive income from the securities market.

It is important to note that an investment adviser cannot hold or manage your funds.

It has to be invested directly under your name in the securities market. He can only offer you recommendations and advisory services for investments.

However, if you lack the skills needed to navigate the online trading software and you believe your understanding of the financial market is sufficient to earn you profit, you can choose a traditional broker.

You can also choose a broker if you do not have the huge resources to invest, neither do you have the high fees usually charged by investment advisers, then your choice of broker would make sense.

But keep in mind, this can be risky if you are not experienced enough or if you lack knowledge of the securities market.

In conclusion, it all boils down to you, what you want from the market, what’s your experience level and what you have to invest.

Perhaps, the words of Sun Tzu in Art of War will perfectly summarize my take on one’s choice between a broker and a financial adviser when paraphrased “Know the enemy, know yourself; your victory will never be endangered. Know the ground, know the weather; your victory will then be total. But I say today, know yourself, know your market and know what you trade then your profit will never be endangered.”