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Florida Whistleblower Qui Tam Lawyers > Florida Securities Arbitration FAQs > What is the difference between a broker and a registered investment advisor?

What is the difference between a broker and a registered investment advisor?

As a general rule, investors deal with two types of investment professionals: (1) brokers, and (2) Investment Advisors. The two positions are different and require different types of licenses.

Brokers: The entry-level position in the investment world is the “registered representative.”Most investors commonly think of this position as a “broker.”Brokers meet with clients and recommend purchases of individual stocks, bonds and the like. Brokers are called “registered representatives” because they are authorized and licensed by the SEC and FINRA to act on behalf of their employers, i.e., licensed broker-dealer firms, such as Merrill Lynch, Smith Barney, etc.

Investors are often surprised to learn how little time, effort and study it takes to become a broker. There is no educational background, college degree or similar requirement. Instead, a broker candidate must sit for and pass a single exam known as the Series 7 exam. If the candidate passes this exam, he or she receives a Serial 7 license and is authorized to make investment recommendations on behalf of the firm.

Importantly, however, brokers cannot take power of attorney or discretion over customer accounts. They can only make individual investment recommendations and then place those trades only after securing the client’s consent on a trade-by-trade basis.

Investment Advisors. Investment Advisors are different. These professionals must sit for and pass a higher level of examination, known as the Series 65 exam. In the investing world, these professionals are known as Investment Advisors, IA’s, Registered Investment Advisors or RIA’s. Investment Advisors can work for broker-dealer firms or they can work on their own. In fact, many Investment Advisors hang their own shingle, set up their own business and manage accounts for clients by way of a power-of-attorney.

As with brokers, it takes no specific educational background, college degree or training to become an Investment Advisor. Instead, the candidate must pass the Series 65 exam, albeit a more difficult exam then the Series 7.

Unlike brokers, Investment Advisors may take discretion over accounts and manage portfolios on an ongoing basis. This means the Investment Advisor need not obtain client consent for each and every trade. They can buy and sell securities as they see fit, without the express consent of the client. Because Investment Advisors have more power and authority over client accounts, they owe higher levels of fiduciary duties to their clients.

Please Note: Rabin Kammerer Johnson provides these FAQs for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.

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