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Brokers and Investment Advisers - How They Get Paid - YouTube
Channel: U.S. Securities and Exchange Commission
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What are the differences in how brokers
and investment advisors are paid for
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their services. Both brokers and
investment advisors can give you advice
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on whether to buy, sell, or hold specific
securities but they are typically paid
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in very different ways. Let's say a
broker recommends that you buy or sell
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some stock and you agree. When the broker
completes the transaction she will
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usually be paid a fee called a
commission. So, for example, if your broker
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recommends that you buy a stock and you
want to invest $5,000 you might pay a
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commission of $50 to $100 when the broker
completes the purchase for you. You
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should know that broker commissions can
vary widely so make sure you understand
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how much you are paying. If you don't
need advice on which securities to buy
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or sell you can use a discount broker to
buy or sell the securities online for a
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lower commission usually only a few
dollars, but in that case you wouldn't
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typically receive a personalized
recommendation from a financial
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professional. Brokers generally get paid
a commission each time you decide to buy
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or sell. An investment advisor on the
other hand is usually paid a fee that is
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based on the total value of your account.
You will hear that called an asset-based
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fee. The advisors fee is usually paid at
preset times like once every quarter. For
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example, if you have an investment
advisory account with a value of $50,000
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you might pay an annual fee to the
investment advisor of 1.5% or
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$750 a year. The differences in the
way brokers and investment advisors
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charge fees are because of the
differences in the services that we just
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talked about. Brokerage services are
generally more transactional and time
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specific, and investment advisor services
are generally more focused on your
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portfolio or account over time.
That's why it is really important that
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you understand both what level of
service you want and how you will pay
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for that service.
How brokers and investment advisors are
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paid creates conflicts that you should
understand. With brokers paid on
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commission you only pay for transactions
you authorize, however it is in the
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brokers' financial interest for you to
buy and sell securities for them to earn
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commissions. With investment advisors
paid an advisory fee based on the value
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of your account, the advisor generally
gets paid more if your account grows so
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in that key way your financial interests
are aligned with the advisor.
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However, the advisors fee usually won't
change based on the number of securities
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you buy or sell so you should consider
if the advisor provides the level of
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portfolio management and monitoring
services you need before you agree to
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pay for those services. Brokers and
investment advisors may charge other
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types of fees and may have other
financial incentives that may conflict
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with your interests and you should ask
about them. For example, both brokers and
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advisors may receive payments from
others for recommending particular
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investments. These payments can give the
financial professional an incentive to
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recommend one product over another. Our
rules governing brokers and investment
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advisors recognize that these conflicts
exist and clearly prohibit both brokers
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and investment advisors from putting
their interests ahead of your interests.
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But knowing that your financial
professional can have these types of
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conflicts and asking him or her about
them can help you make better choices.
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