When someone is thinking about investing in the stock market, one of the first terms that may come to mind is stockbroker. Maybe you have a 401k, IRA, or a brokerage account. Regardless of what type of money you have to invest, you may want help choosing which stocks to invest in. This leads to a question you may not have considered. Do you want a stockbroker or do you want an investment advisor? Either way, you may say, I know I want the best stockbroker or financial advisor in North Carolina. But what is the difference between a stockbroker and a financial advisor? Let’s define each for a better understanding.

What is a stockbroker? Stockbrokers are licensed so that they can sell you a stock for a commission. A stockbroker, based on their client’s request, researches stocks that fit the investor’s risk tolerance or investing style. The stockbroker will receive a commission when the stock is bought and when the stock is sold. The broker will receive a commission whether the stock gains or loses [R1] value. Some stockbrokers actively call clients when they find a stock they feel their client should buy or sell. Others wait until their client calls to engage buys or sells. The idea of having a stockbroker is not as attractive as it used to be. This is because today’s investor can simply open an account with a retail brokerage firm. You surely have seen the commercials for companies like Scottrade, ETrade, Fidelity, etc. These brokerage firms allow individual investors to buy their own stocks in their own account without using a stockbroker.

What is a financial advisor? A financial advisor works with clients to come up with a portfolio of investments. The portfolio may include stocks, bonds, mutual funds, exchange traded funds, and other investments to create a diversified portfolio that meets their client’s risk tolerance and time horizon for the money invested. How does a financial advisor get paid? There are three main ways an advisor is paid: 1-Commission only. 2-Fee only. 3-Fee based. What is the difference between the three?

Commission only. When a commission-only financial advisor sells you stocks, bonds, or mutual funds, they receive a commission. Some investors take issue with this. With commission-only advisors, it is hard to know if the advice they are giving is for your benefit or theirs. Suppose your financial advisor calls to say he thinks you should sell a mutual fund that you have owned for a year and invest in another mutual fund. Naturally, you would ask why? His reply may be that the mutual fund is underperforming and the new fund is better for your portfolio. When you consider that your financial advisor receives a commission for selling the mutual fund, you have to question the real motive.

Fee only. Under this structure, a financial advisor receives a fee to manage your portfolio. This fee is commonly a percentage of the amount of money being managed. For example, if you have $100,000 that is being managed, your financial advisor may charge 1% annually to manage the account. 1% of $100,000 is $1,000 per year. Here is the big difference: The financial advisor receives no compensation for the stock, bond, or mutual fund when it is purchased for your portfolio. This means if you receive a call from your advisor suggesting that you should move from one fund or stock to another, you don’t have worry about motive. The only reason the call would be made is to help your portfolio perform better or to lower your risk. Your financial advisor will receive a fee with or without the change, so you know the recommendation is for your benefit. You need to be aware that with mutual funds there are internal fees that the mutual fund companies charge. You should ask your advisor what those fees are.

Fee based. A fee-based financial advisor is paid through a mixture of fees and commissions. Under this structure, make sure you understand from your financial advisor what the fees are and on what and when they may receive a commission.

When your financial advisor charges a fee, he or she is required by law to work on a fiduciary basis. To work on a fiduciary basis means that they are required by law to put their client’s interest first. You may have believed this was true for all financial advisors. Advisors who get a commission work on the basis that the product they sell should be suitable. There is a big difference between something being “suitable” and something that is for the “best” interest of the client. I would recommend asking your financial advisor if they are required by law to put your interest first.