A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.

Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies.

When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a "dealer." Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm's holdings.

Main points of activity[link]

• Professional participant in securities market who carries out dealer activity shall be called dealer.
• Announcing the price, the dealer is committed to announce other essential conditions of the buy-sell contract of securities: minimum and maximum number of securities subject to purchase and/or sale, as well as the term of announced prices validity.

Functions[link]

• All the functions of broker including financial consulting
• Organization and support of turnover (liquidity), or so-called market-making (price announcing, duty of sell and buy of security at announced price, announcing of min and max number of securities that can be bought/sold at announced price, implementing time periods when announced prices are available)

Regulation[link]

United States[link]

See: Securities regulation in the United States

In the United States, broker-dealers are regulated under the Securities Exchange Act of 1934 by the Securities and Exchange Commission (SEC), a unit of the U.S. government. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Many states also regulate broker-dealers under separate state securities laws (called "blue sky laws").^[1]

The 1934 Act defines "broker" as "any person engaged in the business of effecting transactions in securities for the account of others," and defines "dealer" as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise." Under either definition, the person must be performing these functions as a business; if conducting similar transactions on a private basis, they are considered a trader and subject to different requirements.^[2]

On April 28, 2004, the SEC voted unanimously to change the net capital rule which applies to broker-dealers, thus allowing those with "tentative net capital" of more than $5 billion to increase their leverage ratios.^[3] Many commentators have cited this rule change as an important cause of the financial crisis that began in 2007. The rule change remains in effect, though subject to modifications.

United Kingdom[link]

UK securities law uses the term intermediary to refer to businesses involved in the purchase and sale of securities for the account of others.

The Financial Services Authority authorises and regulates companies engaging in such activity as "regulated activities"^[4] under the Financial Services and Markets Act 2000.

Japan[link]

The common Japanese term for a broker-dealer is "securities company" (証券会社, shōken-gaisha^?). Securities companies are regulated by the Financial Services Agency under the Financial Instruments and Exchange Law. The "big three" are Nomura Holdings, Daiwa Securities Group and Nikko Cordial (a subsidiary of Sumitomo Mitsui Financial Group). Most major commercial banks in Japan also maintain broker-dealer subsidiaries, as do many foreign commercial banks and investment banks.

Securities companies must be organized as kabushiki kaisha with a statutory auditor or auditing committee, and must maintain minimum shareholder equity of ¥50 million.

See also[link]

• Broker
• Brokerage firm
• Trader (finance)
• Stock broker
• Commodity broker
• Options broker
• Floor broker

References[link]

1. ^ NASAA Broker-Dealer Resources
2. ^ Guide to Broker-Dealer Registration, Division of Trading and Markets, U.S. Securities and Exchange Commission, April 2008.
3. ^ General Accounting Office, Major Rule Report: Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities (B-294184), June 25, 2004. (“GAO Major Rule Report”)
4. ^ Financial Services and Markets Act 2000, schedule 2

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v t e

A financial adviser is a professional who helps clients to maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisers use stock, bonds, mutual funds, real estate investment trusts (REITs), options, futures, notes, and insurance products to meet the needs of their clients. Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry.

A further distinction should be made between "fee-based" and "fee-only" advisers. Fee-based advisers often charge asset based fees but may also collect commissions. Fee-only advisers do not collect commissions or referral fees paid by other product or service providers.^[1]

Some investment advisers only charge a fee based on the assets managed for the client. Typically they charge about 1.0 to 1.5% per year to make the investment decisions for the client. They do not collect commissions.

Role[link]

The main purpose of a financial adviser is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. To ensure ethical practices, financial advisers must understand a client's financial situation as well as their need for financial stability. Finance can be complicated and any adviser has responsibilities ethically to see that a client's risk is minimized, and monetarily, that money is maximized within the established risk boundaries.

Retirement planning[link]

One of the major services that financial advisers offer is retirement planning. A financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. In the United States, this will include the use of several investment tools such as 401(k)/403(b) Roth account(s), Individual Retirement Accounts/Roth IRAs, mutual funds, stocks, bonds and CDs.

The financial adviser determines what percentage of the available income is necessary—taking into account tax liabilities, expected inflation, and projected return on investment—to meet a minimum balance by the client's target age of retirement. This is a fairly straightforward calculation, and many automated tools do this. The financial adviser's greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client's risk tolerance.

Investing[link]

Financial advisers may help their clients invest for both long and short term goals. It is the financial adviser's duty to determine the clients' goals and risk tolerance and then to recommend appropriate investments. Generally, a long time horizon allows for the adviser to recommend more volatile investments with potentially greater risks and rewards. Such investments include direct investment in stocks or through collective investment products such as mutual funds and unit investment trusts/unit trusts.

If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. While these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. Although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.

"adviser" vs. "advisor"[link]

There is no difference between a financial "adviser" and a financial "advisor". The terms are interchangeable, and are considered synonymous.^[2]

Compensation[link]

Fee-only[link]

As defined by the review materials for the Certified Financial Planner exam and the National Association of Personal Financial Advisors, fee-only financial advisers, such as an investment adviser, are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisers nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.^[3] The fee-only model of compensation reduces the potential for conflicts of interest between the adviser and the client in that the adviser is not beholden to insurance companies, particular investments, and other financial companies.

A clear distinction should be made between brokers, who often refer to themselves as "fee-based" (receiving both fees and commissions) and "fee-only" (someone who never receives compensation or incentives from a third party.)

A fee-only adviser may reduce conflicts of interest such as:

• advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time.
• an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churning).
• an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the adviser can generate a commission.
• an incentive to make recommendations that pay higher sales commissions to the adviser when a less expensive alternative may have been available.

Commission-based[link]

Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry. For an explanation of commissions and fees charged by mutual funds.

Online-only[link]

A new class of services that deliver guidance regarding financial planning are emerging, offering low cost financial advice through the sponsorship of HR department of employers. Companies like HelloWallet are offering low cost financial advice through the employer. These services are also delivered to the poor through donation of HelloWallet as well as philanthropic organizations.^[4]

History[link]

Much of today's model for what a financial adviser is, stemmed from IDS Financial Services, which later became known as American Express Financial Corporation (AEFC) after the company was sold by Alleghany Corporation, and later became Ameriprise. At IDS, a young rep named James Tausz was a top-ranked broker and served as the basis of inspiration for the company's model of "Financial Planning for a Fee," which IDS VP Vint Lewis popularized by training thousands of IDS stock brokers. Today, the concept of a "financial adviser" is widely popular. Before the IDS model, almost all stock brokers worked on commissions only.^[5]

Qualifications[link]

United States[link]

There are three types of licenses for individual professionals who typically hold themselves out as financial advisers: Investment Adviser Representative Series 65, Registered Representative Series 7 (also known as a "Stock Broker"), Insurance Producer. The practice of investment advice, the sale of investment securities and the sale of insurance products are regulated and therefore an individual must pass an exam, affiliate with a firm and register with one or more states before conducting business. A financial adviser may hold any combination of these licenses depending on the nature of their financial practice. Similar to the term financial adviser, the terms wealth manager, financial consultant and financial planner do not refer to a specific license or designation. These terms are typically selected by individuals to help describe the nature of their financial practice.

The Chartered Financial Analyst (CFA) designation, the Certified Financial Planner (CFP) designation, the Chartered Life Underwriter (CLU), The Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute,^[6] the Certified Financial Planner Board of Standards,^[7] and the College for Financial Planning.^[8]

In the United States, a firm registers as an investment adviser with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment adviser. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process.

Certain multi-state advisors may also register with the SEC, as well as certain Internet based advisers. If an adviser does not qualify for registration with the SEC, the adviser must register with the states where it maintains an office, as well as each state where its clients are located. There are de minimus exemptions in most states, typically exempting from registration those advisers with less than 6 clients, but the exemption varies from state to state.^[9]

Common examples of investment advisers include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) Registered Investment Advisers.

In general, under U.S. law, investment advisers owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.^[10]

In many cases, a Registered Investment Adviser (RIA) is a corporation or partnership while the person actually providing the advice is an investment adviser representative (IAR) of the adviser organization. Investment adviser representatives and individuals registered as investment advisers are sometimes certified as a Certified Financial Planner (CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. [5] or a Chartered Financial Analyst(CFA) holding a charter from the CFA Institute [6] after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a Registered Investment Adviser.

The registration process to become an investment adviser is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisers.^[9][11]

Regulation[link]

In the United States, the Financial Industry Regulatory Authority (FINRA) regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 Uniform Investment Adviser Law Exam. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner (although care must be taken not to be confused with a Certified Financial Planner), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission in the USA. Anyone in the business of providing financial advice can call themselves a financial adviser. There currently isn't any regulation on the use of this title. To charge a fee for advice, one must pass the FINRA Series 65 test—The Uniform Investment Adviser Law Examination. To be a "Registered Investment Adviser" (RIA) or "Investment Adviser Representative" (IAR), one must pass the FINRA Series 65 exam or both of the FINRA Series 7 and Series 66 exams. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.^{[citation needed]}

Canada[link]

The financial adviser role in Canada is varied. Most financial advisers carry licenses to sell life insurance, securities, or mutual fund - or some combination of all three. The life insurance license is obtained through successful completion of the life license qualification program, except in Quebec, where licensing is completed through l'autorite des marchiers financiers. There are three distinct securities licenses available. Completion of the Canadian Securities Course allows the sale of most types of securities, including stocks, bonds, and mutual funds. More advanced licensing is required for the sale of derivatives and commodities. Completion of a mutual funds course allows the adviser to sell mutual funds only, excluding certain types of very specialized funds and importantly, ETFs - although recently non-securities licensed financial advisers have gained access to ETFs through new mutual fund products. The third possible license is the exempt securities license.

In many, but not all cases, licensing requires the support of a dealer or insurer. It is also mandatory for advisers to carry Errors and Omissions Insurance. The term financial adviser can refer to the entire spectrum of advisers. In general, the industry in Canada is segmented into three channels of advisers: MGA, MFDA and IIROC. However, there is little regulatory control exercised over use of the term, and, as such, many insurance brokers, insurance agents, securities brokers, financial planners and others identify themselves as financial advisers.

Many financial advisers in Canada are also financial planners. While there are numerous financial planning designations, the most common is the Certified Financial Planner designation although the Personal Financial Planner designation is also popular in Canada. There is no regulation, outside of Quebec, of the term "Financial Planner".^[12]

United Kingdom[link]

There are three main bodies awarding qualifications for financial advisers in the UK. The main one is the Chartered Insurance Institute, which offers professional financial services qualifications all the way from beginner to degree levels. The IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. The Institute of Financial Planning offers the Certified Financial Planner.

In the United Kingdom investment advice is given either by a financial adviser or a stock broker.

Financial advisers need to pass a series of exams and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority, a UK government qango that must be satisfied the adviser is a “fit and proper person” before they may practice.

This is to be replaced in December 2012 with a new standard of qualification classed as Diploma and all existing advisers will have to attain the new qualifications to be able to continue to give advice going forward. Typically a diploma or higher qualified adviser will have Dip FA or Dip PFS after their name.

Financial advisers are either tied, multi-tied, independent, or fee-only.

As the classifications suggest, tied advisers can only recommend 'financial products' marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work.

Multi-tied agents perform a similar role, except they represent a number of different companies. This is sometimes referred to as the panel system. Tied and multi-tied advisers are nearly always rewarded via commission, though in some cases (and if the adviser is employed rather than self employed) commission may be expressed in notional terms to justify a salary.

An Independent Financial Adviser must offer advice on all 'financial products' on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee for advice about a product or products, rather than being remunerated commission from the financial institution that is promoting the product.

A Fee-only financial adviser designs bespoke solutions, and often by investing directly removes marketing commissions and charges from the costs that clients would otherwise pay. Fee-only advisery firms tend to accept a professional duty of care.

In the UK there has been much debate in the media about the effectiveness of financial advisers, especially in situations where there is perceived bias toward 'financial products' that carry commission.

Best advice is a concept which was never more than a heading in the FSA / PIA / NASDIM regulations (and is now withdrawn in favour of the 'appropriate' standard) and which refers to the general obligation under Contract Law (Agency) that a broker has to find the correct 'financial product' to match a client 'need'. A provider firm must not make a recommendation unless it has a suitable product to offer. If it offers no suitable products then none should be recommended. A multi-tied firm must not make any recommendations unless it has access to a suitable product from the providers on their panel. In the UK many believe impartial advice can be obtained only by consulting an independent financial adviser. Others believe it can only be obtained by consulting an adviser that never accepts commission.

Republic of Ireland[link]

The QFA ("qualified financial adviser") designation is awarded to those who pass the Professional Diploma in Financial Advice and agree to comply with the ongoing "continuous professional development" (CPD) requirements. It is the recognised benchmark designation for financial advisers working in retail financial services. The qualification, and attaching CPD programme, meets the "minimum competency requirements" (MCR) specified by the Financial Regulator, for advising on and selling five categories of retail financial products:

• Savings, investments and pensions,
• Housing loans and associated insurances,
• Consumer credit and associated insurances,
• Shares, bonds and other investment instruments, and,
• Life assurance protection policies.

New Zealand[link]

This article's use of external links may not follow Wikipedia's policies or guidelines. Please improve this article by removing excessive or inappropriate external links, and converting useful links where appropriate into footnote references. (September 2010)

The National Certificate in Financial Services [Financial Advice] [Level 5] is currently being introduced in New Zealand. All Individuates and registered legal entities providing financial services must be registered as a RFSP( Registered Financial Service Provider ) Their Directors, retail and sales staff are required to gain the national certificate.^[13]

The New Zealand Qualifications Authority (NZQA) in conjunction with industry groups via the ETITO administers a qualifications frame work for the qualification. Registrations and examinations are conducted by the ETITO.^[14] All Financial Advisers are required to register with the ETITO by March 31, 2011

The Qualifications Framework consists of a core set of competencies sets, A B C followed by 2 electives covering specialist areas such as Insurance and Residential Property Lending. Certain NZQA approved qualifications such as an Accountancy degree may exempt student from competency set A NZQA approved training in the certificate is offered by the New Zealand Open Polytechnic^[15] as well as several other accredited organizations^[16]

South Korea[link]

In South Korea, the Korea Financial Investment Association oversees the licensing of investment advisers. There are a number of different professional certifications in this area, including Certified Securities Investment Advisor and Certified Derivatives Investment Advisor.^[17]

See also[link]

• Collective investment schemes
• Socially responsible investing

References[link]

1. ^ Apple Tree Wealth Management Your Financial Advisor Charges What???
2. ^ [1]
3. ^ NAPFA - The National Association of Personal Financial Advisors - FAQs
4. ^ http://www.businessweek.com/investor/content/sep2009/pi20090929_616550.htm
5. ^ [2] The Ameriprise Financial History
6. ^ http://www.cfainstitute.org/
7. ^ http://www.cfp.net/
8. ^ http://www.cffp.edu/index.aspx
9. ^ ^{a b} [3]
10. ^ Axinite Financial Advisors Fiduciary Duties of Financial Advisors
11. ^ [4]
12. ^ http://www.advisor.ca/news/industry-news/planning-advocates-push-professionalism-446
13. ^ http://www.business.govt.nz/fsp/
14. ^ http://afacompetence.org.nz/1-who-is-etito/
15. ^ http://www.openpolytechnic.ac.nz/
16. ^ http://afacompetence.org.nz/1-training-providers/
17. ^ Korea Securities Market 2010, Research and International Affairs Department, Korea Financial Investment Association, 2010, p. 332, http://www.kofia.or.kr/kofia/FILE_TEMP/store/470B483E-0C19-0F34-0A2A67597BFFC9A7/CMK%202010%20Final.pdf, retrieved 2011-09-11 

External links[link]

• 10 Questions to Ask When Choosing a Financial Planner
• [7] Becoming an investment Adviser
• AAFM American Academy of Financial Management
• IAIA International Association of Investment Advisers
• AIFA Association of Independent Financial Advisers - UK Trade body
• FSA website Financial Services Authority (UK)
• IAA Investment Adviser Association
• NAIFA National Association of Insurance & Financial Advisors
• SEC IA Search SEC Database of US Registered Investment Advisers
• SECLaw.com Financial Advisor Legal Information Center
• €FPA €uropean Financial Planning Association