IMA Process
Why IMA?
Authors Corner
Learning Center
Fee Schedule
IMA Personnel
Contact IMA
Home page for Prudent Portfolios Independent and Objective Investment Advice for Nearly a Quarter of a Century

12 Differences Between Stockbrokers and Independent Investment Managers 

1. Regulation
Brokers and independ
ent investment managers (sometimes called investment advisors) exist under completely separate regulatory systems. Brokers must comply with the Securities Exchange Act of 1934 and investment advisors comply with the Investment Advisors Act of 1940.

2. Discretion
Typically investment advisors have investment discretion whereas brokers do not, i.e., investment advisors do not need to ask a client's permission to buy or sell a particular investment for that client, whereas brokers do need to ask. The burden of investment decision making and management (within the parameters of a client's investment objectives) is entirely on an investment advisor.

3. Selling
The job of a broker is to sell securities to customers. The broker's firm may be pushing one particular security one week because, e.g., they were the underwriter of the security that week. Office managers of the brokerage firm may order their brokers to sell as much of the particular security as they can to their customers. Investment advisors do not sell their clients anything except their services generally.

4. Compensation
Brokers are usually compensated in whole or in part by commissions. (Some financial "products" they sell have higher commissions than other products they have available for sale. One way a brokerage firm encourages its brokers to sell a particular product over a given time frame is to give their brokers a higher commission on that product than on other products.) A broker's financial incentive is to cause his customer to buy and sell as much as possible without regard to the performance of his customer's investments. (An advertisement answers its own question: "What does a broker get when he gives bad advice? A commission.") This conflict of interest can unconsciously affect even the most well intentioned broker. For other brokers the conflict of interest can lead to so-called "churning" of the accounts of particularly malleable customers. Investment advisors, on the other hand, do not receive any commissions, just as they do not sell anything to their clients. Investment advisors are compensated by an annual fee that is, typically, a small percentage of the value of a client's account. Thus, rather than having a conflict of interest, investment advisors have a congruence of interest with their clients. The more an investment advisor can make his or her client's portfolio grow, the higher the advisor's fee is.

5. Expertise
Brokers generally need to be "all things to all people" because they sell tax shelters, stocks, options, bonds, futures, real estate partnerships, municipal securities, etc., etc. It is difficult to be an expert in all things. Investment managers generally specialize in one investment area (in the case of Investment Management Advisors, Inc., mutual funds). A good investment manager can generally achieve enough diversity within his area of expertise to truly serve his clients' interests. Brokers sell a wide variety of securities, not to produce the best investment results for customers, but to serve the brokerage firm's interest in achieving maximum sales revenues by having almost anything available for sale.

6. Background
The educational and experience requirements for the average retail broker are usually not particularly high. Personnel turnover in the brokerage business is quite high. Typically independent investment managers are well educated financial professionals who have spent the earlier part of their careers as security analysts or portfolio managers or in other relevant jobs. Turnover is not high in the investment advisory profession.

7. Reporting
Investment advisors normally report on a quarterly basis to their clients and the reports clearly show a client's investment returns and performance and compare them to certain relevant indices or standards of performance. Brokerage firms report to their customers monthly and their reports are infamous for their lack of clarity. Typically they do not usefully show a customer's investment performance on either an absolute or comparative basis. Cynics have suggested that brokerage firms will never make their reports clear because if customers understood how bad their performance was they would cease doing business with their broker.

8. Custody
Investment management firms typically have an independent institutional third party hold and account for their clients' securities and cash, whereas brokerage firms do not.

9. Defalcation
We regularly read of fraud, embezzlement, incompetence, greed, misappropriation and other scandals within the brokerage industry. These sorts of things almost never occur within the investment management profession.

10. Minimum Account Size
The minimum account size for many retail brokerage firms is very small or there is no minimum; most brokers will deal with anyone. The minimum account size for investment managers has historically been $1 million or more (in some cases $5, 10 or 100 million). (Investment Management Advisors, Inc. is very unusual in that its minimum is $50,000.)

11. Number of Professionals
Historically, there have been many times the number of brokers in the U.S. as the number of investment advisors.

12. Accessibility
It is very easy to find a broker; indeed brokers will find you. It is difficult to find independent investment advisory firms. There is usually not even a section of the yellow pages in most cities listing investment advisors. Investment advisors generally do not advertise at all, let alone in consumer magazines or newspapers.

See Disclosure Statements on home page and disclosure page of this website