If you’re taking steps toward getting financial advice one of the first decisions is what kind of adviser you should speak to. For many people that boils down to choosing between a stockbroker or a financial planner, but if you’re not familiar with either it can be tough to know what to do. While there are indeed a few similarities between the two, there are also some significant differences.
A stockbroker gives advice to clients about constructing an investment portfolio which will typically be comprised of shares and other listed securities. While they are obliged to undertake a “KYC” (Know Your Client) process and provide a Statement of Advice setting out their understanding of a client’s circumstances and objectives, they will normally not provide advice beyond what stocks to buy and sell.
There are no formal academic qualifications required to be a stockbroker (other than obtaining some basic regulatory/compliance standards), so much of their training is ‘on the job’. It would be very unusual to find a stockbroker who is able to do their own detailed share valuation, so instead they rely on analysts who come up with stock reports and recommendations, which the brokers pass on to their clients.
It would also be unusual to find a broker that undertakes things like ‘asset allocation analysis’, which is working out how much of your portfolio you should invest in different asset classes like shares versus bonds versus property, or ‘correlation analysis’, which is trying to make sure a portfolio is not made up entirely of investments that move in the same direction at the same time (unfortunately most people don’t find out how poorly constructed their portfolio is until the proverbial hits the fan). Again, it is possible they will have access to analysts that make recommendations on aspects of portfolio construction.
Stockbrokers often try to attract clients with access to ‘IPOs’ (Initial Public Offerings) or floats, where a company lists on the stock exchange. These can be a great way to make a quick buck if the company is a good one, but just as many times it can be a way to lose money.
Finally, many stockbrokers still get paid on commission, so the more a client trades the more money they make. The conflicts of interest here are obvious, but increasingly brokers are moving toward a fee for service model.
A good financial planner will take a deep dive into a client’s financial situation and craft a plan to help them reach their lifestyle objectives over time by considering all the aspects of their financial life, looking at things like how their affairs are structured, are they optimised to minimise tax, have they got insurance cover for contingencies like not being able to work for an extended period, are there sources of income available from Centrelink, is their estate planning up to date, and, of course, investments.
While the academic qualifications required to be a financial planner have been criticised in the past as not being tough enough, that is changing. In the next couple of years new rules are coming into force that will provide a reassuringly rigorous standard. Rest assured, despite all the bad press at the moment it’s actually pretty easy to find a well qualified financial planner – just remember to ask them.
When it comes to investments you would normally expect a financial planner to take a comprehensive approach to structuring a portfolio, including asset allocation and correlation analysis. They may recommend direct shares, or managed funds or even just index funds. Often a planner will not do their own investment research but will use an ‘approved product list’ that’s been vetted and approved by the group whose licence they work under.
The other thing a good financial planner will usually insist on is reviewing the plan, normally annually, to make sure it is still relevant and up to date.
If you feel like you’re under control for things like tax planning and insurance cover and you’re happy to put some leg work in to making sure your portfolio is balanced and well structured then a stockbroker will probably be suitable. If, however, you feel like you don’t know where to start in getting yourself financially organized or would prefer to hand over responsibility for all your financial concerns, then a planner is a better fit.
This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.