Advisory Account vs Brokerage Account: Key Differences Explained

When exploring ways to invest, your first step should be to compare an advisory account vs a brokerage account. Why? These distinct account types have unique features that could impact your investing experience. Let's explore their differences and how to determine which one aligns with your investment needs.

What is an Advisory Account?

An advisory account is an account managed by an investment adviser for an annual fee based on a percentage of your assets under management (AUM). The adviser recommends stocks, bonds, or other securities for you to invest in depending on your financial goals and risk tolerance. They also provide ongoing monitoring and advice as the markets or your needs change.

Advisory accounts are best if you:

• Appreciate having continual access to a financial advisor in exchange for ongoing fees
• Want a tailored investment strategy
• Prefer holistic financial planning services

Role of Investment Advisers

Investment advisers are licensed professionals who provide investment advice to their clients. They are legally bound to a fiduciary standard, requiring them to put their clients' interests above all else.

In an advisory relationship, the investment adviser develops a tailored investment strategy based on your income, age, risk tolerance, and goals. They will then make investments on your behalf or recommend certain securities for you to purchase.

Types of Advisory Accounts

• Discretionary Account: Your advisor makes investment decisions without your approval. This is best if you want a hands-off approach to portfolio management.
• Non-Discretionary Account: Your advisor makes securities recommendations, but you retain full control over all investments. This arrangement is best if you want expert guidance but prefer to stay involved at all times.
• Robo-Adviser Account: An algorithm functions as your advisor and manages your investments based on your goals. This is attractive if you value simple guidance and minimal fees.

What is a Brokerage Account?

A brokerage account lets you purchase and hold various financial instruments. Unlike an advisory account, it's designed for self-directed investing instead of a managed approach. Some brokers charge fees for each transaction, but many now offer commission-free trading for most stocks. Further, transaction fees may still apply when buying or selling mutual funds or foreign securities.

Brokerage accounts are best if you:

• Prefer to buy and sell securities on your own
• Don't want tailored advice or investment strategies
• Appreciate lower fees and a low barrier to entry

Role of Brokers

While some brokers may offer personalized guidance, brokerage services generally are restricted to buying and selling financial instruments. In addition, brokers are held to a suitability standard instead of a fiduciary one. This means that they are required to make recommendations appropriate to your financial goals but aren't required to put your needs ahead of their own.

Types of Brokerage Accounts

• Cash Account: Requires full payment for securities at the time of purchase. You can't borrow money to pay for them (like you can in a margin account), and neither can your broker borrow your funds to complete other transactions.
• Margin Account: Allows you to borrow money from your brokerage firm to purchase securities. While margin provides more buying power, it can magnify returns and losses, so this type of account is best suited for seasoned investors.
• Full-Service Account: Combines the features of an advisory and brokerage account, offering a mix of guided and self-directed investing. While it might come with higher fees, it could be suitable if you want access to professional guidance while managing your own portfolio.

Before making a decision, be sure to review your best brokerage account options.

Key Differences Between Advisory and Brokerage Accounts

When deciding between a brokerage vs advisory account, it's helpful to see how they differ.

Fee Structures

• Advisory Account: Flat fee based on a percentage of AUM, which could result in lower costs for frequent traders. The structure also creates synergy between investor and advisor: As your account grows, so does their fee.
• Brokerage Account: Typically, a commission per transaction, which could be beneficial if you don't trade frequently.

Services Offered

• Advisory Account: Comprehensive investment advisory services, including financial advice, planning, portfolio rebalancing, and tax strategies.
• Brokerage Account: Direct access to buy and sell stocks, bonds, mutual funds, and other securities. Full-service accounts may provide guidance and planning for additional fees.

Level of Personalized Advice

• Advisory Account: Highly tailored advice based on your income, age, desired growth, and other financial needs.
• Brokerage Account: Basic transaction-focused guidance without comprehensive financial planning.

Investment Approach

• Advisory Account: Focuses on long-term, multiyear investments for various life stages.
• Brokerage Account: Offers tools to buy and sell investments for the short and long term, depending on your personal investing strategy.

By understanding the key differences between advisory accounts and brokerage accounts, you can confidently choose the one that best aligns with your financial goals.

For additional help making informed financial decisions, explore MoneyAtlas, a trustworthy platform for expert comparisons of banking, loans, credit cards, and investments.