Broker/dealer vs. custodian

A: Both describe firms that provide investment services. Traditionally, broker/dealers were the brokerage firms that hire registered representatives, charge commissions or fees and pay representatives as employees or contractors. Investment custodians traditionally provided services for a fee, and do not pay their independent representatives. Nowadays the lines are blurred, and each type of firm provides some of both types of service. From an investor's perspective, both provide the same services. Both take your money and handle investment transactions on your behalf. From an adviser's perspective, these simply represent different business models. The legal distinction with regard to fiduciary responsibility may be the most significant difference. Broker/dealers maintain relationships with registered representatives and do not act as fiduciaries. The SEC now requires these firms to disclose that any advise they provide is incidental to the primary business of handling investment transactions. Custodians maintain relationships with registered investment advisers who must act in the best interest of their client. There is a fiduciary relationship between the investment adviser and the client, meaning that the adviser is legally obligated to act in the best interest of the investor client. Still confused? You are not alone. Financial advisers and investors rarely reflect an understanding of the distinction.