You may have a preconceived notion of what a financial advisor or financial planner is or should be. I have found throughout my career that companies, or even industries, like to come up with terms that are more aspirational than descriptive. When you choose an investment professional, it always pays to clarify and verify.
What does it mean to be a financial advisor, financial planner, wealth advisor?
The term financial advisor is a generic term that can mean many things. You may think of it as an umbrella term for all registered financial professionals, including registered representatives (aka stockbrokers), investment advisers, insurance agents and financial planners. I went to an event where a mortgage agent had Financial Advisor on his business card. If someone gives you a business card that says Financial Advisor, you should ask what kind of advisor the person is. According to the Financial Industry Regulatory Authority website, all these professionals are financial advisors:
· Registered Financial Professionals
· Investment Advisers
· Financial Planners
· Insurance Agents
Not all lawyers will say they know about investing. I have a couple of clients who are lawyers, which suggests that they don’t think of themselves as investment experts. Typically, you would ask a lawyer, “What kind of law do you practice?” The person may say criminal defense, real estate, family law, estate planning, etc. However, rarely do I hear people say anything other than financial advisor when referring to financial professionals.
Registered Financial Professionals
A registered representative, aka stockbroker or broker for short, buys and sell securities for his or her customers. Securities come in many varieties, and there are many varieties of registrations that allow financial professionals to sell stocks, bonds, mutual funds, options, etc. They are held to a suitability standard, which is less strict than the fiduciary standard. As with many professions, there might be bad apples or at least apples with blemishes. You can go to BrokerCheck to find out.
By contrast, the term investment adviser is a legal term that refers to an individual or company that is registered as such with either the Securities and Exchange Commission or a state securities regulator. Notice that I typed adviser with an er not an or. That is because the body of law that governs this type of investment professional spells the title this way. Although investment adviser representatives work for and give advice on behalf of companies called registered investment advisers (often referred to as RIAs), that body of law says that investment adviser representatives must put clients’ interests ahead of their own or their companies’ interests. That’s the fiduciary standard.
The Centre for Fiduciary Excellence and The Center for Fiduciary Studies define a fiduciary as “someone who is providing investment advice or managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.” They further categorize professionals as investment advisers or investment managers:
· “An Investment Adviser is a professional who is responsible for providing investment advice and/or managing investment decisions.”
· “An Investment Manager is a professional who has discretion to select specific securities for separate accounts, mutual and exchange-traded funds, commingled trusts, and unit trusts.”
Investment adviser representatives must pass an exam and be registered. Financial professionals who are Certified Financial Planners (CFP®) in good standing are often exempted by states from this registration. To find out if you are working with an investment adviser representative, you can go to the Securities Exchange Commission’s Investment Adviser Public Disclosure database. Investment adviser representatives may hold advanced designations such as the Certified Financial Planner (CFP®), Accredited Investment Fiduciary, Certified Investment Management Analyst, and Chartered Financial Analyst.
Insurance agents and producers
Insurance agents, aka producers, sell life, health and property insurance policies, and other insurance products, including annuities. Some products such as variable universal life insurance and variable annuities require the agent to also be a registered representative. Insurance agents, who are regulated by state insurance commissions, must have a license in the states where they do business. Many financial services companies call their insurance agents financial advisors. It is much simpler than explaining all of this. Some agents have advanced designations such as the Chartered Life Underwriter, Chartered Financial Consultant and CFP®.
Blurring the linesome financial professionals are dually registered as both a registered representative and an investment adviser as well as being licensed as an insurance professional. The upside is that you can have many of your needs handled by one person. The problem is that disclosure isn’t always sufficient when they are changing hats and, as a result, the compensation structure is shifting.
Financial planners can come from a variety of backgrounds and offer a variety of services. They could hold the Certified Financial Planner® designation, be a registered representative, investment adviser representative, insurance agent—or have no financial credentials at all. Regulation and licensing depend on the designations and services offered. For example, an investment adviser representative providing financial planning does so as a fiduciary, overseen by his or her state or the Securities Exchange Commission.
Unfortunately, some financial planners might use designations that require little experience, study, or continuing education—or that lack processes for verifying that the person holds the credential or for filing complaints. Many state securities and insurance regulators do not allow financial professionals to use a designation—in particular a “senior” designation—unless it has been accredited. Fortunately, FINRA has a page to help you learn more about Professional Designations. They even have a page for so-called Accredited Designations. These 11 designations have been certified by either the American National Standards Institute or the National Commission for Certifying Agencies. However, the Financial Industry Regulatory Authority does not endorse any designation. You should do your own research to determine if a professional with or without designation fits your needs.
The Certified Financial Planner® designation is the only Accredited Designation that some states view as satisfying their investment advisor representative requirements. It is issued by the Certified Financial Planner Board of Standards, requires at least three years of financial planning experience, and imposes rigorous standards for earning and maintaining the designation. If your planner claims to be a CFP, you can (and should) verify that, along with determining if there are any blemishes on the person’s record. The Certified Financial Planner Board of Standards mandates that a CFP act as a fiduciary in all his or her dealings. That can help you navigate the potential conflicts that come from the blurring of lines noted earlier.
What’s in a name? When it comes to the term financial advisor, we see there are many interpretations as well as many regulators. It is best to clarify what registrations, licenses, and designations your person has. As Reagan said, trust but verify. We have given a few routes for verification to get you started. You may be wise to check credentials every so often as records can change.