Financial Advisor/Adviser, Investment Advisor, Retirement Planner, Financial Planner, Wealth Manager, Etc.
What do all these titles mean? Essentially, they are meaningless iterations of the title of a financial advisor.
The financial services industry needs title reform. The cross-section of different titles, licenses, and certifications make it very difficult for consumers to understand who they are working with and what their fiduciary obligations are. I’ve written this short guide to help you better understand how to find, vet, and hire the right financial advisor for you.
Please understand that, in my opinion, the barrier to entry for an aspiring financial advisor is way too low. This leads to individuals with little experience and no credentials calling themselves financial advisers when in reality they are financial product salesmen.
LICENSING AND COMPENSATION
The first thing to do when beginning to interview a financial adviser is to make sure they are properly licensed. A financial professional's business card may say “financial adviser”, but that does not mean they are truly a financial adviser. Both brokers and investment advisers can put financial advisor or a myriad of other titles on their business cards and marketing materials. The simplest way to determine if a person is in fact a financial or investment adviser is to go straight to the source, which is FINRA (Financial Industry Regulatory Authority). FINRA has an excellent tool called "Brokercheck" which can be used to look up the licensing of financial professionals. This tool can be found at brokercheck.finra.org.
BrokerCheck is the best place to determine whether an "adviser" is actually an "adviser". Individuals on BrokerCheck can be categorized as brokers, investment advisers, or both. The difference can help you determine what kind of services the individual can provide and how they might be compensated.
In addition to being able to see whether an individual is a broker or an investment adviser, FINRA brokercheck also provides several other pieces of valuable information to investors. Any written complaints filed against the individual, certain criminal history disclosures, and filed bankruptcies will be on record.
BROKER VS. ADVISOR
Brokers are also known as registered representatives who are licensed to sell commission-based securities investments (stocks, bonds, mutual funds, and variable annuities). Brokers are required to represent a client's best interest, however, this is not to be confused with a fiduciary standard which requires the financial advisor to put the client’s interests before that of the financial professional.
Investment Advisors, on the other hand, operate under the fiduciary standard. In contrast to being paid a commission, an adviser is licensed to charge a fee for advice that is rendered. As an investment adviser myself, I believe investors are better served by the fiduciary counsel of an adviser.
Hybrid Advisors are licensed as both a broker and investment adviser. This gives the “adviser” the option to offer clients commissioned-based investment products or fee-based investment and financial advice. In some situations, both types of services can be provided to the same client. Consumers should be aware that this type of relationship can result in some additional conflicts of interest.
THE BACK OFFICE AFFILIATION
Once you have confirmed the financial adviser you are considering hiring is properly licensed and that their background aligns with your moral compass, you might want to take a look at who their back office or affiliation is. Brokers are affiliated with Broker-Dealer’s and Investment Advisers are affiliated with companies known as Registered Investment Advisers (RIAs). The Broker-Dealer or RIA a person is affiliated with is also available on BrokerCheck.
Knowing who the back office is for your financial advisor is important for several reasons. You will likely want an advisor with a credible and morally fit back office. If you like your advisor candidate but their back office is constantly being investigated for scandalous acts, you might need to keep looking. Additionally, the back office is often the one who will actually compensate the advisor for commissions or advisory fees. This will allow you to see if your advisor candidate is truly independent or biased towards proprietary products.
DESIGNATIONS AND DEGREES
There are many financial designations, however, few carry as much credibility as the CFP(R) which stands for Certified Financial Planner(R). The CFP(R) designation along with the ChFC(R) Chartered Financial Consultant designation require an extensive curriculum in personal finance, retirement, and investing. Although these are not the only designations or degrees that indicate an educated financial advisor, they are two of the most respected and common. Be sure to ask potential advisors about their qualifications, designations, and continuing education requirements.
WHAT IT BOILS DOWN TO
Most importantly you should find your advisor to be transparent, reliable, and qualified. By doing your homework you can increase the odds of hiring an advisor with a high level of integrity, however, you will still need to feel that you can trust them. Look for an advisor who you believe has a similar moral compass to your own. Once you find them, ask them the tough questions to make sure they are not just a good person, but that they are also qualified. You can find a list of questions to ask a potential adviser here: Advisor Interview Questions.pdf
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Written by Brice Carter.