The financial services industry needs title reform. For an aspiring financial adviser/planner the barrier is far too low. This leads to individuals with little experience and no credentials being hired in finance product sales positions. A brand new financial product salesperson can use the same title on their business card as a credentialed and experienced fiduciary adviser. That in part is why investors are facing challenges around finding the right financial professional to partner with. As a financial adviser, I understand it can be confusing for investors to distinguish between different types of financial advisers, their licenses, credentials, and the services they provide.
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 adviser 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 broker check 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 representative and are licensed to sell commission based securities investments (stocks, bonds, mutual funds, and variable annuities). Brokers operate under what is known as the suitability standard. This means they only have to recommend a suitable investment product. The product does not have to be in your best interest, it merely needs to be suitable.
Investment Advisors, on the other hand operate under the fiduciary standard. The fiduciary standard means that the adviser is required to act in your best interest. 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 as opposed to the lesser standard of suitability.
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 advice. In some situations providing both types of services to the same client. This can sometimes lead to confusion around whether the “adviser” is held to a fiduciary or suitability standard. Investors should be hyper aware as to what standard their financial professional is operating under. Understanding the obligations of the financial professional will allow investors to ensure they are receiving the type of advice they deserve.
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 work under 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 adviser is important for several reasons. You will likely want an adviser with a credible and morally fit back office. If you like your adviser 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 adviser for commissions or advisory fees. This will allow you to see if your adviser 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(™). 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 adviser they are two of the most respected and common. Be sure to ask potential advisers about their qualifications, designations, and continuing education requirements.
WHAT IT BOILS DOWN TO
Most importantly you should find your adviser to be trustworthy, transparent, reliable and qualified.. By doing your homework you can increase the odds of hiring an adviser with a high level of integrity, however, you will still need to feel that you can trust them. Look for an adviser 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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This article is written by Brice Carter.