With a growing number of individuals referring to themselves as financial advisers it’s no surprise 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. The purpose of this article is to provide you with a few key factors you should consider when looking to partner with a financial adviser and how the differences between different types of adviser impacts you.
Licensing and Compensation
The first thing to do when beginning to interview a financial adviser is to make sure they are properly licensed. The simplest way to do this is to go straight to the source, which is FINRA (Financial Industry Regulatory Authority). FINRA has an excellent tool called broker check which can be used to look up the licensing of financial professionals. This tool can be found at brokercheck.finra.org.
Individuals on broker check 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. A broker is someone who is a registered representative licensed to sell commission based securities investments (stocks, bonds, mutual funds etc.). An investment adviser, on the other hand, is someone who is licensed to charge a fee for advice that is rendered. An individual who is licensed as both a broker and investment adviser may choose to offer clients the option between buying commissioned based investment products, or obtaining fee based investment advice, and in some situations providing both types of services to the same client The distinction needs to be made between a broker (registered representative) and investment adviser because even though an individual might be calling him or herself a financial adviser he or she may only be a broker.
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.
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. This information is also available on broker check. Many financial advisers may have created their own firms, known as DBAs (Doing Business As); however much of the time they maintain a relationship with a larger company that provides all the necessary support they need even though these DBA firms are not owned or operated by the larger company.
Knowing who the back office is for your financial adviser is important for several reasons. The first reason being 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. The second reason is that we are living in an investment world with an ever growing level of complexity. This makes research and resources exceedingly more important. By employing an adviser with a back office that supplies him/her with innovative research and tools, they should be able to put you in a better position to succeed. In addition you will probably want an adviser that has a back office with a good track record of supervising advisers.
Designations and Degrees
Education is a valuable tool for a financial adviser. For financial advisers earning financial industry designations or advanced degrees shows a commitment to improving yourself for the good of your clients. As a result, over the past decade, dozens of new designations have been created and offered to financial advisers. Some designations take a great deal of time, effort, and ongoing education while others may mean little more than a participation ribbon. With all that alphabet soup behind the adviser’s name, how do you spot a truly qualified adviser? The best way to ensure that an adviser’s designations are credible is to do a little research on their designations. While researching designations you will quickly realize some designations have much more strenuous requirements than others. For example, the CFP® or Certified Financial Planner TM designation requires a college level program of study in financial planning, completion of a two day ten hour exam, three years of qualified work experience, and adherence to a high standard of ethics (1). By visiting the CFP® website www.cfp.net you can find CFP®’s in your area.
If you do not want to spend the time to do the research on several designations, that is understandable. Fortunately, a lot of the work has already been done for you. I would recommend checking out a great article that Investopedia has published entitled “The Alphabet Soup Of Financial Certifications” (2).
What It Boils Down To
The most important quality for a financial adviser is to be trust worthy. 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. Some good questions to ask might be:
- Who is your broker dealer or investment advisory firm?
- What kind of resources do they supply?
- Are you required to sell proprietary products?
- How are you compensated?
- What industry designations have you earned?
- What types of continuing education do you participate in?
- What’s your investment process?
Keep in mind that just because an adviser has a small firm behind them and limited designations does not mean that they are not a good qualified adviser. The fact of the matter is there are great advisers who do not work for the best firms or have the most well recognized designations. In addition, there are lower quality advisers at larger firms with advanced designations.
Hiring an adviser can be a big step towards managing your finance but it doesn’t have to be a stressful experience. Often by interviewing different advisers you will learn a lot about the industry and different philosophies. Just keep in mind when hiring an adviser, do your research and ask the tough questions.
- CFP® Certification Requirements. cfp.net. Retrieved 02/12/2014 from www.cfp.net.
- Investopedia Staff (2010, November 26) The Alphabet Soup of Financial Certifications. investopedia.com. Retrieved 2/12/2014 from www.investopedia.com.
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This article is written by Brice Carter.