A common misconception about financial advisors is what one must do to be able to be called a financial advisor, financial consultant, or similar term. To most people’s surprise there is no legal, educational, or licensure requirement to be a financial advisor—anyone can call oneself a financial advisor. . .almost. This applies to financial advice in general, however, advice about securities (stocks, bonds, et cetera) and insurance are a little different.
In order to sell a security or give advice about a security, one must be licensed through FINRA (Financial Industry Regulatory Authority). Even though FINRA provides licensure, it does not provide any sort of endorsement regarding how good a certain financial advisor actually is. Similarly, in order to provide advice about insurance in the state of Utah, one must be licensed through the Utah Insurance Department.
The caveat to these licenses is that these licenses do nothing to ensure the quality of the advice the financial advisor gives out. In an effort to address this issue, certain endorsements are available to those willing to put in the time and expense to get them.
If someone provides advice about financial planning (estate planning, insurance products, investments et cetera), he or she can become a Certified Financial Planner (CFP). A CFP is someone who has passed an additional series of test (in addition to the regular licenses like the Series 7, Series 66, and State Insurance licenses). This certification proves the candidate has jumped a much higher hurdle than someone who merely has the normal licensure, however, financial advice is highly subjective and even a CFP may give out unscrupulous advice. The CFP is meant to show that advisor has a broader knowledge base than someone who is not a CFP.
There are also different types of financial advisors, and as a consumer, you should know which type you are working with, and what the pitfalls can be from working with each type.
There are three main types of financial advisors out there: those who get paid commission, those who are only paid a consulting fee, and those who are paid both. An advisor who is paid any type of commission is a salesman. If you ask your financial advisor how he or she gets paid, they should tell you. If they beat around the bush, that is a signal that you should RUN—you are not working someone totally honest.
Fee-only planners fundamentally have their interests lined up with yours (since they are not trying to sell you anything), but some people have second thoughts about paying someone hundreds of dollars to meet with them. The nice thing about commission-based advisors is you only pay them if you purchase a product; however, how is one to know if the advice given was any good to start with or if the agent was just trying to sell you something.
To help identify which type of advisor you are working with, here are a couple different sources where you can find financial advisors:
-Life insurance agents: love to call themselves financial advisors, however, ALL life insurance agents are trying to sell a product (life insurance). Some insurance agents are more honest than others, and some even give out great advice, while some love to pretend they are unbiased financial advisors. fundamentally, their interests lie in being able to support their family by selling you a product, and you should be cautious of the advice they give out.
-A Person working at your bank: may offer investment advice about bank products, including CD’s, money markets, or opening up an IRA or Roth IRA. Know that this person works for the bank, and that his (or her) loyalties in the end lie with the bank.
-Securities brokerage agents: work for a company that primarily sells securities. These agents may also offer insurance products (but usually through another company). Securities agents are paid commissions, and are usually offering advice about which investment you should buy—you have probably already made the decision to invest by the time you have called these people. As a consumer, know that commissions on various securities differ, so you should put the agent on the spot and find out if they have an incentive to push a certain product at you.
-Financial planning firms: have two basis structures—fee-based and fee-only. Fee only means the advisor will not charge you a commission—even if you purchase a product. Fee-based means they charge a fee and also get paid commissions. These firms are often smaller and locally-owned. Even though fee-only advisors charge you a fee, the advice they give out is often far superior to what you would get elsewhere, and, in the end can SAVE you money from by steering you with the right services (rather than shove you into a product). The only thing about fee-only advisors is you to make sure you are not paying for services you do not need (remember, you are usually being charged by the hour).
In the end, it is up to you to find someone you believe is giving you appropriate financial advice. Financial advisors do have owe a duty of care to their clients—fiduciary responsibility. However, fiduciary responsibility is highly subjective, and even if you get ripped off, not only is it extremely difficult to get your money back, but the time they cost you is impossible to get back.
The material presented in this article is for discussion purposes only and is not nor may be interpreted to be personal financial advice. The author as well as the entities who publish or are otherwise associated with this article recommend the reader to pursue personalized advice from a financial professional
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This article raises some good points, especially about sales.Some clarifications:
A CFP is not required to be registered. CFPs follow a Code of Ethics that requires conflict disclosures but it is not enforceable by a regulator.
A bank employee that provides investment advice pursuant to the bank’s trust powers as your agent(not a broker-dealer sub of the Bank) must act in your sole interests and cannot accept commissions or fees on products without stringent disclosure requirements that exceed those required by the SEC of RIAs. I wrote about this point in the July 19 issue of Investment News. You can find the link on my twitter feed as this format does not permit links.
Jan Sackley
Fiduciary Risk Management and
Regulatory Compliance Professional
269-323-8119
twitter@JanSackley
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