I am biased. I am a believer in the value of financial advice. The unfortunate part is there are advisors worth their weight in gold, but the majority of consumers don’t work with these advisors. Before you think I’m about to self-promote, I’m not. I plan to give you perspective and allow you to decide on what you want. Consumers often find themselves working with a nice person, but providing financial services from a model that is broken. The natural question is why? How do you distinguish those that you want to work with vs. those you want to avoid? The answer takes some time to explain, and if you stick with me, we will build throughout a multi-part series. My goal is to provide you with the ability to evaluate anyone who calls himself or herself a financial advisor or financial planner. How to spot the differences, and not fall for a smooth talking presentation. I want to equip everyone with the knowledge and tools. I want consumers to find their ideal fit with a “golden” advisor from above.
First, there is not enough stringency on a title for a business card or LinkedIn profile. Naturally, it makes it hard to know the difference as a consumer. I want the community of financial advice to do better, and not view advisors in the same light as a used car salesperson. That reputation has been rightly earned over the years. Far too many financial advisors have regarded clients as a zero-sum game and as a revenue source. The age of the financial salesperson needs to end.
Let’s begin from the top; there are three main categories of people who call themselves “financial advisors” or “financial planners”: Registered Investment Advisors (RIAs), Brokers, and Insurance Agents. Before moving forward, we need to distinguish the differences and explain some definitions. The difference is far more than semantics, boring I know, but this is foundational information. If you get confused, that’s normal because the financial services industry like to keep it that way. Not to worry, I’ll continue to break down and provide reference material.
RIA – A person who is engaged and compensated in the act of giving advice and making recommendations.
-Pass series 65 exam
-Regulated by the Securities and Exchange Commission (SEC)
-They are held to a fiduciary standard.
-Fiduciary as defined by the National Associate of Personal Financial Advisors (NAPFA) is, “A fiduciary is a professional entrusted to manage assets or wealth while putting the client’s best interests first at all times.”
-Advice-Focused
Broker – A broker is someone who is compensated by a transaction.
-Pass series 7 exam
-Regulated by the Financial Industry Regulatory Authority (FINRA)
-They are held to a suitability standard
-Suitability defined by Investopedia is answering, “is appropriate for my client?”
-Product-focused
Insurance Agents – An agent is a person who represents an insurance firm and sells insurance policies on its behalf.
-Commission & Salary based
-Pass state-specific insurance exam
-Independent or Captive (exclusive for one firm/product)
-Regulated by State Insurance Legislation
-Product-focused
If the above is hard to comprehend here is an analogy. Let’s imagine you are are on vacation and arrive in a city that you’ve always wanted to explore. You now face a critical decision. Do you want to hire a local guide to talk with you, help you find important monuments, learn the history, and get emersed into the city? Or would you prefer walking through the city stopping at numerous tourist stands buying confusing city maps, documents explaining the history of the city, and random trinkets, then have each worker point out what else you need? The guide is an RIA whose advice and guidance helps you better understand the city, it’s history, and provide the depth of information you want, and helping more fully enjoy the city. The tourist stands are brokers and agents looking to sell you what they think fits what you want but are incentivized by you buying more and more from their stand, not focused on the quality of your visit.
I apologize for the definitions; I hope the analogy is helpful. These are key to understanding the difference, and knowing where underlying motivations lay. As all three of these above titles can and do refer to themselves as financial advisors or financial planners. Also, people can be combinations of all three, which adds to the confusion. The mixture is known as being dual-registered.
I find it difficult to make an argument for someone to be called a financial advisor if compensation is paid for anything outside of their advice. The term advisor by Webster definition is, “a person who gives advice, typically someone who is an expert in a particular field.” So understanding the definition of what an advisor is should eliminate the insurance agent and the broker from using the title financial advisor. The issue is in today’s world that is not the case. What about someone that is dually registered as an RIA and either a Broker or Insurance Agent? Dual registration is widespread. Unfortunately, this adds more confusion. Have we spotted a trend? The trouble is real for those in the industry and magnified for the consumer looking for advice. The overarching concept of dually registered is that an individual can earn commission and then turn around and charge for advice depending on their preference. The simple question to ask is. How can one be a part-time fiduciary?
If you head is not spinning yet, let’s add another twist. What about someone that has and uses the CFP® mark and is dually registered? A CFP® stands for a certified financial planner. They are obliged to uphold the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence as outlined in CFP Board’s Code of Ethics. The Rules of Conduct require CFP® professionals to put their client’s interests ahead of their own at all times and to provide their financial planning services as a “fiduciary”—acting in the best interest of their financial planning clients. Again, how can one be dually registered and be a fiduciary? Today’s CFP® holders are not required to be RIAs.
I was dually registered at my previous firm so I can speak from experience the issues that are present. As I went through the CFP® curriculum, I began to realize I could not uphold the CFP® standard where I was employed. If it seems like I have an agenda here, I do. My agenda is to increase awareness and attempt to bring clarity to a situation that is so dark and murky.
I hope you will stay with me as we dive deeper into what makes financial advice an asset to someone vs. a liability. I want to empower educated consumers to make the decisions about their financial livelihood.