Personal Finance Essentials
The Four Kinds of Practitioners You Can Hire
250 Titles. Four Types.
One Question That Matters.
The financial services industry has conjured up a wide variety of titles – Financial Advisor, Financial Planner, Financial Consultant, Account Executive, Vice President of Investments. No matter what someone calls themselves, there are really only four kinds of advisors. That might surprise you, given that research has found as many as 250 professional designations used in the field. None of them are recognized by federal or state regulators. Unlike the MD for doctors or the CPA for accountants – which require years of schooling at accredited institutions and rigorous independent exams – most financial designations are issued by private entities. Some can be earned through self-study, open-book tests or simply by writing a check. The designations may suggest experience, but they carry no government standing. What actually determines how an advisor earns a living, and what obligations they owe you, are their licenses – not their designations.
Registered Representatives
Registered Representatives, more commonly known as stockbrokers, are licensed and regulated by the Financial Industry Regulatory Authority, known as FINRA. No firm may execute securities transactions without being a FINRA member, and no individual may work in the securities business without passing a FINRA examination. The most common licenses held by consumer-facing advisors are the Series 6 (permitting the sale of mutual funds), the Series 7 (allowing the sale of stocks, bonds, municipal securities, options, mutual funds and ETFs) and the Series 63 (a required state securities license).
Stockbrokers legally represent their brokerage firms – not you. In the eyes of regulators, brokers are product salespeople. The SEC requires brokerage firms to disclose on monthly statements: “Our interests may not always be the same as yours.” Brokers earn their income through commissions, and their brokerage firm is their legal client. Any advice they provide is considered incidental to the sale of products.
Mutual fund commissions can be collected in three ways: at the time of purchase (a front-end load, also called Class A shares), through a withdrawal fee that declines over six or seven years (a back-end load, or Class B shares) or through an annual charge of approximately 1% during the first year of withdrawal (a level-load, or Class C shares). Federal rules require fund companies to automatically award volume discounts called breakpoints when investors put in larger amounts – discounts that reduce the commission paid. However, higher loads mean higher commissions for the broker. Some have been known to split accounts to avoid breakpoints, fail to apply accumulated investment totals that qualify clients for a lower rate or move clients between fund families purely to generate new commissions. All of these practices are illegal. The fundamental question with commission-based advisors remains: when a product is recommended, is that recommendation in your interest or in the broker’s?
Stockbrokers legally represent their brokerage firms – not you. In the eyes of regulators, brokers are product salespeople. The SEC requires brokerage firms to disclose on monthly statements: “Our interests may not always be the same as yours.” Brokers earn their income through commissions, and their brokerage firm is their legal client. Any advice they provide is considered incidental to the sale of products.
Mutual fund commissions can be collected in three ways: at the time of purchase (a front-end load, also called Class A shares), through a withdrawal fee that declines over six or seven years (a back-end load, or Class B shares) or through an annual charge of approximately 1% during the first year of withdrawal (a level-load, or Class C shares). Federal rules require fund companies to automatically award volume discounts called breakpoints when investors put in larger amounts – discounts that reduce the commission paid. However, higher loads mean higher commissions for the broker. Some have been known to split accounts to avoid breakpoints, fail to apply accumulated investment totals that qualify clients for a lower rate or move clients between fund families purely to generate new commissions. All of these practices are illegal. The fundamental question with commission-based advisors remains: when a product is recommended, is that recommendation in your interest or in the broker’s?
Licensed Insurance Agents
Insurance is regulated at the state level, not federally. Unlike a share of stock – which is identical regardless of who owns it – an insurance policy is a custom-designed contract governed by state law. Every agent must hold a state insurance license based on the state of residency of their clients, not their own.
The four main types of insurance licenses are: Property/Casualty (covering homeowners, automobile and liability insurance), Life/Health (covering life, health, accident and disability income insurance, as well as fixed annuities), Long-Term Care Insurance and Variable Annuity (which also requires a FINRA Series 6 or Series 7 license). Like stockbrokers, insurance agents legally represent the insurers, not their customers. They earn commissions from product sales, with annuity commissions ranging from 1% to 15% of the amount invested – sometimes more than the client will earn in interest. The same potential conflict of interest that exists with stockbrokers exists with insurance agents.
The four main types of insurance licenses are: Property/Casualty (covering homeowners, automobile and liability insurance), Life/Health (covering life, health, accident and disability income insurance, as well as fixed annuities), Long-Term Care Insurance and Variable Annuity (which also requires a FINRA Series 6 or Series 7 license). Like stockbrokers, insurance agents legally represent the insurers, not their customers. They earn commissions from product sales, with annuity commissions ranging from 1% to 15% of the amount invested – sometimes more than the client will earn in interest. The same potential conflict of interest that exists with stockbrokers exists with insurance agents.
Investment Advisor Representatives
Investment Advisor Representatives are affiliated with Registered Investment Advisors – firms registered with the SEC or a state regulatory agency. Unlike stockbrokers and insurance agents, Investment Advisor Representatives are legally obligated to serve your best interests. This obligation is called a fiduciary duty, and it stands in sharp contrast to the legal obligations of brokers and insurance agents.
To practice, Investment Advisor Representatives must hold a FINRA Series 65 license (along with a Series 63 state license) or the Series 66, which combines both into one examination. Many are also dually licensed – holding brokerage and insurance licenses in addition to their advisory registrations – because implementing their recommendations often requires access to investment and insurance products.
If an advisor is serving you as a Registered Investment Advisor, they must provide you with Form ADV – the registration statement filed with the SEC or state regulator. This document describes the firm’s services, its fee schedule and the advisor’s background. It also specifies when the advisor is acting as a true advisor versus as a salesperson. If a financial professional cannot produce Form ADV, they are not a Registered Investment Advisor. You can verify registration directly at adviserinfo.sec.gov.
Unlike brokers and agents who earn commissions, Investment Advisor Representatives are paid fees. These fees may be based on time – either an hourly rate or a flat annual retainer – or on the size of the account being managed. A fee tied to account value is called an asset management fee. Typically, the larger the account, the smaller the percentage rate.
To practice, Investment Advisor Representatives must hold a FINRA Series 65 license (along with a Series 63 state license) or the Series 66, which combines both into one examination. Many are also dually licensed – holding brokerage and insurance licenses in addition to their advisory registrations – because implementing their recommendations often requires access to investment and insurance products.
If an advisor is serving you as a Registered Investment Advisor, they must provide you with Form ADV – the registration statement filed with the SEC or state regulator. This document describes the firm’s services, its fee schedule and the advisor’s background. It also specifies when the advisor is acting as a true advisor versus as a salesperson. If a financial professional cannot produce Form ADV, they are not a Registered Investment Advisor. You can verify registration directly at adviserinfo.sec.gov.
Unlike brokers and agents who earn commissions, Investment Advisor Representatives are paid fees. These fees may be based on time – either an hourly rate or a flat annual retainer – or on the size of the account being managed. A fee tied to account value is called an asset management fee. Typically, the larger the account, the smaller the percentage rate.
Money Managers
A money manager is not the same as a financial advisor. A money manager’s relationship is with the money itself, not with the individual client. The most common example is a mutual fund manager, whose job is to invest in accordance with the fund’s objectives. Every investor in that fund is treated identically: when the manager buys or sells a security, every client’s holdings change in the same way and in the same proportionate amounts.
Stockbrokers, insurance agents and Investment Advisor Representatives commonly recommend that clients invest with money managers – through mutual funds, exchange-traded funds, annuities or wrap accounts. The distinction is clear: the money manager manages the fund while the financial advisor manages the client’s personal finances.
Stockbrokers, insurance agents and Investment Advisor Representatives commonly recommend that clients invest with money managers – through mutual funds, exchange-traded funds, annuities or wrap accounts. The distinction is clear: the money manager manages the fund while the financial advisor manages the client’s personal finances.