You’ve made that leap and you are ready to work with a financial advisor. You have your checklist of what to ask, but how do you know if they are qualified for what you want? Here you’ll find many of the common designations that you will encounter in the financial services field.
I hope this helps you as you pick an advisor that is best for your financial future.
The CFP® is a top designation for financial advisors who offer personal financial planning. CFPs® are certified after passing rigorous requirements, including an exam and educational requirements mandated by the CFP Board.
A CFP® will have a basic knowledge of all aspects personal finance, but often they will rely on other secondary professionals are help with specific financial processes. For example, an attorney will be needed to help implement an estate plan. Insurance professionals and accounting professionals may also be needed to execute more complex financial matters.
Not all CFPs® provide comprehensive financial planning services. Some will provide investment management and some will not, so be sure to ask about the specific services they provide.
Registered investment advisor is not an individual designation like a CFP®. It means that the advisor, or the firm that the advisor works for, has filed with the state (Department of Corporations) or the federal government (SEC) that they are giving financial advice, usually regarding securities, for a fee.
People who work for RIA firms are called Investment Advisor Representatives (IAR). Generally they are required to have taken the comprehensive Series 65 exam, though requirements vary by state and this can be waived in certain circumstances.
RIA firms or individuals hand out an annual disclosure document to the public, called the ADV Part 2. The ADV Part 2 is a comprehensive document of the policies and procedures of the advisor or firm and their fee structure as well as any conflicts of interests that may exist. You should always review this document before you hire a financial advisor.
RIAs also have a fiduciary duty to you – that means putting your interests first before their own and their firm’s.
Are IARs financial planners? Sometimes. The SEC explains the difference between a financial planner and an investment advisor as “most financial planners are investment advisors, but not all investment advisors are financial planners.” This just means that some investment advisors only deal within a limited range of products of services and will not offer comprehensive financial planning.
Fee-only financial advisors have individual RIA registrations and are a part of the National Association of Personal Financial Advisors (NAPFA). Fee-only financial advisors are also required to act as a fiduciary. David Marotta, a contributor for Forbes, explains a fee-only financial advisors’ ethical obligation: “Part of the annual fiduciary oath NAPFA members sign reads, ‘The advisor does not receive a fee or other compensation from another party based on their referral of a client or the client’s business.’ ”
Fee-only financial advisors’ compensation can be fixed, hourly, or performance based. They may manage money for you as a percentage of assets that you give them. For example, many fee-only financial advisors charge 1 percent of the assets under their management (AUM). That is called managing money on a discretionary basis.
They may also manage money for you, for a fee, on a non-discretionary basis. This means that they call you and tell you when to buy or sell and you make or approve the transaction, vs. granting them trading authority (on a discretionary basis).
Registered Representatives are also called Account Executives or Financial Consultants, among other titles. People generally know them by the phrase “stockbroker.” Stockbrokers will have at least passed a Series 7 exam, possibly other Series exams and be registered with FINRA, or another self-regulatory organization. They may also hold the CFP® designation. Stockbrokers typically work at large investment firms called broker-dealers that provide them support and oversight.
Stockbrokers make clients aware of investment opportunities that are suitable for them and then execute transactions based on client instructions. They can also put in orders for their firm to buy and sell securities on behalf of the client. They usually make money on commissions from the trades that they do.
Typical broker-dealer firms are Merrill Lynch, Morgan Stanley, etc. It can be difficult for a consumer to figure out who is a stockbroker and who is a financial advisor but always feel free to ask questions.
Quick Tip: Look at the small print on the business card or on the website that says something similar to, “Securities offered through ABC Securities.” That is a clear sign that the individual works for a broker-dealer.
Chartered Financial Analyst is a prestigious designation offered by the CFA Institute. In order to be known as a CFA, a person needs to pass three extensive exams over three years, covering a variety of areas including accounting, economics, ethics, money management and security analysis. A CFA is trained in portfolio management and to analyze stocks, bonds and other investments. Many firms that do a lot of individual stock and bond trading will have CFAs in-house that run analysis for them.
Chartered financial analysts must have four years of experience in the financial industry, complete the CFA Program, become a member of the CFA Institute and apply for membership in their local CFA society, as well as adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct.
My rule of thumb is, anyone who has long-term financial goals like retirement, buying a home, college funding or career transitioning would be best served by a long-term relationship with a fee-only financial advisor who practices financial planning. That way, you pay for the financial advice and you don’t have to buy securities.
But if you were looking to purchase a savings bond for your niece for her birthday or need help selling securities that you inherited, I would go to a stockbroker. Ultimately, the decision between a financial advisor and a stockbroker depends on what services you are looking for.
Anyone you work with should listen to you and care about your financial goals, your risk tolerance and your tax bracket. You should also feel empowered to ask as many questions as you need to screen financial advisors, after all it’s your money.
When all of these factors are taken into consideration with money management, long-term financial success is more likely.
Choosing a financial advisor is an individual decision. It comes down to your circumstances, how well an advisor can help you with them and your comfort with the advisor.
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