Types of Financial Advisors
You’ve probably heard the term “financial advisor” once or twice in your life, but what that truly means can be ambiguous.
Financial Advisor is a term used by financial professionals who are paid to give financial advice to their clients. However, there are a variety of different advisors that individuals can select from depending on their needs.
Here are the most common terms for different types of financial advisors:
- Financial Planners
- Registered Representatives (more commonly known as brokers or stock brokers)
- Investment Advisors
Financial planners usually charge a fee for advising on overall financial situations (cash flow, taxes, debt, estate planning, etc.) and creating a comprehensive plan for dealing with your assets. These individuals may not be licensed or registered to handle investments and securities, so they cannot advise on specific investments that you would like to make, but rather give general information on what money you should invest.
Anyone who charges a fee for giving overall financial advice (that is not related to specific investments) can be considered a financial planner. If you want to have someone with more credentials you can look for a planner who is either a CFP (Certified Financial Planner) or CPA (Certified Public Accountant). These individuals have studied, trained, and passed tests that give them these designations and may be able to offer more qualified advice.
Registered Representatives (Brokers)
Registered Representatives, or brokers, are licensed and registered individuals who buy and sell securities, these include stocks, bonds, and mutual funds. They are registered representatives of a firm (broker-dealer or brokerage firm) and buy/sell securities for their clients for a fee, commission (meaning they make a cut of the purchase of a security) or a combination of both.
Brokers must pass specific exams to be licensed (a Series 6 or Series 7) and must register with the SEC (Securities and Exchange Commission). However, they are regulated by the Financial Industry Regulatory Authority (FINRA) or another self-regulatory organization.
They are subject to what is called the “suitability standard.” This standard states that the broker must have a reasonable basis for any buying or selling that they do for their client. Their decisions do not have to have the client’s best interests in mind and they do not need to offer cheaper options, even if they exist.
It is important to note that in April of 2017, a new Department of Labor ruling will come into effect that will require all financial advisors to act under the “Fiduciary Standard.” Read more about that in the Investment Advisors section below.
It’s also important to note that brokers may not advise on tax strategy. Their primary focus is typically on securities and how those are invested for their clients.
Just like the brokers, investment advisors may be licensed with specific exams (Series 65) and they are also involved with the advising in specific securities and investments. They may buy or sell securities for their clients.
There are some major differences between an Investment Advisor and a broker, however. First, while the broker is held to the “suitability standard”, the investment advisor is held to the “fiduciary standard.” This means that they are obligated to work in the best interest of their client. This often looks like the advisor giving multiple options for investments, weighing the pros and cons of each option with the client, and giving unbiased information about each investment option given to the client.
Second, Investment Advisors typically are fee-based. This means that they charge fees for their work rather than working off commissions. They do this largely to comply with the fiduciary standard. If they don’t work off commissions then it is easier for them to make unbiased strategies and plans for your investments.
Third, these individuals are registered and regulated by the SEC directly or a state securities regulator, often based on the size of assets under management that the advisor or advisor’s firm has, however they may be regulated by the SEC if they are registered in 15 or more states.
These are just highlights of three different types of professionals who may call themselves financial advisors. When looking for a financial advisor, it’s important to have an understanding of what services you want or need.
Note that financial advisors may have multiple designations, certifications, or licenses. An investment advisor can be a financial planner and vice versa. A broker may also be a CFP. When looking for a financial advisor, it’s good to know all the designations that the potential advisor may have to give you a better understanding of what services they offer.
GuideSpring Wealth Strategies, LLC is a registered investment advisory firm in the state of Colorado and Texas. Nathan Wilson, our registered investment advisor, is a Certified Tax Specialist™ and handles building tax-advantageous financial strategies for our clients. Please let us know if you would like to know more about our services.
Check out our next blog in this series: Setting Financial Goals.
Know what to look for! Get our complimentary eBook “Choosing a Financial Advisor”. Learn about the different types of advisors, questions to ask a perspective advisor, red flags to look for, and more! Find the right advisor for you.
Get the eBook emailed directly to you!