Do You Know How Your Advisor is Licensed

Knowing Your Advisor's License Will Tell You Everything

Almost anyone can call themselves a financial advisor, without any training or even licensing. Similarly, seeing the job title Investment Manager, Wealth Manager, Wealth Advisor and many others doesn't mean much with regard to the person's qualifications or how they provide advice. Many job titles in the financial services industry don't actually mean much.

Professional designations, like Certified Financial Planner (CFP) can help to distinguish between more qualified and the less qualified advisors. Unfortunately, in addition to respected designations like the CFP, there are a large number of less reputable designations which have sprung up as well. Some of the more worthless designations require little more than watching a few online videos and taking a test.

Between the wide range of meaningless job titles and the alphabet soup of certifications and designations, it's easy for an advisor to hide how they truly do business. One thing an adviser can't hide, however, is how they're licensed. Anyone making money from providing investment services must be licensed. Their license(s) will tell you plenty about the advisor including what they can advise on, how they are compensated, and whether they are fiduciaries.

Commissioned Product Sales Licenses

Many financial advisers hold Series 6, 7, 3, and 63 licenses. These licenses allow the individual to sell financial products and earn a commission on those sales. Historically, financial advice given by those with these licenses was designed primarily to make the sale of the product happen.

Commissions can Influence Advice

This is not to say the advice is bad, but it does not need to be the best advice for the client. Selling commissioned financial products means the advisor can be influenced by the amount of money they will make off of recommending a particular product. For example, an advisor who gets paid a 5% commission off of Financial Product A and 8% off of Product B is likely to see Product B as a better alternative, even if it's just a subconscious bias.

Avoid Single-License Advisors

Additionally, those carrying only one of the above licenses can only recommend and sell the financial product covered by that license. This means they have no ability to sell a different product which might better meet the client's needs. Going to an insurance agent (with only an insurance license) to purchase insurance may make sense. But it doesn't make sense to get comprehensive financial advice from a single-license advisor. The financial analysis they do always seems to conclude with the advice to buy the type of financial product they are licensed to sell. When all you have is a hammer, everything begins looking like a nail.

Series 6 – Insurance & Mutual Fund License

The Series 6 license allows individuals to sell mutual funds, life insurance, and annuities. All three of these products have their place in a financial plan; although the high costs of annuities makes them appropriate only in specific situations. An advisor with only this license will have a very limited options for their advice. Although the Series 6 is often held in conjunction with other licenses, many insurance agents only carry a Series 6 and a state insurance license. 

Commissions with these products are often hidden from the client, buried within the disclosure documents and prospectuses. Client's purchase the product through the agent from the insurance company or mutual fund company. The company then takes a portion of the purchase price and sends it back to the agent as a commission. This has the effect of either reducing the money the client actually invests or creating an additional fee if the client wants to sell the investment or both.

Series 7 – Securities License

The Series 7 allows an advisor to sell stocks, bonds, government instruments, options, other securities, and mutual funds. The license allows for most any investment to be sold, except for real estate, commodities, and futures. Sometimes called the stock broker's license, commissions under this license usually look like transaction fees for making the trades. Hidden commissions can also be present, especially from investment banks trying to push new issues of securities. Most people who are stock brokers hold other licenses in addition to the Series 7.

Series 3 – Commodities License

The Series 3 allows an advisor to sell commodity futures contracts. If you ever wanted to make your money off of betting on the future prices of wheat, oil, or other commodities; this is the advisor for you. Be warned though, commodities are considered among the riskiest investments and often have dramatic and quick price swings.

Series 63 – State License of State Law

The Series 63 is a state administered license which combines the Series 6 and the Series 7 subject matter but for state law. The Series 63 will generally be held in conjunction with other licenses. 

Series 65 – Registered Investment Advisors

The Series 65 is the license for Registered Investment Advisors (RIAs) and only allows an advisor to sell advice without commissions. Although it is for RIAs, the license may also be held by stock brokers who run managed accounts and charge on an AUM basis.

Single-License Advisors are Preferred

The 65 license is the exception to the 'avoid the single license' suggestion because  an advisor holding only the Series 65 cannot sell commissioned products and therefore doesn't have that conflict of interest. The license allows a firm or an individual to provide advice on all types of investments; including securities, mutual funds, insurance, annuities, commodities, and others. 

The Series 65 license more closely resembles other professions such as doctors, accountants, and lawyers; who don't make their money through commissioned product-sales. Instead, these professionals and RIAs are paid for their services directly by the clients.

You may also see those with a Series 65 license referred to as Investment Advisor Representatives (IARs). Technically, the advisory firm is the RIA and the advisor employees are IARs--but RIA is often used for both the firm and the people.

Compensation: Fee-Only

Those holding only the Series 65 license earn their compensation by charging their clients directly. The most common method is based on Assets Under Management, where the advisor charges a percentage of the account balance they are managing. RIAs can also charge using an hourly fee, a fee per project, or a monthly retainer. 

This compensation model has significantly fewer conflicts of interest, because the advisor gets paid the same no matter what you invest in. This means the advisor's advice is more likely to be based on what they believe will improve your finances the most.

Those with only the Series 65 are not allowed to earn commissions on products they sell or take any outside fees. The only way they can be compensated is by the client. This means, while an RIA can advise you on the type and amount of life insurance you should get, they can't sell you the policy. Nor can they earn a referral fee from sending you to a life insurance agent. Most RIAs work with trusted brokers, insurance agents, and other professionals to execute the advice given. 

Fiduciary Status 

RIAs are the only advisors who are required to be fiduciaries 100% of the time. This means the advice they give is required, by law, to be in the client's best interest. Other advisors may be fiduciaries when advising on retirement accounts, under the Department of Labor Fiduciary rule, and not be fiduciaries when providing other advice.

Series 66 – RIA/Broker Combo

The Series 66 license is for those who are compensated both on commissions and on client fees. This compensation structure is known as Fee-Based, which means they are able to charge the client directly and they also make commissions. Again, there is nothing wrong with commission-drive advice, but the lack of transparency and the potential for conflict of interest should spur you to have a deeper conversation with your advisor.

The Series 66 can often be held by former stock brokers who are transitioning to RIA work, or by people who have some clients who prefer being charged directly and others who prefer being charged through commissioned products.

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Joshua Escalante Troesh.jpg

Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at