Summary: Financial Advisor Guide

Purpose

To help consumers select a financial advisor and protect themselves from questionable or predatory practices. Many advisors are actually commissioned salespeople.

 

Choosing the Right Financial Advisor

If you are considering working with a financial advisor, and you should, it is important to understand your options and be able to choose an adviser who is truly putting your needs first.

Unfortunately, many 'advisers' operate as commissioned salespeople, rather than true advisers. Their legal obligation is to do what is in the best interest of their employer rather than their client.

What’s in a Name

Most job titles in financial advising are marketing terms and tell you little about the adviser and the service they provide. Financial planner, financial adviser, wealth manager, and many other titles have no legal definition and anyone can use them.

Ignore the adviser’s job title and instead look at how they are licensed. Unlike brokers and insurance agents, Registered Investment Advisors are legally held to the fiduciary standard. Fiduciary advisers will have a Form ADV Brochure (like this one) on the SEC website.

FIDUCIARY

Fiduciary advisers owe a legal duty of loyalty to their clients and are required to place their clients interests first. Currently, only Registered Investment Advisors are legally held to the fiduciary standard. And sadly, nearly 90% of ‘financial advisers’ are held to the much lower suitability or best interest standards as financial product salespeople.

Working with a fiduciary greatly increases your legal rights if the advice is against your interests or is just plain bad advice.

FEE-ONLY

Fee-only financial planners are paid for their advice, similar to an attorney, doctor, or CPA. Most financial planners, however, are paid on commission for the products they sell to clients.

While it doesn’t eliminate conflicts of interest, being fee-only removes conflicts of interest from compensation based on product sales, commissions, kickbacks, or other forms of hidden compensation.

COMPREHENSIVE

Advisers who only manage or pick investments often struggle to justify their fee. Advice should go beyond investments and retirement to incorporate cash flow analysis, tax planning, risk management, debt management, estate planning, and more.

Research by Texas A&M University, Vanguard, and others have found comprehensive advisers increase client wealth, while non-comprehensive advisers may not.

Licenses & Certifications

Understanding the licenses and certifications of an adviser will tell you a lot about their business practices, how they make money, and even their skill.

You can check an adviser out on Brokercheck.org, the website created by federal regulators to provide information to the public. If an investment adviser is not on the site, they are either an insurance agent or a criminal.

About the Author

Joshua Escalante Troesh is a Tenured Professor of Business and a Registered Investment Advisor who helps families and business owners optimize their resources to achieve their financial and life goals. He has been quoted in Forbes, US News & World Report, Investopedia, CNBC, and many other media. He would love the opportunity to be one of the advisers you interview; you can learn more about him at Purposeful Strategic Partners.

Table of Contents

  1. Fiduciary - [jump to section]

    • Is the adviser required to do what’s in my best interest?

    • Does the adviser have a duty of loyalty to their company or to me?

  2. Fee-Only - [jump to section]

    • Is the adviser selling me commissioned financial products?

    • How can I get advice without a product sales pitch attached to the advice?

  3. Adviser Expertise - [jump to section]

    • What is the adviser’s advice-related training, or did the adviser just get trained on selling a product?

    • Does the advisor offer comprehensive advice on my entire life, or just investment management and life insurance?

    • Do those letters after the adviser’s name actually mean anything?

    • How is the adviser licensed, or would they be illegally giving advice?

  4. Researching An Adviser - [jump to section]

    • How do I investigate an adviser?

    • Does the adviser have any regulatory infractions or serious client complaints?

    • How do I interview an adviser; what questions do I ask and what answers do I look for?

  5. Getting Additional Help & About the Author - [jump to section]

A Tale of Two Legal Standards: Fiduciary & Suitability

The financial services industry is divided into two large camps. Those companies and advisers who are under the fiduciary standard and those who are not. Being a fiduciary means the adviser (and their company) owes a duty of loyalty to their client and has a legal obligation to do what is in their clients’ best interest.

While you would think a financial adviser would always be a fiduciary, this is not the case. Only about 10% of ‘financial advisers’ are held to the fiduciary standard, while the rest are held to the much lower suitability or best interest standard as sales representatives.

FIDUCIARY STANDARD

Being a fiduciary means the adviser owes a duty of loyalty to the client, must offer advice in the client’s best interest, and fully disclose and work to eliminate conflicts of interest. If a fiduciary financial advisor fails to do what is in their client’s best interest, the client has numerous legal protections, including the right to sue the adviser.

Currently only Registered Investment Advisers (RIAs) are legally held to the fiduciary standard. Other types of financial advisers sell financial products, and neither they nor their employers are required by law to be fiduciaries.

The importance of this difference can most easily be seen by the incredible amount of money the brokerage and insurance industries spent on fighting the DOL Fiduciary rule; $4.5 million in just the three months the Center for Responsive Politics looked at in 2015. Sadly, the rule was defeated in the 5th Circuit and the SEC proposed ‘best interest regulation’ being proposed doesn’t hold brokers or insurance companies to a fiduciary standard.

TWO TYPES OF FIDUCIARIES

Advisers who hold the CFP and some other certifications may also be fiduciaries, even though they are not legally held to the standard. The CFP board requires all of their certificants to take a fiduciary oath and to act as fiduciaries as defined by the CFP Board. The CFP Board, however, is quick to point out this is not a legal obligation. As a professional certification body, the most the CFP Board can do is take the CFP marks away from an adviser. While the CFP marks demonstrate the adviser has achieved a significant level of technical competence and professional expertise, they do not create a legal responsibility to their clients.

Unlike the CFP certification, being registered as an investment adviser offers legal protection to consumers but it does not imply a certain level of professional expertise nor technical competence. RIAs are held to the fiduciary standard in court disputes based on their licensing with the SEC, which makes it significantly easier for a client to prove the adviser harmed them with bad advice. An adviser who is a Registered Investment Adviser will have disclosure filings, including a form ADV brochure on the SEC website, such as this one. The Part 2 Brochure provides a plain-English explanation of the adviser and their business which can be used in court if the adviser violates their promises.

YOUR LEGAL RECOURSE IF A FIDUCIARY VIOLATES THE STANDARD

When a fiduciary violates their legal obligation, you can hold them accountable for their actions, including suing them for the damages caused to you if they gave advice counter to your interests. Fiduciary advisers can also face losing their license, SEC fines, and potentially jail time if the violation is egregious enough. These consequences are an important function of the fiduciary standard because it creates an enforcement and punishment mechanism for bad actors who violate the trust of the adviser relationship.

SUITABILITY STANDARD

The suitability standard is a much lower legal standard, meaning advisers can get away with a lot of questionable actions without being held accountable. The suitability standard says the adviser isn’t actually giving advice, but rather making a recommendation as part of a sales pitch. The recommendation doesn’t have to be in the client’s best interest, but rather only has to be suitable to the client. So the recommendation can be in a higher cost, higher risk, or lower expected return investment than what is otherwise available. In fact, it is perfectly legal for the adviser to choose the investment that pays the highest commission as a part of their reason for the recommendation.

Further, advisers who are under the suitability standard don’t have a legal obligation to their clients, like fiduciary advisors do. Instead, advisers under the suitability standard have a legal obligation to do what is in the best interest of their employer; which are the insurance companies, the stock brokerage companies, or the mutual fund companies. And sadly, these companies also don’t have a fiduciary obligation to offer advice in their clients’ best interest.

While you can still try to sue an adviser who gives ‘bad’ advice, the extremely low bar of the suitability standard means the adviser can get away with a lot of very questionable actions and recommendations.

THE BEST INTEREST STANDARD

In 2019, the SEC implemented the Best Interest Rule for broker/dealers and their sales agents. (If you can think of a major financial advising company, chances are they are a broker/dealer.

The SEC specifically avoided applying a fiduciary duty on broker dealers, even though they borrowed similar language which will create confusion for consumers.

As a result, many consumer advocates believe the rule was a hand-out to the financial services industry to help them avoid being subject to a fiduciary standard in the future. While the industry spent millions fighting the DOL’s true fiduciary standard, no lawsuits have been filed to fight the SEC’s watered-down Best Interest rule.

WHEN A FIDUCIARY DOESN’T HAVE TO BE

Another twist is that there are some advisers and companies who are licensed both as Registered Investment Advisers and as brokers or insurance agents. This allows the adviser (and company) to choose when they are giving advice under the fiduciary standard or when they give it under the suitability standard. And there is no obligation for them to inform the client which standard they are operating under or when they decide to switch to the lower suitability standard.

While most advisers try to do what is in their best interest, the lack of a fiduciary standard leaves the client with little recourse if an adviser is engaged in questionable or predatory practices.

Financial Planner as Trusted Adviser or Sales Rep

Just like every other profession, compensation can go a long way to incentivise and influence how an adviser does their job. Broadly speaking, there are 3 ways an adviser can get paid.

  1. Fee-Only advisers are paid directly by their clients for the advice they give and cannot accept money from third-parties.

  2. Commissioned advisers are paid a commission from the mutual fund, insurance company, or other third-party when they sell you a financial product.

  3. Fee-Based advisers get paid on both ends, getting paid directly by their clients and also receiving a commission from the mutual fund, insurance company or other third-party for the financial product they sell you.  

While each of these compensation models has its own conflicts of interest, there are substantive differences between them. How an adviser gets paid greatly impacts the incentives they have to work in the client’s best interest or to not. This is why in my practice, I’ve reworked my compensation model numerous times attempting to remove conflicts of interest between myself and my clients. Not because I’m worried I am a bad person, but because I know I’m human. And the human subconscious will find many ways to justify and rationalize why the thing that makes the advisor the most money also happens to be best for the client.

Loyalty goes to whomever writes the check. An adviser paid through a commission from the insurance company or mutual fund company will have loyalty to those companies. While an adviser paid directly by the client will have their loyalty to the client. This issue is exactly why the American Bar Association, the American Medical Association, and other professional groups have ethics rules governing or barring acceptance of referral fees, commissions, or other sales-related compensation.

Commissioned Advisers (Sales Agents)

Commissioned advisers are paid a commission for the sales of financial products they successfully make. Clients under this model can receive financial advice at no direct cost, which can be attractive for poorer clients. The sales pitch is appealing, with the adviser telling the client that the client doesn’t pay anything and the adviser is paid by the financial services company (an insurance company, stock broker company, or mutual fund company).

Commissioned advisers can be paid commissions as high as 8% or 10% of the amount invested by the client, along with earning an annual commission of as much as 1% of the investment balance for years after the sale has been made, regardless of whether the adviser stays in touch with the client. As an example, up to 15% of your premiums paid for annuity or cash value life insurance products will go to the insurance agent as commissions.

Unfortunately, the client is actually paying for these fees indirectly through a back-end deal that allows the financial services company to pay the adviser a fee and then recoup the money from the client over time. The company recoups the commission paid to the adviser by having higher expenses hidden deep within the financial product contract and often including a hefty cancellation fee if the client wants to exit the investment.

Conflicts of Interest

Commissions, referral fees, and other kick-backs create a conflict of interest between the adviser and the client simply because the adviser does not get paid unless the client buys the financial product they can sell. So not only is the adviser limited in recommending other investments which might be better for the client, but they are also incentivised to advise the client to invest in a manner that pays the adviser the biggest commissions. It may sound crazy, but most 'advisers' can increase their pay by advising clients to invest in higher-cost products that pay the advisor higher commissions. So the adviser earns more money while your returns diminish due to higher fees.

Commissioned advisors also have other incentives designed to increase profitability of their company, often at a cost to the client. Not only are advisers incentivised to guide you in a particular direction, but many commission programs include sales contests and other incentives designed to get advisers to push particular (usually high-profit/high-cost) products to their clients.

Technically, as a sales agent, the commissioned adviser’s legal duty of loyalty is to the company that employs them and not to their client.

Fee-Only

A fee-only adviser can only accept compensation directly from their clients for the advice provided, similar to the way most attorneys or CPAs work. This means they are not allowed to take commissions or receive other kickbacks related to the advice they give. Many people mistakenly think a fee-only adviser means the adviser is also a fiduciary. This is not true.

While commissioned advisers are never fiduciary advisers, it is also possible for a fee-only adviser to not be a fiduciary. It is important to vet any adviser based both on their legal fiduciary status and their method(s) of compensation. Make sure to ask an adviser if they accept any commissions, referral fees, personal perks , or any other kickbacks from outside companies. An adviser and their company should be paid only by you as the client, which greatly reduces conflicts of interest.

Within the fee-only realm, there are a few different methods an adviser can get paid; including Assets Under Management, Project-Based Fees, Hourly Fees, or Monthly/Annual Subscriptions.

Assets Under Management

The most common fee-only compensation structure is the Assets Under Management or AUM model. AUM fees are charged as a percentage of the assets the adviser is directly managing for the client, usually the assets held in accounts with the adviser’s company. The fee is expressed as a percentage of the assets under management, and a 1% fee on a million dollar account is common.

With a 1% fee on a million dollar account, the client would pay $10,000 (1,000,000 x 0.01) per year for the adviser’s investment management and advice services. Fees are typically as high as 2% for smaller accounts or significantly less than 1% for accounts larger than $1 million.

Advantages & Potential Conflicts of Interest

Advisers working under the AUM model are generally incentivised to increase the client’s wealth, because the adviser’s pay increases as the client gets wealthier. As a result, the advice given is usually consistent with increasing your net worth. AUM fees do, however, creates a conflict of interest when a client might benefit from something that reduces their invested assets; such as using retirement funds to pay off their mortgage. Because the adviser’s fees would drop as the invested assets drop, they are less likely to recommend paying off a mortgage with the funds in a retirement or other investment account. At its most egregious, the conflict of interest can cause some AUM advisers to recommend the client take out a higher-interest second mortgage on their home so they can invest more in the stock market.

Another potential conflict of interest is the desire for the adviser to ‘collect’ assets under management, usually through roll-overs from company 401(k) plans into retirement accounts the adviser can manage (IRAs). There are many legitimate reasons for rolling over a 401(k) to an IRA; including lower costs, better investment choices, ease of management, and avoiding IRS required minimum distributions. But for some clients who have an increased risk of lawsuit, rolling over to an IRA could put their retirement assets at slightly greater risk depending on the state they live in.

Monthly/Annual Subscriptions

On the other end of the spectrum is the newest and least common fee structure, the monthly or annual subscription model. Under this model, the client pays a monthly or annual fee, sometimes called a retainer, to gain access to financial planning and advice. While a newcomer, this model is quickly gaining popularity with clients who are accustomed to paying monthly fees for professional services and investors who want fee-only financial advice but don’t have large pools of retirement funds to roll over to an IRA.

Advantages & Potential Conflicts of Interest

The subscription model has the least potential conflicts of interest because the adviser is paid the same amount of money regardless of the advice they give. And the client is made keenly aware of the true costs of the advising relationship because they see the fee every month. The biggest potential concern is that the client would stop using the advising service and the fee would become another worthless monthly bill, similar to their gym membership.

Regulators also see this as a potential concern and most advisers under this model are careful to regularly provide value to clients in order to avoid the scrutiny of state regulators and the SEC. “Regulators are always looking out for the best interest of consumers, and want to ensure that they receive fair treatment from their financial advisor.” says Alan Moore, CEO of XY Planning Network which is at the forefront of subscription-based planning. “XY Planning Network's advisors believe the subscription model is the most consumer-friendly fee structure since it is transparent, can be canceled at anytime, and align the client and advisors interests.”

Project-Based Fees

Financial planning as a project-based fee allows a client to have a financial adviser analyze their situation and make a recommendation for a financial goal based on a limited scope of engagement. This could be a one-time plan for buying a house, paying down student loan debt, or setting up a retirement plan.

Advantages & Potential Conflicts of Interest

The biggest advantage of the project-based fee is the client knows up front exactly what the fee is. Both the client and the adviser understand what is to be delivered to the client and what the client will pay. The biggest disadvantage to the project-based fee model is the client is left to implement and manage the plan without ongoing support from the adviser. Financial planning is best done as an ongoing process, because the inputs of financial planning change every year. Economic conditions, tax rates and law, a client’s financial condition, the client’s goals, and other factors can all dramatically change over time. These changes can quickly render the best financial advice obsolete.

Conflicts of interest can also arise when the adviser is a fee-based adviser rather than a fee-only adviser. In these circumstances, the adviser is incentivised to create a financial plan where the solution includes the client buying financial products the adviser can earn a commission on. If the adviser is a fee-only adviser, however, this conflict hopefully disappears, unless a spouse or business partner happens to sell those products.

Hourly Fees

A final fee-only alternative is the adviser charging an hourly rate for financial planning services, similar to how most attorneys or CPAs operate. In this model the client pays the adviser for the time it takes them to analyze the client’s situation and make a recommendation. Hourly rates vary greatly depending on location, complexity, and the expertise of the adviser. Typical fees range between $200 and $300 per hour, but hourly rates can be lower or much higher.

Advantages & Potential Conflicts of Interest

The obvious advantage of hourly fees is the client is paying directly for the time it takes to make a recommendation. This can be a big disadvantage, however, when the hours begin to add up. Similar to hiring a lawyer, the hourly fees can add up quickly and many clients are surprised by the amount of time it takes to responsibly create a financial plan.

Another potential concern is the client is less likely to bring up important decisions or disclose related information to their adviser out of fear of paying the hourly fee. Again, lessons can be learned from the legal profession where it is common for huge legal fees to be required to correct a problem made worse by a client wanting to avoid paying their attorney the hourly fee for preventative legal advice.

As with project-based fees, conflicts of interest are less likely, but can arise when the adviser is a fee-based adviser whose advice is to buy products the adviser sells on commission. Additionally, the hourly adviser has an incentive to spend a little extra time researching something in more detail than necessary under the guise of due diligence.

Comprehensive Advice: Beyond Investments and Life Insurance

Your financial adviser is one of the most important professional relationship in your life. Money touches nearly every aspect of your life, and the complexity of money management can be mind-boggling. Numerous academic studies have demonstrated the value of comprehensive advice, but also showcase how non-comprehensive advice may offer little to no benefit to the client.

Vanguard Research

Vanguard publishes an annual study called Advisor Alpha which seeks to quantify the value an advisor can offer a client. In the research, Vanguard finds that comprehensive advisers add around 3% greater return after paying the typical 1% advisory fee on a million dollar account. While this may make it seem like hiring any adviser is a no-brainer, about half of that return was tied to behavioral coaching rather than investment selection and management.

Texas Tech Research

Another study from Texas Tech University, titled Planning for Retirement, demonstrated using a comprehensive financial planner more than doubled the family’s average retirement wealth when compared to the average family, but non-comprehensive advisors barely added ten percent (10%). The study’s abstract stated “Results suggest that planning, particularly with the help of a comprehensive advisor, improves retirement outcomes.”

What Comprehensive Means

Truly comprehensive financial planning will go beyond investment management and life insurance to include every aspect of your financial life. Comprehensive financial planning integrates investment planning with estate planning, tax planning, risk management, education funding, cash management, employee benefits selection, debt management, and every other aspect of your financial life.

Retirement Planning Example: Typical vs. Comprehensive Advice

Retirement planning is what most people think of when they think of financial planning and the aspect which is most often featured in advertising. Typical advisers’ retirement planning service will include rolling over investments from 401(k) accounts to IRA accounts, selecting investments, managing those investments over time (hopefully including rebalancing), and providing a sustainable withdrawal strategy in retirement.

Comprehensive advice would include the above, but would add strategies around optimizing multi-decade tax planning, providing greater income earlier in retirement when you can enjoy it more, maximizing Social Security and minimizing Medicare costs through claiming strategies. Social Security is a good example where comprehensive advice can add significant value. There are over 700 different ways to claim Social Security. Determining which is optimal for a client can mean hundreds of thousands of dollars in extra Social Security lifetime benefits between the optimal strategy and the typical advice for both to wait until 70.

Adviser as Multi Level Marketer

Sadly many advisers don’t offer comprehensive financial planning, and some advisers don’t have enough training to understand the world of financial planning beyond the products they sell.

One of the most egregious examples of the problems with the financial services industry is the way in which some firms recruit and train their advisory staff. In these firms, a wide net is cast to recruit as many people as possible to work for the firm as advisers. (Since the licenses don’t require a degree, the net can be pretty wide). These new advisers are then given training on how to pass the licensing exams to be able to legally sell insurance or mutual fund products. The advisers are then given additional training on how to sell the products. In total, a few weeks of training have been taken. And thus ends the ‘extensive’ training of the advisers.

I’ve had numerous students ask me about firms like these, because they went into a meeting as a potential customer of the advice, and left with a job offer and a contract for an annuity. One student told me the adviser’s pitch to join the firm was that all she had to do was watch a web video and take a test and she could start helping people with retirement as an adviser. This scared her since she knew nothing about retirement planning.

While all firms aren’t as aggressive, a surprising number of firms use this ‘burn and churn’ model for their employees. They hire as many people as they can, get them to burn through selling products to their family and friends, and then the people churn out of the advice industry because they don’t truly have the skills to attract non-related clients.

A true adviser will have devoted years to the profession in education and training before they ever give a word of advice. And they will be pursuing advanced degrees and advanced professional certifications, if they haven’t already attained them.

Alphabet Soup: Finance Designations from the Impressive to the Absurd

The financial advice industry seemingly is focused on trying to confuse and impress the public with a ridiculous number of letter combinations advisers can get to put after their names on business cards, corporate bios, and marketing materials. How else can you explain the nearly 200 different designations listed on the industry regulator’s website. While some designations like the CFP, CPA, and CFA actually do mean the adviser has demonstrated some significant minimum standard of expertise, the majority of the designations listed are nothing more than marketing gimmicks designed to make consumers believe the adviser has an expertise they may not have.

Many designations have very simple requirements such as a short self study course and passing a 50 question exam. Some are even easier to attain, such as holding a degree and paying the certification body an annual fee to use their letters. The Masters of Financial Planning (MFP), for example, requires their certificants to have a degree in a related field and pay the conferring body an annual fee. No other educational requirement or exam is required to use the letters. Sadly, most of the 200 designations offer limited assurance to clients that the adviser is actually skilled.

Valuable DESIGNATIONS

You should look for an adviser who has one of the following designations or educational backgrounds. Professional advisers will pursue designation with rigorous requirements, including education and passing of a difficult exam. Just as you wouldn’t want to see a doctor who hasn’t passed the medical boards or use a lawyer who hasn’t passed the bar exam; you shouldn’t work with an adviser who isn’t serious enough about the profession to pursue one of the better-recognized designations.

CFP

The CFP designation is considered the gold-standard for financial planner and is the most well known financial planning designation. To acquire the CFP an adviser must hold a bachelor’s degree, complete 8 graduate-level courses with an approved education provider, pass a comprehensive 6-hour exam (with a 60% pass-rate), attain 6,000 hours of experience, complete ongoing continuing education, and agree to the CFP Board’s code of ethics.

The CFP education and exam cover a broad range of topics in financial planning including investments, retirement planning, economics, tax planning, education funding, risk management & insurance, employee benefits, estate planning, and more. The broad knowledge base ensures clients receive advice from a professional who has demonstrated a minimum level of competency in the major factors impacting their financial life.

MBA

A Masters of Business Administration is a graduate degree which covers general business concepts including economics and finance. While those with an MBA don’t have the detailed financial-planning background someone with a CFP designation has, they are likely to have acquired the basic tools during their schooling to be able to provide competent advice.

Financial Planning Degree

Many of the education providers of the CFP designation also offer bachelor’s degrees in financial planning, which offer a similar breadth of Those with these degrees may be on their way to attaining the CFP designation but may not have passed the CFP exam or have completed the 6,000 hours experience requirement.

Other Valuable Designations

Other designations which can demonstrate an adviser’s skill and commitment to the profession include the CFA, CPA, J.D., ChFC, and PFS designations. While not as comprehensive as the CFP curriculum, they still demonstrate significant expertise by the adviser in the relevant field. Like the CFP, holders of these designations are required to have extensive education, pass a rigorous exam, and keep current with continuing education.

CFA - The Chartered Financial Analyst designation is an investment analysis-focused program which includes a grueling 3-level series of tests. Generally CFA holders are employed by mutual fund companies or other institutions for investment analysis, as the curriculum goes very deep on investments but does not cover the breadth of topics that impact the typical family or business.

CPA & PFS - The Certified Public Accountant designation, and its lesser known brother the Personal Financial Specialists, are conferred by the AICPA. The designation are tax-centric, with the CPA designation being focused exclusively on accounting and taxes. The PFS covers topics generally in line with the topics covered under the CFP.

J.D. - A Juris Doctorate is the degree earned through law school on the way to becoming an attorney. Many attorneys are well versed in estate planning law and tax law, but may not have similar skills in investments, retirement planning, Social Security, and other areas of financial planning.

ChFC & CLU - The Chartered Financial Consultant and Chartered Life Underwriter are insurance-centric designations primarily for people who come to financial planning by way of being an insurance agent. The CLU is devoted nearly exclusively to life insurance while the ChFC looks more comprehensively at financial planning similar to the PFS and the CFP above. Holders of these designations, however, are likely to be insurance-focused planners who earn commissions on the financial products they sell.

A License to Advise or a License to Sell?

Financial advisers also carry licenses which are conferred by government regulators after passing an exam. Unlike a drivers license or a medical license, financial services licenses do not imply a level of skill or expertise by the adviser. Instead, it just means the adviser understands basic concepts and the laws related to what is and isn’t allowed for a person with each license. You should never assume that because a person has a license it means they have any expertise.

SERIES 65 – REGISTERED INVESTMENT ADVISORS

The Series 65 is the license for Registered Investment Advisors (RIAs) and allows an advisor to sell advice but does not allow them to sell financial products on commission. Although it is for RIAs, the license may also be held by stock brokers who run managed accounts and charge on an AUM basis. Those holding only this license can advise on anything within financial services, including products sold on commission like insurance, but they cannot sell the product and collect the commission themselves.

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.

COMMISSIONED PRODUCT SALES LICENSES

All other licenses in financial services are sales licenses which allow advisers to sell financial products on commission. Many financial advisers hold the Series 6, 7, 3, and 63 licenses. 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.

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. 

Insurance License

Each state also licenses the insurance agents within the state to allow them to sell insurance products, again on commission. There is no Series exam for the insurance license because they are regulated by state law rather than federal law.

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.

When a Fiduciary Doesn’t Have to Be

Another twist is that there are some advisers and companies who are licensed both as Registered Investment Advisers and as brokers or insurance agents. This allows the adviser (and company) to choose when they are giving advice under the fiduciary standard or when they give it under the suitability standard. There is no obligation for them to inform the client which standard they are operating under or when they decide to switch to the lower suitability standard.

Researching an Adviser

It is a good practice to interview at least three to four professionals before selecting one. Before your potentially waste your time interviewing an adviser, though, make sure there is nothing glaringly problematic about them. Financial advisers

Four Basic Types of Advisers

There are four basic types of comprehensive financial advisers who offer advice on all aspects of personal finances:

  1. Registered Investment Advisers

  2. Stock Brokers

  3. Insurance Agents

  4. Criminals

Obviously, you want to stay away from the last one, but it is important to understand if you don’t see the adviser listed on the websites of regulators for the first three, you are dealing with a criminal. Insurance agents are regulated by each state, so you will want to find your state’s Insurance Commissioner’s website. Registered Investment Advisers and Stock Brokers are listed at BrokerCheck.org, where you can verify their backgrounds including their disciplinary record, if they have any.

Brokercheck.org

Broker Check is a consumer disclosure database of financial advisers established by the SEC and FINRA, the self-regulatory body for Broker-Dealers. The website gives you access to records of every company or person who has ever been licensed by the SEC to give investment advice or sell investment products. Broker Check will allow you to look up details about any company or person who is legally allowed to advise on or sell securities.

The site allows you to see an adviser’s background, licenses, work history. The site will also shows you “disclosures,” which including criminal charges, complaints, lawsuits, settlements, and other potential red flags. Always research an adviser on BrokerCheck before setting up an interview and potentially wasting your time or worse.

Interviewing an Adviser

Just like any other professional, you should interview an adviser not only to see if they know their stuff, but also to see if you trust them as a person. If you don’t trust an adviser, then even the best advice isn’t worth a dime because you are not likely to take it.

QUESTIONS TO ASK AN ADVISER

Are you a Registered Investment Adviser, a broker, and/or an insurance agent?

Currently, only Registered Investment Advisers are held to the Fiduciary Standard of being legally required to do what is in your company’s and your employees’ best interests. Brokers and insurance agents are salespeople of the company they represent and have a legal duty to do what is in their employer’s best interest, not their client’s best interest. While most advisers will say they will do what is in your best interest, unless they are a Registered Investment Adviser, you have no legal recourse if they don’t. You can read more about the Fiduciary Standard above.

What are your licenses and how are you compensated?

There are a lot of licenses an adviser might have. Registered Investment Advisers hold the Series 65 license. If an adviser only holds this license, then they are compensated by the client for the advice they give. All other licenses in the financial services industry are commissioned sales licenses and allow an adviser to earn commissions for the financial products they sell (often disguised as advice). Approximately 90% of financial advisers are compensated in whole or in part as commissioned product sales people.

What is your experience, education, and what certification do you hold?

Your adviser should have significant experience in advising people on their finances, ideally with at least 10 years experience in a financial planning related field. They should also have significant education such as the CFP certification, an MBA, a financial planning degree, or one of the other designation described above.

Who do you use as a custodian?

You will want to make sure the custodian is a major companies with significant experience in their respective fields, as the custodian is the company which will actually hold your money. The custodian should be a large, well-recognized financial institution with a long history of protecting investors’ funds. If you’ve never heard of the custodian, it is a red flag. My firm uses TD Ameritrade or Charles Schwab as the custodian which holds client money; while Bernie Madoff used Westport National Bank, a Connecticut bank with one office and just nine affiliated branches.

How do you choose and manage investments?

This is definitely the question with the most subjective ‘right’ answer. Investment strategies vary significantly by adviser, and there is no single correct strategy. You want to see they have a structured process for choosing investments, emphasize low-fee fund options, avoid using mostly or solely one company’s funds, and have a strategy that incorporates a plan for managing risk.

Regarding the management of risk, the strategy should not include variations of having a crystal ball so they can ‘get out’ of the market before a market crash. Instead, it should be a consistent strategy through market ups and downs designed to account for the natural volatility that comes with investing. Exciting strategies about picking the best investments, avoiding market crashes, and beating the market all sound cool but all have been proven by academic research to cost clients money.

What is your fee and what services are included in your fee?

No one works for free, and you should beware anyone who tells you they do. An adviser should be very straight-forward with their fees and what is included with the fees. And the adviser’s services should go far beyond just picking investments, managing your retirement account, and selling you insurance products.

What type of clients do you work with?

While an adviser doesn’t have to exclusively work with clients exactly like you, they should have some experience clients who have faced similar opportunities and challenges to the ones you face in your life.

What would you like added to this guide?

We are always looking to add resources to help the public advocate for themselves and understand their personal finances. If you have additional questions about selecting a financial advisers that you would like answered, please let us know. We will do our best to answer your questions about choosing the right financial planner and add the information to this guide.


About the Author

Joshua Escalante Troesh is a financial planner and Tenured Professor of Business & Entrepreneurship with two decades experience helping individuals with personal finance and entrepreneurship. He holds an MBA, has passed the rigorous CFP exam, and has been quoted in Forbes, U.S. News & World Report, The Street, Investopedia and other media.

Joshua owns Purposeful Strategic Partners, a Registered Investment Advisory firm working with business owners and families with planning for their future and achieving their life goals. Joshua would love to be one of the advisers you interview as you find your financial planner, but he encourages you to please investigate and interview him as you would any other adviser.

Potential Conflicts of Interest

Joshua is a fee-only and fiduciary financial planner, a Registered Investment Adviser, and has passed the CFP exam. This creates a potential conflict of interest as his business is structured in the same manner he recommends the public seek out financial advisers. His beliefs, however, guided how he structured his business, and not the other way around.

Quoted In:

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“While my beliefs on the ideal type of financial adviser align with how I have structured my business, my beliefs came first. As a professor, I had been teaching students about the difference between financial planning as a profession and as a sales industry for years before I became a financial advisor myself. And when I created my business, I structured it in the way I believed was ethically right and in the best interest of the consumer.”
— Joshua Escalante Troesh

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