One of the biggest obstacles to clear communication in our daily lives is the use of vague, poorly understood terms. Sometimes people unconsciously use vague language, like colloquialisms. These terms may be innocuously generic like “I went to the doctor.” This may mean they saw a family physician, an orthopedic surgeon, or a gastroenterologist. They may even mean a physical therapist, a PA, or an ARNP.
Other times, it’s unconscious, but the consequences are high. One of my biggest pet peeves that falls into this category is the term “this economy.”
Worse, though, is when vague terms are used to intentionally mislead, confuse, or obfuscate. In my opinion, the finance industry does this intentionally with the phrases like “in your best interest, putting our clients first, etc.” I’m my opinion these phrases should be replaced with one of two phrases that are legally clear: 1) fiduciary or 2) not a fiduciary!
Even the seemingly straightforward title of financial advisor refers to a surprising range of product and service providers
This range is not limited to one part of the industry but spans several different regulatory bodies including both government agencies and self-regulating associations! It’s no wonder people don’t really know:
- What financial advisors do
- Whether they need one
- Whether they want one, even if one is not “needed”
- How to choose a financial advisor
I’m here to help you understand financial advisor terms, including:
Fiduciary- Credentials
- Financial Advisor
- Brokers (aka broker-dealers, BDs)
- Hybrid Broker (aka dual-registered – a BD and a Registered Investment Advisor)
- Investment Advisor (aka Registered Investment Advisor, or RIA)
- Insurance Agents
- Robo-Advisor
- Retirement Plan Advisor
- Financial Planner
- Wealth Manager
- A Word on Disciplinary Action and Your Due Diligence
FiduciaryFiduciary (legal term)
Before we break down who’s who, let’s talk about the “f-word” – fiduciary! You may have heard this word before, but let’s clarify what it means. To me, the first division among advisors should be fiduciary vs. non-fiduciary.
“Investment advisers” are held by federal statute to a fiduciary duty, which is legally enforceable under the Investment Advisers Act of 1940, Sections 206 (1) and (2). This law prohibits advisers from “employing any device, scheme, or artifice to defraud any client or prospective client.” The fiduciary standard also requires advisers to uphold an “affirmative duty of utmost good faith” and to make full and fair disclosure of material facts. This standard also obligates advisers to prioritize their clients’ interests over their own. In a dispute, the fiduciary advisor carries the burden of proof.
I’d argue that anyone not held to a legal fiduciary duty shouldn’t even be allowed to give paid advice. Unfortunately, that’s not how it works. So, let’s talk about the other, lesser standard in the financial industry called “suitability.” Unlike fiduciary duty, the suitability standard doesn’t require the broker-dealer to act in the client’s best interest. It only requires a “reasonable basis to believe that the investment strategy or transaction they recommend is suitable for the client.” But what does “suitable” mean, exactly? We don’t really know, and when it goes to court, the burden of proof falls on the client.
The suitability standard is highly controversial. Most people assume that all financial advisors are fiduciaries. When this isn’t the case, the entire industry can come under fire, as all “financial advisors” get lumped together. Every so often, the government attempts reform, but lobbyists usually stall significant changes. Eventually, financially savvy individuals take to publishing articles and blog posts criticizing advisors for getting paid a lot to do very little, and the cycle continues.
Suitability has proven to be such a weak standard that the SEC created a second standard to add to it: Regulation Best Interest, or Reg BI. This rule requires additional disclosures, but in my opinion, adding another page to the 27 pages of disclosures clients already receive doesn’t protect anyone.
Financial Advisor Certification
Have you ever wondered about the alphabet soup of letters following some advisors’ names? According to FINRA, there are nearly 250 different financial advisor and professional designation certifications available. These are certifications, not licenses, which means they’re managed by the companies that created them and their respective boards. Around 90% of these fall into what we call “pay-to-play” certifications—weekend courses designed by “educational” companies to be easily attainable and to charge advisors an annual fee, all for the sake of adding instant credibility.
Don’t get me wrong; I believe advisor continuing education requirements should be higher. But a long list of designations after someone’s name often reflects insecurity more than expertise. There are exceptions, of course—one of my favorite advisors has all of these behind his name: MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL! Below, I’ve listed the designations I consider meaningful. If it’s not here, I consider it nearly meaningless.
Financial Advisor (colloquial):
When I first started in wealth management, a friend told me her husband objected to working with me because “everyone has a friend who is a financial advisor.” That might seem true, but here’s the problem stated more accurately: “everyone has a friend who calls themselves a financial advisor.” Unfortunately, in the United States, anyone can adopt this title—it doesn’t require a specific credential.
The education, skillset, and sophistication of those using the title vary widely, depending on their actual job function and individual experience. There are no standardized education or experience requirements and no regulatory body specifically policing the use of this title.
While there’s no licensing requirement to call yourself a financial advisor, those recommending or selling investment products are typically required to hold various securities licenses. The type of products they sell, whether they sell them at all, and how they’re compensated determine which licenses they must obtain.
Here are a few different roles that may be called financial advisors (These are specific legal entities):
Brokers (aka broker-dealers, BDs)
Function: Security sales, incidental investment advice
Numbers: There are about 620,000 brokers in the U.S. This is the most common role in the industry.
Legal Standard: Suitability, NOT fiduciaries. Duty to employer.
Exams: All exams are organized by type of product sold: Series 6 for selling mutual funds, annuities, etc; Series 7 considered the gold standard because it allows one to sell the most types of products.
Regulator: FINRA (self-regulating industry organization), registered with SEC
Fees: Commission
People often use the terms “financial advisor” or “investment advisor” interchangeably, but they’re frequently referring to broker-dealers or hybrid broker-dealers. Broker-dealers (BDs) can sell a variety of financial products, including mutual funds, stocks, and bonds. While they won’t call themselves fiduciaries, they may claim they’re looking out for your best interest.
How are brokers not held to the fiduciary standard; you might ask? Congress has determined that any investment advice brokers provide is considered “incidental” to their primary role: selling securities.
Under the suitability standard, many financial advisors work on commission for the products they sell. This often means the client never receives a bill from the advisor. But, as with all “free” things, you could end up paying significantly more—sometimes two to four times as much—compared to transparent pricing models.
Hybrid Broker (aka dual-registered – a BD and a Registered Investment Advisor):
Function: Security sales, investment advice, investment management.
Numbers: Of the 620,000 brokers mentioned above ~312,000 are dually registered, these firms manage ~80% of all assets managed by RIAs.
Legal Standard: Part-time suitability, Part-time fiduciary.
Exams: Series exams as above.
Regulator: FINRA (self-regulating industry organization), registered with SEC
Fees: Commissions or Fee-based (commissions AND fees from clients)
Many of the giant firms you’d recognize are hybrid BDs. These are the firms that Tony Robbins calls the “wolves in sheep’s clothing”. Under regulatory pressure from the now-defunct Obama era DOL fiduciary rule and demand from a client base awakening to the hidden and excessive fees of the commission model, many broker-dealers opened Registered Investment Advisor businesses to which they transferred management of their retirement account business. There was no incentive to give up the more lucrative commission model on taxable (non-retirement) accounts because these accounts weren’t threatened by impending legislation. Generously, one could call these part-time fiduciaries.
Additionally, as the tides turned away from commissions, some individual advisors have realized that they want to be fiduciaries, or just want more freedom in their practice, and have migrated entirely away from their broker-dealer. However, this is very hard to do. It is far easier to open a new business under the Registered Investment Advisor model with the same staff, then keep running your old business in the same way. Then the advisor gets the marketing advantage of being a fiduciary, but can easily “switch hats” to sell a commissioned product during the same meeting without alerting the client. The advisor is ostensibly working for two different companies at the same time. This appears to be a lot more lucrative than just leaving the BD model entirely.
I was fortunate – no, I was intentional – to start my career with a full-time fiduciary firm. I never grew into the golden handcuffs of the BD model. There are some good people working in this model, but there are very few reasons for clients to choose a part-time fiduciary over a full-time fiduciary.
In fact, there’s significant data showing that clients of these hybrid brokerage models were often better off before the firms made the switch. Despite the “fiduciary” rebranding, many of these firms continue business as usual.
Investment Advisor (aka Registered Investment Advisor, or RIA):
Function: Investment advice, investment management
Numbers: ~81,000 in the U.S. (IAR-only)
Legal Standard: Fiduciary in all cases, as defined by the Investment Adviser Act of 1940.
Exams: Series 63, Series 65 (for advisors who don’t receive commissions), waived for CFPs.
Regulator: FINRA (self-regulating industry organization), registered with SEC or state depending on size.
Credential: CFA, CFP
Fees: Commissions, Fee-based (commissions AND fees from clients), or Fee-only
Oddly enough, the term Registered Investment Advisor (RIA) refers to a company, not an individual. In a stroke of questionable decision-making, it was decided that individuals working at an RIA would be called Investment Advisor Representatives (IARs). This group makes up such a small subset of the advisory world that you may never have met one.
RIAs are bound by law to act as fiduciaries in all cases, with all clients. THIS is the most compelling reason for a client to seek out an RIA. It’s easy to see why a hybrid broker-dealer would struggle to meet this standard consistently.
While RIAs offer a big step up in accountability, the bar for becoming an IAR is still painfully low. There are no prerequisites or educational requirements to sit for the exam, nor do you need sponsorship from an employer or any prior professional certifications. The only requirement is passing the Series 65 exam—once. If you fail, you can retake it every 30 days until you pass. Having taken the Series 65 myself, I’d say its about twice as difficult as passing the driver’s license test at age 16 was.
The series 65 study course book is about 500 pages, covering securities law and very basic investment concepts. In no way would this information prepare someone to evaluate investment vehicles thoroughly, nor does it touch on financial planning. As a result, less scrupulous companies have little incentive to educate their employees beyond the scope of their own product offerings and some even discourage it.
In my experience, the biggest issue with IARs is their general lack of education for the level of work their clients expect. Many “successful” investment advisors come from sales-heavy backgrounds (think auto sales) or simply have a natural charisma. It’s very common for advisors to become VERY successful financially while only knowing slightly more than their clients about investments or financial planning. If you’ve ever had an advisor talk down to you or avoid answering questions, it’s likely they lacked the knowledge to respond confidently.
While this is the only type of firm I would recommend, you still need to be discerning. Ask plenty of questions, including these four!
Insurance Agents (typically life agents)
Function: Sales of insurance products, risk management advice
Numbers: ~902,000 in the U.S.
Legal Standard: Suitability. No fiduciary standard exists in the insurance industry.
Exams: SEI, exams specific to type of insurance sold.
Regulator: State insurance commissioner.
Credential: CLU is the gold standard, but doesn’t qualify someone to recommend investments. Many agents even have the CFP designation, but their companies incentivize selling products over planning.
Fees: Commissions only
The insurance industry plays a crucial role in promoting financial stability. Most people recognize the importance of outsourcing certain risks, whether it’s through auto, health, or life insurance. But why do some insurance agents call themselves financial advisors? Frankly, the term “financial advisor” is often used as a marketing tactic to attract clients seeking broader financial guidance—even when the agent’s primary focus is selling insurance.
I frequently recommend specific types and amounts of insurance for my clients, but I always refer them to an insurance expert (agent) to purchase it. Most investment products sold by insurance companies are too expensive and unnecessarily complex to benefit the average person. Insurance should primarily be viewed as a risk-management tool, not a wealth-building strategy. In a few specific and rare cases, I recommend clients use insurance products to meet an investment need. Just as I would never try to sell an insurance policy, insurance agents shouldn’t be recommending investments.
When you consider how many insurance agents are out there compared to IAR-only advisors, it’s easy to see how a small percentage of bad actors upselling inappropriate insurance “investments” can tarnish the reputation of financial advisors as a whole.
Other terms:
Robo-Advisor (colloquial):
A robo-advisor isn’t really an advisor, but an investment platform built on a BD, Hybrid, or RIA. They offer investment management and may even offer a call-center version of financial planning, but it’s typically not holistic planning, rather just answering planning-related questions.
Retirement Plan Advisor (colloquial):
Most commonly, these are employees of your workplace retirement plan (401(k), 403(b), 457, etc). Also called a 401(k) financial advisor, a retirement plan advisor is typically authorized only to talk to you about the investments offered in that plan. They can help you set reasonable return expectations, select an allocation, and follow-up with you at regular intervals about allocation changes.
Financial Planner (colloquial):
Just like financial advisor, anyone can call themselves a financial planner. I use this term to make a distinction between the many types of “financial advisors” and someone who actually focuses on financial planning work.
Financial planners are not regulated by a single entity, but rather by the regulator that oversees the services they provide. For example, an accountant who prepares financial plans is regulated by the state Board of Accountancy. A financial planner who is also an investment adviser is regulated by the SEC or the state where they do business.
Still, there are a few gold-standard designations here that deserve a mention:
- CFP® CERTIFIED FINANCIAL PLANNER®
- ChFC, Chartered Financial Consultant®
- PFS, Personal Financial Specialist (for CPAs)
Wealth Manager (colloquial)
Wealth managers are not regulated by a single entity, but rather by the regulator that oversees the services they provide. This is a term that describes a bundle of financial services typically including comprehensive financial planning, investment management, and coordination with your other financial service providers, such as your CPA, insurance agent, and any attorneys.
A Word on Disciplinary Action and Your Due Diligence
While I do think most people will do better with an advisor than without one, more and more I think it’s important to get a good advisor from the start. Sometimes we joke that one-dimensional firms like BDs and hybrids are your “starter-advisor” or the 100-level coursework that clients graduate from, but a bad advisor can do real damage to a client. It’s critical to do your research on any advisor you consider, because the suitability standard provides such little recourse.
Something else to consider: Most people have a hard time leaving their advisor, even when the experience has been terrible. The sad truth is that most people pick their advisor based on two things 1) referral from a trusted friend or family member, and 2) how nice the advisor is. Let me tell you, ALL advisors are nice before you become a client and most continue to be nice forever. That does NOT mean they are good at their jobs. It doesn’t even mean they are good people!
I have been shocked by how many advisors have complaints and disciplinary action on their record but are still working. I’ve been even more shocked when I share these records with a prospect, who then responds with “but he’s so nice, I don’t want to upset him by leaving.”
Check out your advisor on FINRA’s BrokerCheck.
If you are ready to work with a true fiduciary, fee-only RIA, take a minute to schedule a First Time Call with someone on our team.
