Financial Advisor: More Than What You Think

What is a financial advisor?

A financial advisor is a legal designation for someone who is approved by certification to provide financial advice, especially when it comes to investing and where to put your money. “Financial advisors” is a very broad category that actually includes over 230 different certifications that cover a broad range of activities, specializations, and expertise. A financial advisor may be someone who gives generalized financial advice or someone who provides a highly specialized service. 

What do financial advisors do?

There are a lot of different types of financial advisors. Put simply, financial advisors help people make better financial decisions. But not all financial advisors are the same, just like not all engineers are the same. You wouldn’t ask an electrical engineer to help you with a civil engineering problem. You wouldn’t ask an industrial engineer to help you design a computer chip. All engineers use practical skills to solve design problems, but that doesn’t mean all of them have the same skillset.

In that way, financial advisors are like engineers. The following is a very limited list of the kinds of specialities financial advisors can have:

• Debt elimination
• Wealth management
• Retirement planning
• Estate planning
• Financial therapy
• Life transition planning
• Tax management
• Financial behavior
• Investing
• Wealth creation

What are the different types of financial advice professionals?

There are an insane number of different specialties that fall under the umbrella definition of financial advisors. FINRA, the organization that manages certification for financial advice professionals, currently tracks 233 different certifications and designations for financial advisors. Many of these certifications overlap in terms of what they do, but some of them are highly specialized.

Broadly speaking, though, most people will use one of eight different general types of financial advisors: 

Credit counselor

A credit counselor is a financial advisor who is trained and certified in debt management, budgeting, and consumer credit. Most credit counselors work for non-profit organizations who help people who are struggling under significant personal debt. Credit counseling is not the same thing as debt settlement companies, which are for-profit companies. 

Credit counselors do some of the following things:

• Work with you to develop a debt payoff plan 
• Counsel you on your credit report and credit score
• Help you structure a monthly budget
• Provides advice about money management and cash flow

To find a credit counselor, you can visit the National Foundation for Credit Counseling. You can learn more about credit counseling by visiting the Consumer Financial Protection Bureau. 

Financial advisor

“Financial advisor” is a broad category that can capture many different kinds of financial advice professionals which are regulated by FINRA. That means these professionals obtain certification and licensing. 

Financial advisors have been subject to regulation since the enactment of the Investment Advisers Act of 1940. This law mandates that individuals offering investment advice for compensation must register with the government and prioritize their clients’ interests. They must also carry Errors and Omissions Insurance (E&O insurance) as they can be held accountable for the advice they offer. 

So, any professional who can legally give advice on investing is a financial advisor. It is not terribly constructive to delineate the difference between a financial advisor and a financial planner.

Examples of certifications that are common to financial advisors: 

• Certified Financial Planner (CFP)
• Chartered Financial Consultant (ChFC)
• Chartered Financial Analyst (CFA)
• Chartered Investment Counselor (CIC)
• Certified Investment Management Analyst (CIMA)

Financial planner

A financial planner is a financial professional who provides guidance on the full range of their personal finances: budgeting, cash flow management, investing, insurance, retirement planning, and estate planning. Financial planning focuses on helping people set long-term financial goals and lay out a strategy for how to accomplish them. 

Example of a certification for financial planners: 

• Certified Financial Planner (CFP)

Financial coach

Financial coaches stand out from other financial advisors as they operate without regulation, unlike most financial support professionals. They offer guidance, motivation, and support but cannot provide investment advice, which would subject them to regulation under the Investment Advisers Act of 1940. 

Financial coaches should never cross the lines of legal advice, tax advice, or investment advice. 

Financial coaches can provide guidance on cash flow management, debt management, budgeting, but not investing. Coaches also rarely give their clients specific financial advice, but rather provide support and allow the client to seek out their own answers. 

Because financial coaches is an unregulated term, anyone can claim to be a financial coach. Many people move into the space after successfully pulling themselves out of debt and want to help others do the same. However, there is an emerging movement to provide training and certification for financial coaches. Financial coaches could have a Certified Personal Finance Counselor (CPFC) certification. Click here to learn more about financial coaches.

Financial therapist

Financial therapy is a branch of personal therapy that focuses on the impact of mental health on financial behavior. According to the Financial Therapy Association, financial therapists are “professionals dedicated to the integration of cognitive, emotional, behavioral, relational, and financial aspects of well-being.” 

Financial therapy is a relatively new discipline which means it might be a little challenging to find a financial therapist who is taking new clients. The best approach would be to visit the Financial Therapy Association’s Find a Financial Therapist tool.

A financial therapist could have the Certified Financial Therapist (CFT-I) certification. 

Financial counselor

Financial counselors concentrate on enhancing personal finance habits, including budgeting, credit enhancement, and reducing debt. They typically aid middle or lower-income clients in advancing their financial well-being. They are often employed by nonprofits, local governments, or supportive organizations and offer additional assistance to individuals.

The best way to find a financial counselor would be to visit the AFCPE website. Financial counselors could have a Certified Personal Finance Counselor (CPFC) certification

Wealth psychologist

Financial therapists who specialize in high net-worth individuals are called wealth psychologists or wealth counselors.

Wealth advisor

A wealth advisor, also known as a wealth manager, is a financial advisor who helps high net-worth individuals manage their personal, family, and dynastical wealth. 

Certified Public Accountant (CPA)

A certified public accountant is a form of financial advisor who helps individuals and businesses plan and reach their financial goals. A CPA often focuses on cash flow, tax management, and understanding financial laws.

What does it mean for a financial advisor to be a fiduciary? 

The word fiduciary is a pretty fancy word that we just don’t use everyday. But its meaning is actually pretty simple: a fiduciary is a person who is legally obligated to put someone else’s interests first in the way that they act. That means that financial advisors who have a fiduciary responsibility toward their clients must put their clients’ interests above their own. That sounds like it should be obvious, but it isn’t necessarily. 

For example, when you walk into a car dealership, the finance manager is trying to sell you a car and has no fiduciary responsibility to ensure that he puts your interests first. He is likely to sell you extended warranties, upgrades, and financing that benefit his employer more than you. A non-fiduciary financial advisor might suggest products based on the highest commissions or limit recommendations to products from their own company.

Is it important that my financial advisor is a fiduciary?

There are a number of reasons why you would want to make sure that your financial advisor is a fiduciary. 

Reason one:

Fiduciaries are required to provide full disclosure of any conflicts of interest they may have. This means that you can be sure that your advisor is not recommending investments or products that will benefit them financially, but not you. If your advisor is not a fiduciary, they may have conflicts of interest that can influence the advice they give you. For example, they may receive commissions or incentives for recommending certain investments, even if those investments are not the best option for you. This can lead to a situation where the advisor is putting their own financial interests ahead of yours, which can ultimately harm your financial well-being.

Reason two:

Fiduciaries are required to act in your best interests at all times. This means that they will not recommend investments or products that are too risky for your risk tolerance, or that do not align with your financial goals. If your financial advisor is a fiduciary, they are paying more attention to your wishes and goals because acting against them could leave them liable if things do not turn out as expected. 

Reason three:

Fiduciaries have a higher standard of care compared to non-fiduciaries. If a fiduciary error causes your financial loss, they might be held responsible for those losses. It doesn’t guarantee no losses or demand compensation, but it obligates them to be more responsible with your account.

By working with a fiduciary advisor, you can have greater confidence that the advice you receive is in your best interests. Fiduciary advisors are held to a higher standard of care, and are required to disclose any potential conflicts of interest. This can help you make more informed decisions about your finances and achieve your long-term goals.

How can I tell if a financial advisor is a fiduciary?

If you want to make sure that a financial advisor is a fiduciary before you agree to work with them, there are a few things you can do to find out. 

Ask them

The simplest way to find out if your financial advisor is a fiduciary is to simply ask them. They should be able to answer this question clearly and concisely. If they are not sure or they try to avoid answering the question, that is a red flag. Some of the following are questions you can ask your financial advisor:

• “Are you legally obligated to act in my best interests at all times?”
• “Do you receive any commissions or incentives for recommending certain investments or financial products?”
• “Do you disclose all potential conflicts of interest that may arise in our relationship?”
• “Do you have any affiliations with financial products or services that you recommend to clients?”

Check with federal regulators

Financial advisors with professional designations must register with the SEC or state regulators. All registered financial advisors are fiduciaries, by law. So, if you can find your financial advisor on the websites that report on the registered professionals, you can be sure that they are legally fiduciaries. 

You can look up whether a financial advisor is registered with the SEC by visiting this website. Or, you can check on the FINRA website for their broker registration.

An advisor not registered with the SEC might still be a fiduciary. An update to the Investment Adviser Act in 2010 mandated SEC registration only for advisors managing over $100 million. Smaller advisors may register with their individual states. So, if you don’t see them, you might need to ask them or check with your state securities board webpage. 

Most financial advisors also place their professional designations after their name. You can check with the chartering organizations for whether that designation is a fiduciary or not. You can also check with that organization to ensure that their designation is accurate and up-to-date. 

Are all financial advisors fiduciaries?

Whether or not all financial advisors are fiduciaries depends on your definition of financial advisors. A financial advisor registered with the SEC must prioritize your interests over their own when handling your account. This is their fiduciary responsibility. But there are other people you may work with related to finances that are not fiduciaries, for example insurance brokers, stock brokers, and financial coaches. These people do not qualify for the legal definition of financial advisor, but most of us do not go through our lives speaking by legal definitions. 

How do financial planners get paid?

Financial planners earn their money in two broad ways: commission and fees.

How do commissions work for financial planners?

Some financial planners earn commissions from recommended products like mutual funds or insurance policies. They get paid based on what you buy, so you might not feel like you’re directly paying for their service. However, this approach could lead to conflicts of interest between your best interests and their commissions. Consequently, many people prefer financial advisors who charge fees instead.

How is fee-based compensation for financial advisors calculated?

Fee-based compensation for financial advisors can come in four ways. 

Flat rate

A financial planner might charge a one-time fee for their services. For instance, they may charge you to put together a financial plan. Once they deliver the plan, the engagement is over. 

Depending on its complexity, you could expect a flat fee for a financial plan to be over $2,000. If the project is complicated, you can expect to pay several times that. 

Per hour

A financial planner might charge you by the hour for the time they spend on your account. The advantage to this approach is that it allows you to seek advice as issues come up even if you don’t need constant attention. 

It would not be uncommon for the per hour charge to be over $200. 

Percentage of assets under management

In this model, the financial advisor will charge you a percentage of the assets that they are managing every year. The advantage of this model is that you are never sent a bill. You never have to write a check. The disadvantage of this model is that their fee is taken out of your investment every year regardless of whether the stock market was up or down and even if most of your investments are not being actively managed. 

There is no standard percentage that a financial advisor would charge for managing your money, but it is not uncommon for the fee to be on a sliding scale. You might receive a discounted percentage when your assets exceed $1 million or again for assets over $5 million. 

More and more financial advisors are moving away from commission-based compensation in order to avoid the conflict of interest that it can introduce. However, it is wise to still ask whether the financial advisor earns any of their income through commission. There are instances where financial advisors have a mixed compensation model. In those cases, you would want to know which recommendations might be influenced by the chance of earning a commission.

Here’s a simple example of asset under management fee structure: Suppose the financial advisor is managing $200,000 for you and their fee is 1%. That means that every year, the financial advisor would charge you $2,000 ($200,000 x 1% = $2,000).

What is Series 6 and 7 financial advisor?

Financial advisors must pass exams that permit them to sell strokes, bonds, securities, and other investments. While there are dozens of different exams, the most famous of these exams are the Series 6 and Series 7 exams, but they aren’t the only ones.  

In order to pass the exam, the candidate must score at least 70% on the test. The Series 6 and Series 7 exams are separate, the Series 7 exam being the second and more comprehensive of the two. 

Series 6

The Series 6 exam is a 90 minute exam with a passing grade of 70%. According to FINRA, the Series 6 “exam measures the degree to which each candidate possesses the knowledge needed to perform the critical functions of an investment company and variable contract products representative, including sales of mutual funds and variable annuities.”

Series 7 

The Series 7 exam is nearly four hours long, requires a 72% for passing, and “measures the degree to which each candidate possesses the knowledge needed to perform the critical functions of a general securities representative, including sales of corporate securities, municipal securities, investment company securities, variable annuities, direct participation programs, options and government securities.” (FINRA) 

The Series 7 exam permits a comprehensive list of things the candidate can do. “A candidate who passes the Series 7 exam is qualified for the solicitation, purchase and/or sale of all securities products, including corporate securities, municipal fund securities, options, direct participation programs, investment company products and variable contracts.”

Qualification exams for financial advisors:

Securities Industry Essentials (SIE)

• Securities Industry Essentials (SIE)

FINRA Representative-level Exams

• Series 6: Investment Company and Variable Contracts Products Representative Exam
• Series 7: General Securities Representative Exam
• Series 22: Direct Participation Programs Limited Representative Exam
• Series 57: Securities Trader Representative Exam
• Series 79: Investment Banking Representative Exam
• Series 82: Private Securities Offerings Representative Exam
• Series 86/87: Research Analyst Exam
• Series 99: Operations Professional Exam

FINRA Principal-level Exams

• Series 4: Registered Options Principal Examination Exam
• Series 9/10: General Securities Sales Supervisor Exam
• Series 14: Compliance Officer Exam
• Series 16: Supervisory Analysts Exam
• Series 23: General Securities Principal – Sales Supervisor Module Exam
• Series 24: General Securities Principal Exam
• Series 26: Investment Company Products/Variable Contracts Limited Principal Exam
• Series 27: Financial and Operations Principal Exam
• Series 28: Introducing Broker/Dealer Financial and Operations Principal Exam
• Series 39: Direct Participation Programs Limited Principal Exam

Municipal Securities Rulemaking Body (MSRB) Exams

• Series 50: Municipal Advisor Representative Exam
• Series 51: Municipal Fund Securities Limited Principal Exam
• Series 52: Municipal Securities Representative Exam
• Series 53: Municipal Securities Principal Exam
• Series 54: Municipal Advisor Principal Exam

National Futures Association (NFA) Exams

• Series 3: National Commodities Futures Exam
• Series 30: NFA Branch Manager Exam
• Series 31: Futures Managed Funds Exam
• Series 32: Limited Futures Exam – Regulations
• Series 34: Retail Off-Exchange Forex Exam

North American Securities Administrators Association (NASAA) Exams

• Series 63: Uniform Securities Agent State Law Exam
• Series 65: Uniform Investment Adviser Law Exam
• Series 66: Uniform Combined State Law Exam

What is the difference between a financial advisor and a financial planner?

The terms “financial advisor” and “financial planner” are often used interchangeably. However, there are some differences between the two.

Financial Advisor

A financial advisor provides advice on various aspects of your finances, including investment management, insurance, retirement planning, and tax planning. Financial advisors may work for a financial services company, brokerage firm, or bank. They may receive commissions or fees for their services, and may be registered with the Securities and Exchange Commission (SEC) or state regulators.

Financial Planner

A financial planner is a type of financial advisor who focuses on creating a comprehensive financial plan that takes into account all aspects of your financial life. This may include investment management, insurance, retirement planning, tax planning, budgeting, cash flow management, and estate planning. Financial planners typically work independently or for a financial planning firm, and they may charge a fee for their services. Some financial planners hold professional designations, such as Certified Financial Planner (CFP), which requires rigorous education and training in financial planning.

In general, a financial advisor may focus on a specific area of your finances, such as investment management, while a financial planner takes a more holistic approach to your financial life. However, there is often overlap between the two roles, and many financial advisors also offer comprehensive financial planning services. 

What are the different kinds of financial advisors? 

Financial advisors come in a broad range of flavors. There are financial advisors who focus on wealth management, accounting, behavioral finance, credit counseling, or general financial management. But, there are also financial advisors who specialize in divorce, taxes, estate planning, financial therapy, retirement, education planning, small businesses, housing, and even focused on specific financial products, like 401k or insurance. FINRA, the governing body over financial advisors, currently tracks 233 different designations for financial advisors. 

Common professional designations in the financial advisor industry:

Organizations relevant to financial advisors

The Association for Financial Counseling & Planning Education (AFCPE)

The AFCPE is a trade organization that provides education and training for financial professionals. They provide the training and certification for the AFC (Accredited Financial Counselor) designation which focuses on helping people get out of debt, establish healthy financial habits, and set the foundation for financial progress.

National Financial Educators Council (NFEC)

The NFEC provides training and certification for the Certified Financial Education Instructor (CFEI) for financial educators. They have also created a curriculum and designation for a Certified Financial Wellness Consultant which is one of the few certifications for financial coaches. 

Financial Planning Association (FPA)

One of the largest trade organizations for financial advisors, the Financial Planning Association (FPA). It provides continuing education for Certified Financial Planner (CFP) professionals. It also provides professional groups, services, as well as publishes the Journal of Financial Planning. 

CFP Board

The CFP Board provides the training and certification for the Certified Financial Planning (CFP) designation. The CFP designation is one of the most common amongst financial advisors.

The National Association of Personal Financial Advisors (NAPFA)

The National Association of Personal Financial Advisors (NAPFA) 

North American Securities Administrators Association (NASAA)

The North American Securities Administrators Association (NASAA) represents state and provincial securities regulators in the United States, Canada and Mexico.

FINRA (Financial Industry Regulatory Authority)

FINRA is responsible for maintaining the licenses that financial professionals use. This is the best place to find a full list of the different financial advisor designations and their chartering organizations. 

What is the Investment Advisers Act of 1940?

Investment Advisers Act of 1940 (yes, the law uses the spelling ‘Advisers’ not ‘Advisors’) set rules on what a person or organization must do if they give people advice on how to invest their money. Indeed, the law aimed to shield consumers and enhance transparency in financial advice. It begins by defining a financial adviser as “any person who, for compensation, engages in the business of advising others.” If you’re curious about the legislation, you can find it here). 

According to the Investment Advisers Act of 1940, you must be licensed if to do any of the following three things: 

1. Provide investment advice to others for compensation. This includes providing advice on securities, such as stocks, bonds, and mutual funds.
2. Issue reports or analyses regarding securities. This includes providing research reports or analysis on securities.
3. Manage assets for others. This includes managing money for clients, such as in a 401(k) or IRA.

Updates to the law stipulated that advisors needed to register with the SEC only if they had at least $100 million under management. Otherwise, the advisor would have to register with the state in which they operate. 

If you looking for more detailed information may want to look around on the SEC website on Investment Management. You can find it here.