WHAT'S IN A NAME

In the aftermath of the recent financial meltdown, investment rip-offs and ponzi schemes have been revealed with disturbing frequency. It is now more important than ever for investors to understand the choices available to them when seeking financial advice. Unfortunately, the financial crisis has not provided the additional clarity that investors need to make the most informed decisions.

Consumers have more choices when seeking financial advice than ever before. Differentiating between these providers can be extremely difficult, especially since their names can sound so similar. There are financial planners, investment advisors, retirement specialists, financial consultants, registered representatives, brokers, wealth managers, estate planners, and more, all promising to help investors reach their financial goals. With so many providers vying for business, how can an investor make the best choice?

Although the messages of these providers may sound amazingly similar, there are some key differences that can have a significant impact on an investor’s experience. A better understanding of these factors can help investors make the most appropriate choice for their particular circumstances.

Registration
Most individuals who provide investment advice must be registered with a regulatory agency. Advisors who sell securities as registered representatives, or stock brokers, must register with FINRA (Financial Industry Regulatory Authority). Other investment advisors, who do not sell securities, register either with the SEC (Securities Exchange Commission) or the state securities regulator where they do business. Advisors can be dually registered with both FINRA and the SEC or state, to provide advice and to sell products to their clients. Financial planners may or may not be required to register as investment advisors, depending on the kind of advice they provide.
Just because an advisor is registered, however, does not mean that they are highly educated or experienced. The regulatory bodies that govern financial advisors determine the minimum qualifications of their registrants. Brokers or registered representatives are required to pass the Series 7 exam, which is administered by FINRA. The exam, which tests their knowledge of securities regulations, securities markets, and products, has no educational prerequisites. Advisors registered with the SEC or state are also required to either pass an exam or hold a qualifying professional designation.

Qualifications
An advisor’s qualifications should be fully explored by any potential investor. In addition to experience, an advisor’s education and certifications/designations should be considered as well. The universe of possible professional designations is a virtual maze of letters. A few of the most frequently encountered are listed below:
CFP (Certified Financial Planner) The most widely known designation specifically for financial planners. Holders must have a bachelor’s degree and three years of financial planning experience. Must also complete an educational program, and a two-day, ten-hour exam.
CFA (Chartered Financial Analyst) The most widely known designation focused on investment knowledge. Holders must have a bachelor’s degree and four years of investment related experience. Must also pass three six-hour exams given over a two year period.
ChFC (Chartered Financial Consultant) Holders often come from insurance industry. Must have taken a seventy-five hour course, passed an exam, and taken continuing education courses.
CIC (Chartered Investment Consultant) Holders must first obtain CFA, and have significant experience with investment consulting and portfolio management.
CIMA (Certified Investment Management Analyst) Administered by the Investment Management Consultants Association. Must have three years of financial management experience.
CLU (Chartered Life Underwriter) Holders specialize in insurance and estate planning.
Holding a designation does not ensure that an advisor will provide excellent advice and service, but it does indicate that the advisor has made the extra effort to further his financial education and distinguish himself from other advisors.

Compensation
There are several methods of compensation used by providers of financial advice:
· Hourly Charge. This method is most frequently used by financial planners who perform a detailed analysis of an investor’s goals, risk tolerance, resources, and obligations, in order to develop a plan best suited for achieving the client’s financial objectives.
· Commissions. Registered representatives or brokers, are often compensated by sales commissions on products they recommend or on trades executed for their clients.
· Fee-Only. Many investment advisory firms are compensated based on the amount of assets under their management. These fees typically run from .75% to 1.5%, depending on the size of the account.
Combination. Some advisors are affiliated with broker/dealers and may receive a combination of commissions and fees

Responsibility to Clients
Although most financial advisors are trustworthy, there are still differences in the standard of care that they must legally exercise with client accounts. Advisors governed by the Investment Advisers Act of 1940 (registered investment advisors) are “fiduciaries” by law. This means that they must put the client’s best interest above their own and provide the best advice possible. They must also disclose all fees and any conflicts of interest. In contrast, advisors governed by the Securities and Exchange Act of 1934 (most brokers and registered representatives) must only ensure that investment decisions are “suitable” for the investor. These two standards sound similar but can be quite different in actuality. An expensive investment product that pays a hefty commission might be “suitable” for an investor, in the eyes of a broker who earns the commission, but it probably isn’t the “best choice” in the eyes of a registered investment advisor who has a fiduciary responsibility.

The financial services industry is one of the few where participants with the same job titles have such widely different backgrounds, skills, and qualifications. Industry regulators have been unable or unwilling to provide investors with clarity on the subject. So, it is up to investors to do their own research. By gaining an understanding of the major differences between “financial advisors”, investors will be better equipped to make this important financial decision.