Financial adviser
Encyclopedia
A financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension
planning, and/or advice on life insurance
and other insurances such as income protection insurance
, critical illness insurance
etc., and/or advice on mortgages.
Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk
by using proper asset allocation
. Financial advisors use stock
, bonds, mutual fund
s, real estate investment trust
s (REITs), options
, futures
, notes, and insurance
products to meet the needs of their clients. Many financial advisers receive a commission
payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services
industry.
A further distinction should be made between "fee-based" and "fee-only" advisers. Fee-based advisers often charge asset based fees but may also collect commissions. Fee-only advisers do not collect commissions or referral fees paid by other product or service providers.
Some investment advisors only charge a fee based on the assets managed for the client. Typically they charge about 1.0 to 1.5% per year to make the investment decisions for the client. They do not collect commissions.
planning. A financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. In the United States
, this will include the use of several investment tools such as 401(k)
/403(b) Roth account(s), Individual Retirement Account
s/Roth IRA
s, mutual funds, stock
s, bonds
and CDs
.
The financial adviser determines what percentage of the available income is necessary—taking into account tax liabilities, expected inflation
, and projected return on investment—to meet a minimum balance by the client's target age of retirement. This is a fairly straightforward calculation, and many automated tools do this. The financial adviser's greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client's risk tolerance.
s/unit trust
s.
If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. While these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. Although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.
exam and the National Association of Personal Financial Advisors
, fee-only financial advisors, such as an investment advisor, are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisors nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. The fee-only model of compensation reduces the potential for conflicts of interest
between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.
A clear distinction should be made between brokers, who often refer to themselves as "fee-based" (receiving both fees and commissions) and "fee-only" (someone who never receives compensation or incentives from a third party.)
A fee-only advisor may reduce conflicts of interest such as:
payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services
industry.
is stemmed from IDS Financial Services, which later became known as American Express
Financial Corporation (AEFC) after the company was sold by Alleghany Corporation, and later became Ameriprise. At IDS, a young rep named James Tausz
was a top-ranked broker and served as the basis of inspiration for the company's model of "Financial Planning for a Fee," which IDS VP Vint Lewis popularized by training thousands of IDS stock brokers. Today, the concept of a "Financial Advisor" is widely popular. Before the IDS model, almost all stock brokers worked on commissions only.
, Registered Representative
(also known as a "Stock Broker
"), Insurance Producer
. The practice of investment advice, the sale of investment securities and the sale of insurance products are regulated and therefore an individual must pass an exam, affiliate with a firm and register with one or more states before conducting business. A Financial advisor may hold any combination of these licenses depending on the nature of their financial practice. Similar to the term Financial advisor, the terms wealth manager, financial consultant and financial planner do not refer to a specific license or designation. These terms are typically selected by individuals to help describe the nature of their financial practice.
The Chartered Financial Analyst
(CFA) designation, the Certified Financial Planner
(CFP) designation, the Chartered Life Underwriter (CLU), The Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute, the Certified Financial Planner Board of Standards, and the College for Financial Planning.
In the United States
, a firm registers as an investment advisor with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process.
Certain multi-state advisors may also register with the SEC, as well as certain Internet based advisors. If an advisor does not qualify for registration with the SEC, the adviser must register with the states where it maintains an office, as well as each state where its clients are located. There are de minimus exemptions in most states, typically exempting from registration those advisors with less than 6 clients, but the exemption varies from state to state.
Common examples of investment advisors include pension fund
managers, mutual fund
managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock broker
s (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) Registered Investment Advisor
s.
In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.
In many cases, a Registered Investment Advisor
(RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner
(CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. http://www.cfp.net/ or a Chartered Financial Analyst
(CFA) holding a charter from the CFA Institute
http://www.cfainstitute.org/index.html after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a Registered Investment Advisor.
The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors.
, the Financial Industry Regulatory Authority
(FINRA) regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker
should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 Uniform Investment Adviser Law Exam
. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner
(although care must be taken not to be confused with a Certified Financial Planner
), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission
in the USA. Anyone in the business of providing financial advice can call themselves a Financial Advisor. There currently isn't any regulation on the use of this title. To charge a fee for advice, one must pass the FINRA Series 65 test—The Uniform Investment Adviser Law Examination. To be a "Registered Investment Adviser" (RIA) or "Investment Adviser Representative" (IAR), one must pass the FINRA Series 65 exam or both of the FINRA Series 7
and Series 66 exams. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.
license or a securities license. The life insurance license is obtained through successful completion of the life license qualification program
, except in Quebec, where licensing is completed through l'autorite des marchiers financiers. There are three distinct securities licenses available. Completion of the Canadian Securities Course
allows the sale of most types of securities, including stocks, bonds, and mutual funds. More advanced licensing is required for the sale of derivatives and commodities. Completion of a mutual funds course allows the advisor to sell mutual funds only, excluding certain types of very specialized funds. The third possible license is the exempt securities license
.
In all cases, licensing requires the support of a dealer or insurer. It is also mandatory for advisors to carry Errors and Omissions Insurance. Technically, the term financial advisor refers to a securities licensed individual who provides investment advice to retail clients. However, there is little regulatory control exercised over use of the term, and, as such, many insurance brokers, insurance agents, securities brokers, and others identify themselves as financial advisors.
Many financial advisors in Canada are also financial planners. While there are numerous financial planning designations, the most common is the Certified Financial Planner
designation. There is no regulation, outside of Quebec, of the term "Financial Planner".
, which offers professional financial services qualifications all the way from beginner to degree levels. The IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. The Institute of Financial Planning offers the Certified Financial Planner
.
In the United Kingdom
investment advice is given either by a financial advisor or a stock broker
.
Financial advisors need to pass a series of exams and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority
, a UK
government
qango that must be satisfied the advisor is a “fit and proper person” before they may practice.
This is to be replaced in December 2012 with a new standard of qualification classed as Diploma and all existing advisers will have to attain the new qualifications to be able to continue to give advice going forward. Typically a diploma or higher qualified adviser will have Dip FA or Dip PFS after their name.
Financial advisors are either tied, multi-tied, independent, or fee-only.
As the classifications suggest, tied advisors can only recommend 'financial products' marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work.
Multi-tied agents perform a similar role, except they represent a number of different companies
. This is sometimes referred to as the panel system. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.
An Independent Financial Adviser
must offer advice on all 'financial products' on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee
for advice about a product or products, rather than being remunerated commission
from the financial institution that is promoting the product.
A Fee-only financial adviser designs bespoke solutions, and often by investing directly removes marketing commissions and charges from the costs that clients would otherwise pay. Fee-only advisory firms tend to accept a professional duty of care.
In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward 'financial products' that carry commission.
Best advice is a concept which was never more than a heading in the FSA / PIA / NASDIM regulations (and is now withdrawn in favour of the 'appropriate' standard) and which refers to the general obligation under Contract Law (Agency) that a broker has to find the correct 'financial product' to match a client 'need'. A tied or multi-tied advisor must recommend the most appropriate financial product within their company, even if a more appropriate product is available in the market place. An Independent Financial Adviser must recommend an appropriate financial product in the market place, even if a better solution is available outside the universe of commission-paying 'financial products'.
In the UK many believe impartial advice can be obtained only by consulting an independent financial advisor. Others believe it can only be obtained by consulting an advisor that never accepts commission.
The New Zealand Qualifications Authority
(NZQA) in conjunction with industry groups via the ETITO administers a qualifications frame work for the qualification. Registrations and examinations are conducted by the ETITO. All Financial Advisers are required to register with the ETITO by March 31, 2011
The Qualifications Framework consists of a core set of competencies sets, A B C followed by 2 electives covering specialist areas such as Insurance and Residential Property Lending. Certain NZQA approved qualifications such as an Accountancy degree may exempt student from competency set A NZQA approved training in the certificate is offered by the New Zealand Open Polytechnic
as well as several other accredited organizations
, the Korea Financial Investment Association
oversees the licensing of investment advisors. There are a number of different professional certifications in this area, including Certified Securities Investment Advisor
and Certified Derivatives Investment Advisor.
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
planning, and/or advice on life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
and other insurances such as income protection insurance
Income protection insurance
Income Protection Insurance is an insurance policy, available principally in the United Kingdom and Ireland, paying benefits to policyholders who are incapacitated and hence unable to work due to illness or accident...
, critical illness insurance
Critical illness insurance
Critical illness insurance or critical illness cover is an insurance product, where the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy....
etc., and/or advice on mortgages.
Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
by using proper asset allocation
Asset allocation
Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.-Description:...
. Financial advisors use stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, bonds, mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s, real estate investment trust
Real estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s (REITs), options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
, futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
, notes, and insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
products to meet the needs of their clients. Many financial advisers receive a commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
industry.
A further distinction should be made between "fee-based" and "fee-only" advisers. Fee-based advisers often charge asset based fees but may also collect commissions. Fee-only advisers do not collect commissions or referral fees paid by other product or service providers.
Some investment advisors only charge a fee based on the assets managed for the client. Typically they charge about 1.0 to 1.5% per year to make the investment decisions for the client. They do not collect commissions.
Role
The main purpose of a financial adviser is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. To ensure ethical practices, financial advisers must understand a client's financial situation as well as their need for financial stability. Finance can be complicated and any adviser has responsibilities ethically to see that a client's risk is minimized, and monetarily, that money is maximized within the established risk boundaries.Retirement planning
One of the major services that financial advisers offer is retirementRetirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
planning. A financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, this will include the use of several investment tools such as 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
/403(b) Roth account(s), Individual Retirement Account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s/Roth IRA
Roth IRA
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
s, mutual funds, stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
and CDs
Certificate of deposit
A certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
.
The financial adviser determines what percentage of the available income is necessary—taking into account tax liabilities, expected inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, and projected return on investment—to meet a minimum balance by the client's target age of retirement. This is a fairly straightforward calculation, and many automated tools do this. The financial adviser's greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client's risk tolerance.
Investing
Financial advisers may help their clients invest for both long and short term goals. It is the financial adviser's duty to determine the clients' goals and risk tolerance and then to recommend appropriate investments. Generally, a long time horizon allows for the advisor to recommend more volatile investments with potentially greater risks and rewards. Such investments include direct investment in stocks or through collective investment products such as mutual funds and unit investment trustUnit Investment Trust
A Unit Investment Trust is a US investment company offering a fixed portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors.-Types:...
s/unit trust
Unit trust
A unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
s.
If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. While these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. Although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.
Fee-only
As defined by the review materials for the Certified Financial PlannerCertified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
exam and the National Association of Personal Financial Advisors
National Association of Personal Financial Advisors
National Association of Personal Financial Advisors is an American financial planning trade organization created in 1983 to expand the use of Fee-Only financial advisors by individual consumers. NAPFA established the first set of professional standards for Fee-Only financial advisors and has...
, fee-only financial advisors, such as an investment advisor, are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisors nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. The fee-only model of compensation reduces the potential for conflicts of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.
A clear distinction should be made between brokers, who often refer to themselves as "fee-based" (receiving both fees and commissions) and "fee-only" (someone who never receives compensation or incentives from a third party.)
A fee-only advisor may reduce conflicts of interest such as:
- advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time.
- an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churningChurning (stock trade)Churning is the practice of executing trades for an investment account by a salesman or broker in order to generate commission from the account. It is a breach of securities law in many jurisdictions, and it is generally actionable by the account holder for the return of the commissions paid, and...
). - an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a commission.
- an incentive to make recommendations that pay higher sales commissions to the advisor when a less expensive alternative may have been available.
Commission-based
Many financial advisers receive a commissionCommission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
industry.
Online-only
A new class of services that deliver guidance regarding financial planning are emerging, offering low cost financial advice through the sponsorship of HR department of employers. Companies like HelloWallet are offering low cost financial advice through the employer. These services are also delivered to the poor through donation of HelloWallet as well as philanthropic organizations.History
Much of today's model for what a financial advisorFinancial adviser
A financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness...
is stemmed from IDS Financial Services, which later became known as American Express
American Express
American Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
Financial Corporation (AEFC) after the company was sold by Alleghany Corporation, and later became Ameriprise. At IDS, a young rep named James Tausz
James Tausz
James W. Tausz is the founder and CEO of the Bradford Financial Center, established in 1970, which is one of the largest independent financial firms in the Midwest United States, and several other corporations....
was a top-ranked broker and served as the basis of inspiration for the company's model of "Financial Planning for a Fee," which IDS VP Vint Lewis popularized by training thousands of IDS stock brokers. Today, the concept of a "Financial Advisor" is widely popular. Before the IDS model, almost all stock brokers worked on commissions only.
United States
There are three types of licenses for individual professionals who typically hold themselves out as Financial advisors: Investment Advisor RepresentativeInvestment Advisor
The term Investment Advisor is an individual or firm who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities...
, Registered Representative
Registered Representative
A Registered Representative, also called a General Securities Representative, a Stock Broker, or an Account Executive, is an individual who is licensed to sell securities and has the legal power of an agent....
(also known as a "Stock Broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
"), Insurance Producer
Independent Insurance Agent
Independent insurance agents, also known as insurance sales agents or "producers", typically sell a variety of insurance and financial products, including property insurance and casualty insurance, life insurance, health insurance, disability insurance, and long-term care insurance.Property and...
. The practice of investment advice, the sale of investment securities and the sale of insurance products are regulated and therefore an individual must pass an exam, affiliate with a firm and register with one or more states before conducting business. A Financial advisor may hold any combination of these licenses depending on the nature of their financial practice. Similar to the term Financial advisor, the terms wealth manager, financial consultant and financial planner do not refer to a specific license or designation. These terms are typically selected by individuals to help describe the nature of their financial practice.
The Chartered Financial Analyst
Chartered Financial Analyst
The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) designation, the Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
(CFP) designation, the Chartered Life Underwriter (CLU), The Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute, the Certified Financial Planner Board of Standards, and the College for Financial Planning.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a firm registers as an investment advisor with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process.
Certain multi-state advisors may also register with the SEC, as well as certain Internet based advisors. If an advisor does not qualify for registration with the SEC, the adviser must register with the states where it maintains an office, as well as each state where its clients are located. There are de minimus exemptions in most states, typically exempting from registration those advisors with less than 6 clients, but the exemption varies from state to state.
Common examples of investment advisors include pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
managers, mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
s (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) Registered Investment Advisor
Registered Investment Advisor
The term Registered Investment Adviser is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term...
s.
In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.
In many cases, a Registered Investment Advisor
Registered Investment Advisor
The term Registered Investment Adviser is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term...
(RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
(CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. http://www.cfp.net/ or a Chartered Financial Analyst
Chartered Financial Analyst
The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) holding a charter from the CFA Institute
CFA Institute
CFA Institute is headquartered in the United States of America at Charlottesville, Virginia, with offices in Hong Kong and London. Formerly known as the Association for Investment Management and Research , CFA Institute awards the Chartered Financial Analyst designation...
http://www.cfainstitute.org/index.html after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a Registered Investment Advisor.
The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors.
Regulation
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA) regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 Uniform Investment Adviser Law Exam
Uniform Investment Adviser Law Exam
The Uniform Investment Adviser Law Examination, also called Series 65 exam, was developed by the North American Securities Administrators Association and is administered by the Financial Industry Regulatory Authority...
. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner
Financial planner
A financial planner or personal financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes: cash flow management, education planning, retirement planning, investment planning, risk management and insurance...
(although care must be taken not to be confused with a Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...
in the USA. Anyone in the business of providing financial advice can call themselves a Financial Advisor. There currently isn't any regulation on the use of this title. To charge a fee for advice, one must pass the FINRA Series 65 test—The Uniform Investment Adviser Law Examination. To be a "Registered Investment Adviser" (RIA) or "Investment Adviser Representative" (IAR), one must pass the FINRA Series 65 exam or both of the FINRA Series 7
Series 7
Series 7 may refer to:*The 7th season of any of many shows or series. See .*The General Securities Representative Exam, commonly referred to as the Series 7 Exam. It is the most comprehensive financial securities exam offered by the FINRA...
and Series 66 exams. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.
Canada
The financial advisor role in Canada is varied. Most financial advisors carry either a life insuranceLife insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
license or a securities license. The life insurance license is obtained through successful completion of the life license qualification program
LLQP
LLQP is part of the Canada regime under which those employed in the financial services sector obtain a certificate allowing the sale of life insurance products. The LLQP is valid in all provinces and territories except Quebec, which uses a separate system altogether.This is an entry level program...
, except in Quebec, where licensing is completed through l'autorite des marchiers financiers. There are three distinct securities licenses available. Completion of the Canadian Securities Course
Canadian Securities Course
The Canadian Securities Course offered by the Canadian Securities Institute is the initial course required for becoming licensed to work within the Canadian securities industry as a securities dealer or securities agent....
allows the sale of most types of securities, including stocks, bonds, and mutual funds. More advanced licensing is required for the sale of derivatives and commodities. Completion of a mutual funds course allows the advisor to sell mutual funds only, excluding certain types of very specialized funds. The third possible license is the exempt securities license
Alternative investment
An alternative investment is an investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity,...
.
In all cases, licensing requires the support of a dealer or insurer. It is also mandatory for advisors to carry Errors and Omissions Insurance. Technically, the term financial advisor refers to a securities licensed individual who provides investment advice to retail clients. However, there is little regulatory control exercised over use of the term, and, as such, many insurance brokers, insurance agents, securities brokers, and others identify themselves as financial advisors.
Many financial advisors in Canada are also financial planners. While there are numerous financial planning designations, the most common is the Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
designation. There is no regulation, outside of Quebec, of the term "Financial Planner".
United Kingdom
There are three main bodies awarding qualifications for financial advisers in the UK. The main one is the Chartered Insurance InstituteChartered Insurance Institute
The Chartered Insurance Institute is a United Kingdom based professional organisation for those working in the insurance and financial services industries....
, which offers professional financial services qualifications all the way from beginner to degree levels. The IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. The Institute of Financial Planning offers the Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
.
In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
investment advice is given either by a financial advisor or a stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
.
Financial advisors need to pass a series of exams and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
, a UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
qango that must be satisfied the advisor is a “fit and proper person” before they may practice.
This is to be replaced in December 2012 with a new standard of qualification classed as Diploma and all existing advisers will have to attain the new qualifications to be able to continue to give advice going forward. Typically a diploma or higher qualified adviser will have Dip FA or Dip PFS after their name.
Financial advisors are either tied, multi-tied, independent, or fee-only.
As the classifications suggest, tied advisors can only recommend 'financial products' marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work.
Multi-tied agents perform a similar role, except they represent a number of different companies
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
. This is sometimes referred to as the panel system. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.
An Independent Financial Adviser
Independent Financial Adviser
Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market...
must offer advice on all 'financial products' on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee
Fee
A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...
for advice about a product or products, rather than being remunerated commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
from the financial institution that is promoting the product.
A Fee-only financial adviser designs bespoke solutions, and often by investing directly removes marketing commissions and charges from the costs that clients would otherwise pay. Fee-only advisory firms tend to accept a professional duty of care.
In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward 'financial products' that carry commission.
Best advice is a concept which was never more than a heading in the FSA / PIA / NASDIM regulations (and is now withdrawn in favour of the 'appropriate' standard) and which refers to the general obligation under Contract Law (Agency) that a broker has to find the correct 'financial product' to match a client 'need'. A tied or multi-tied advisor must recommend the most appropriate financial product within their company, even if a more appropriate product is available in the market place. An Independent Financial Adviser must recommend an appropriate financial product in the market place, even if a better solution is available outside the universe of commission-paying 'financial products'.
In the UK many believe impartial advice can be obtained only by consulting an independent financial advisor. Others believe it can only be obtained by consulting an advisor that never accepts commission.
Republic of Ireland
The QFA ("qualified financial adviser") designation is awarded to those who pass the Professional Diploma in Financial Advice and agree to comply with the ongoing "continuous professional development" (CPD) requirements. It is the recognised benchmark designation for financial advisers working in retail financial services. The qualification, and attaching CPD programme, meets the "minimum competency requirements" (MCR) specified by the Financial Regulator, for advising on and selling five categories of retail financial products:- Savings, investments and pensions,
- Housing loans and associated insurances,
- Consumer credit and associated insurances,
- Shares, bonds and other investment instruments, and,
- Life assurance protection policies.
New Zealand
The National Certificate in Financial Services [Financial Advice] [Level 5] is currently being introduced in New Zealand. All Individuates and registered legal entities providing financial services must be registered as a RFSP( Registered Financial Service Provider ) Their Directors, retail and sales staff are required to gain the national certificate.The New Zealand Qualifications Authority
New Zealand Qualifications Authority
The New Zealand Qualifications Authority is the New Zealand government crown entity tasked with providing leadership in assessment and qualifications....
(NZQA) in conjunction with industry groups via the ETITO administers a qualifications frame work for the qualification. Registrations and examinations are conducted by the ETITO. All Financial Advisers are required to register with the ETITO by March 31, 2011
The Qualifications Framework consists of a core set of competencies sets, A B C followed by 2 electives covering specialist areas such as Insurance and Residential Property Lending. Certain NZQA approved qualifications such as an Accountancy degree may exempt student from competency set A NZQA approved training in the certificate is offered by the New Zealand Open Polytechnic
as well as several other accredited organizations
South Korea
In South KoreaSouth Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
, the Korea Financial Investment Association
Korea Financial Investment Association
The Korea Financial Investment Association is a non-profit, self-regulatory organization in South Korea, founded under the Financial Investment Services and Capital Market Act...
oversees the licensing of investment advisors. There are a number of different professional certifications in this area, including Certified Securities Investment Advisor
Certified Securities Investment Advisor
In South Korea, a Certified Securities Investment Advisor is a certified professional permitted to offer investment advice to clients and to accept purchase and sale orders for certain financial products on their behalf...
and Certified Derivatives Investment Advisor.
External links
- 10 Questions to Ask When Choosing a Financial Planner
- AAFM American Academy of Financial Management
- IAIA International Association of Investment Advisers
- AIFA Association of Independent Financial Advisers - UK Trade body
- FSA website Financial Services Authority (UK)
- IAA Investment Adviser Association
- NAIFA National Association of Insurance & Financial Advisors
- SEC IA Search SEC Database of US Registered Investment Advisers
- SECLaw.com Financial Advisor Legal Information Center
- €FPA €uropean Financial Planning Association