When you’ve realized it’s time to get some professional help from the financial services industry, you’ll probably start with a Google search. You might enter phrases like “financial planner,” “financial advisor,” “investment advisor” or “wealth manager,” plus the name of your city, in hopes of finding the right person to guide your financial life. Unfortunately, these terms can be used by a long list of people offering many different services, including mortgage brokers, credit “fix-it” agencies, stockbrokers and insurance salesmen. There’s no guarantee that the people showing up in your search results are qualified, under what regulatory authority they operate, what legal protections you have if you work with them, and how they’re compensated. When evaluating professional financial advisors, consider these three main categories: certification, compensation structure, and registrations or licensure.
Some professions are pretty clear about who’s who. When you see the letters “M.D.” after a name, you know that person is a medical doctor. Someone with a Ph.D. has a doctorate in philosophy. In the financial services industry, however, there are more than 200 designations that can follow a person’s name. The following are some of the most prominent certifications associated with the financial planning industry: CFP (certified financial planner): This is considered the best certification in the field of financial planning or advising. It’s the only one that requires a test at the completion of the core study and the only one that’s acknowledged by the National Commission for Certifying Agencies. CFA (chartered financial analyst): This is the best designation for those who offer investment analysis, rather than more wide-ranging financial planning. ChFC (chartered financial consultant): This designation is used most often by insurance industry representatives. PFS (personal financial specialist): This designation is for certified public accountants who focus on taxes and take additional training in personal finance. It takes years of study to earn these certifications or designations. Other designations may be less meaningful; some can be obtained with a simple correspondence course or a weekend seminar.
It’s also important to understand how financial services professionals are paid. Fee structures can determine the type of advice you get. Here are the most common compensation arrangements: Fee-only: This structure is also called “fee-for-service.” In it, the client pays the advisor for a specific service provided. Payment can be by the hour or based on a fixed price, retainer, percentage of assets managed, or a combination thereof. Fee-only or fee-for-service advisors tend to uphold the “fiduciary standard,” which means they must recommend the product that’s best for the client. And because they’re not paid by commission, they’re not motivated to give you advice that results in more-expensive financial products. Commission-based: In this fee structure, the advisor receives a percentage of the sale or premium from financial services companies after selling one of their products. These individuals often call themselves “broker-dealers.” Many financial authorities, professional associations and academics believe this arrangement can lead to conflicts of interest, because the professional has an incentive to sell the product with the largest commission. Fee-based: This approach is a combination of commission and fee-for-service models — but it can be confusing, because consumers often don’t understand which part of the advice they’re getting is “fee-only” and which part is subject to commissions. Advisors who receive a commission are subject not to the fiduciary standard but to the “suitability standard,” which holds that financial advice must merely be “suitable” for the consumer — and thus, more likely to result in the salesperson doing what’s best for him or his firm, rather than what is best for you. Advisors with the certifications or designations mentioned earlier can be paid by either commissions or fees. That’s why it’s important to clarify not only your advisor’s designation, but also how he or she makes money.
Titles, registrations and licensure
When choosing an advisor, it is important to understand his or her title and licensure. This will tell you what she can legally do for you. An insurance agent, a broker-dealer, and a registered investment advisor all provide forms of financial advice, but the types of services they provide, the licensing body that oversees them, and the responsibility they have to the consumer can vary widely. For example, an RIA is required to uphold the fiduciary standard, but people holding the other two titles are not. Keep in mind that advisor certifications or designations are not the same as titles. It’s possible for someone to be registered as an RIA and also undergo further training to gain the certification of CFP. To show this wide range, the chart below lists a variety of titles, along with the authority, legal safeguard and compensation methodology for each.
|Title||Licensed by||Legal standard||Compensation|
|Insurance agent||Insurance license by the state||Can vary by state law, but generally not fiduciary||Commissions|
|Registered investment advisor (RIA)||The Investment Advisors Act of 1940||Fiduciary standard||Fees billed directly to the client. No fees from outside sources.|
|Investment advisor representative (IAR)||SEC||Fiduciary standard||Paid by the RIA as an employee|
|Broker-dealer (BD)||Securities Exchange Act of 1934||Suitability standard||Commissions|
|Registered representative of broker-dealer (RR)||SEC||Suitability standard||Part of the broker-dealer’s commissions|
|Hybrid or dually licensed representative||Meet qualifications of both IAR and registered representative, or are insurance-licensed||Can vary||Fees when RIA or IAR; commissions when RR or insurance sales|
If you want to work with a professional, certified advisor who isn’t motivated by selling you products and will give you a well-rounded view of your finances, enter these terms into the Google search box: “Certified financial planner” “fiduciary” “[your city’s name]” To save yourself some time, look for members of the National Association of Personal Financial Advisors. These folks are CFPs, are fee-only, and abide by the fiduciary standard. Go to the NAPFA site to find one near you. Michael Chamberlain, CFP, is the owner of Chamberlain Financial Planning and Wealth Management, a fee-only firm with offices in Santa Cruz, Sacramento and Campbell, California.