If you are like many people, you may not have the confidence and/or expertise to make certain financial and investing decisions on your own. Enter the multitude of professionals who provide a range of financial and investment services. Because there are so many different types of professionals, it can be confusing to determine whose services to seek if you need financial and investing advice. Here, we will explain the differences between stockbrokers, investment advisors and financial planners to help you find the right professional.
Before we explain the roles of certain financial professionals, it is important to note that many titles imply a certain level of expertise or education. However, the fact is that individuals can use a number of titles without holding any professional designation. In other words, you can call yourself a financial advisor without having any specialized education, training or expertise. FINRA (the Financial Industry Regulatory Authority) duly warns consumers on its "Understanding Professional Designations" Web page to "be aware that Financial Analyst, Financial Adviser (Advisor), Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific designation." If you are unsure about a potential professional's experience, training and financial designation, ask him or her.
Stockbrokers, also called registered representatives , are regulated professionals who make trades on behalf of retail and institutional clients in exchange for a fee and/or commission. The Securities and Exchange Act of 1934 defines a broker as "any person engaged in the business of effecting transactions in securities for the account of others." FINRA further clarifies that "A broker-dealer is a person or company that is in the business of buying and selling securities - stocks, bonds, mutual funds and certain other investment products - on behalf of its customers (as broker), for its own account (as dealer), or both. Individuals who work for broker-dealers - the sales personnel whom most people call brokers - are technically known as registered representatives."
A broker-dealer must:
- be registered with the Securities and Exchange Commission (SEC)
- be a FINRA member
- pass qualifying exams: the Series 7 (General Securities Representative) and Series 63 (Uniform Securities Agent State Law Exam)
- be employed by or associated with a broker-dealer firm
Investment advisors are individuals (known as Investment Advisor Representatives, or IARs) or companies that provide advice about securities to clients. Investment advisors receive compensation for providing advice regarding various investment products including stocks, bonds, mutual funds and exchange-traded funds (ETFs). An investment advisor should not be confused with a financial advisor, a generic title that typically refers to stockbrokers or registered representatives.
Investment advisors must be registered with the SEC or a state securities regulator, depending on the value of client assets under management. Investment advisors include the following:
- asset managers
- investment counselors
- investment managers
- portfolio managers
- wealth managers
There are several methods by which you might pay an investment advisor:
- an hourly fee
- a fixed fee
- a commission on the products they sell to you (if he or she is also a broker-dealer)
- a percentage of the value of the assets they manage for you
- a combination of the above methods
Financial planners help individuals and corporations meet their short- and long-term financial goals by evaluating each client's current financial status and developing a program to meet his or her objectives.
Financial planners often have a specialty (or specialties) such as the following:
- asset allocation
- estate planning
- risk management
- tax planning
CFP® professionals may charge for their services by fee or by commission . You may pay a fee-only CFP® an hourly rate, a flat rate or a percentage of your assets and/or income. Because a fee-only CFP® does not receive any commission on products sold, many consider their advice to be unbiased and in the client's best interest.
Commission-only Certified Financial Planner ™ certificants , on the other hand, earn a commission on the sale of certain products. This payment structure may create a conflict of interest because the CFP® may suggest a product that provides a better commission, but that is not appropriate for you. They can also charge a combination of fees and commissions, including a flat fee for creating a financial plan.
The Bottom Line
Stockbrokers, investment advisors and financial planners come from a variety of educational and professional backgrounds. Before hiring a professional, it is important to inquire about his or her credentials, clarifying both what the designation means and how it was earned. You can also contact that issuing organization to confirm that the professional earned the credential and that he or she is in good standing.
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