Different Types of Financial Advisors & Financial Advisor Designations

The terms financial advisor and financial consultant have evolved over the years. Today, they’ve become catch-all labels for professionals who provide financial planning services, manage investment portfolios, or sell insurance and other financial products.

In reality, there are many different types of financial advisors. Financial advisors who serve individuals and families make up the majority of financial advisors, and they fall into three categories: investment advisors, Certified Financial Planner (CFP) professionals, and Registered Representatives (RRs), previously known as stock brokers. Note that many advisors wear all three of these hats, which is why it’s important to understand the differences before you begin your search.

Investment Advisor: Managing your money with your best interests in mind

Investment advisor is the official title for professionals who are more commonly called Registered Investment Advisors. They are licensed by their state and/or the Securities and Exchange Commission (SEC) to offer investment advice and manage client portfolios.

Because they are paid directly by clients, investment advisors are legally required to act in their clients’ best interests. This is otherwise known as the fiduciary standard

What does the fiduciary standard mean?

  •         Advisor recommendations & actions must reflect their clients’ financial objectives, timeframes, and risk tolerance
  •        They must strive to keep their own fees – as well as expenses charged by mutual funds & other investment products – reasonable
  •        They must avoid exposing their clients’ assets to excessive risk

 

Most investment advisors charge Assets Under Management Fees, otherwise called AUM-based fees. This is usually calculated as a percentage of the assets that they manage on behalf of their client. For example, if they charge 1% for managing a $500,000 portfolio, the annual fee will be $5,000. These fees don’t include management expenses charged by the mutual funds in their clients’ portfolios.

Certified Financial Planner (CFP®) Professionals: Committed to integrity and accountability

Financial planners create holistic financial plans to help their clients manage cash flows, reduce debt, improve savings, and invest more effectively. They can also assess their clients’ insurance needs and provide advice on estate and succession planning.

Unlike investment advisors and brokers, those who call themselves financial planners are not regulated or licensed. Technically, anyone can call themselves a financial planner (which is kind of scary!).

To bring credibility and accountability to the profession, a number of industry organizations have formed to award formal certifications to financial planners. The most well known is the Certified Financial Planner Board of Standards, otherwise known as the CFP Board. Its stated purpose is “to benefit the public by granting the CERTIFIED FINANCIAL PLANNERTM Professional (CFP®) certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning”.

To earn the CFP certification financial advisors must:

  •        Have at least a Bachelor’s degree & 3 years of relevant experience in the financial services industry
  •        Pass a comprehensive CFP Certification Examination covering a wide range of financial planning & investment topics
  •        Agree to abide by the CFP Board’s code of ethics & rules of conduct, which require them to act with integrity & accountability & to always put their clients’ best interests first
  •        Agree to complete 30 hours of CFP Board-approved continuing education courses over a specified reporting period, to keep up to date with developments in the financial planning field

 

Financial advisors who earn the CFP certification are allowed to add CFP® after their name. However, they cannot refer to themselves as “CFPs” or “Certified Financial Planners.”, they must call themselves “CERTIFIED FINANCIAL PLANNER® Professional” or “CFP® Professional.” Be suspicious of any advisors who do not use this required terminology.

Most CFP professionals are paid directly by clients for the services they provide, such as creating comprehensive financial plans. However, many are also investment advisors. In this case, they often begin a client relationship by creating a financial plan, demonstrate the value they can add, and then expand the relationship to manage the client’s investment portfolio.

Keep in mind, though, that CFP professionals can also work at large banks as brokers. This could create conflicts of interest as they are wearing two different hats: one as a planner, and another as a registered representative who is allowed to receive a commission from products that the bank or insurance company sells.

Registered Representatives: No longer cliche stock brokers

Back in your parents’ day, if someone wanted to invest in stocks or bonds they used stock brokers. Today, they’re generally just called brokers, because most of them make their living selling mutual funds and life insurance to clients rather than trading securities. Their formal name is Registered Representative (RR). They work for broker dealers, and are licensed and regulated by the Financial Industry Regulatory Authority, or FINRA. Unlike investment advisors, brokers are not paid directly by clients, instead, they earn commissions for trading stocks and bonds, and for selling mutual funds and other products.

Since they’re not required to act as fiduciaries, brokers can recommend funds that offer them the best commissions, as long as the funds meet the suitability standard. This means that their recommendations must still reflect the client’s defined investment objective, risk tolerance, and budget, but it’s not held to the highest standard of fiduciary responsibility.

Financial Consultants and Wealth Managers: Catch-all terms

Like the term financial advisor, financial consultant and wealth manager are both generic job titles that do not require licenses or certifications.

In the past, financial consultant was often used by brokers who offered financial-planning services. Likewise, in recent years, wealth manager has emerged as a marketing term to describe financial advisors who focus on high-net-worth clients, usually those with $5 million or more in investable assets. They’re almost always licensed as investment advisors and brokers, and a growing number are CFP® professionals.

What’s the Best Type of Financial Advisor?

If you’re looking for an investment professional it’s important to fully understand the differences between investment advisors and brokers. Hiring the wrong one for your needs can have serious impacts.

At Zoe Financial, we believe that fee-only investment advisors and CFP® professionals – those who bill clients directly without earning commissions – are the best choice for most investors. But having the right designation and fee structure should not be enough: finding an advisor who truly has a client-centric (and financial planning-centric) practice should be the goal in our mind.  

If you agree, let Zoe Financial help you find the right one.