Well, I beg to differ from the Bard’s famous quote from Romeo and Juliet: “What’s in a name…?” There is plenty in a name, particularly when it comes to investment professionals. If you are contemplating using a professional to manage your investments, it is important to know the difference, as each are regulated differently and may have different legal obligations to their clients.
Investment Advisor: This is a person (or firm) paid a fee to give advice on investments to their clients. They are registered with the Securities and Exchange Commission (SEC) or a state securities regulator. Investment advisors provide advice that is individually tailored to their clients’ needs using securities like stocks and bonds, or mutual funds. They are considered “fiduciaries,” the highest standard of care, and as such, have to put their clients’ interest ahead of their own.
Broker-dealer: Technically a broker-dealer is a person or company that buys and sells securities for a commission. Their sales persons (registered representatives) are commonly called “brokers.” Broker-dealers are also registered with the SEC and are members of FINRA (Financial Industry Regulatory Authority). Brokers are required to pass a qualifying exam and be licensed by the state. Brokers can offer a variety of products including annuities, depending on the licenses they hold. Brokers can also be compensated through fees shared with them by mutual funds and insurance companies. Brokers are not considered fiduciaries, but are required to recommend investments that are “suitable” for their clients.
Insurance Agents: In addition to selling traditional insurance products, some agents also sell products that are considered securities, such as variable annuity contracts or variable life-insurance policies. These agents must also be licensed as registered representatives in the state and comply with FINRA rules. They are also not considered fiduciaries.
Financial Planners: This group offers a wide scope of services, is not required to be licensed, and is not subject to regulation. However, planners could also be brokers, insurance agents, or accountants, and if so, would be subject to regulation in those other capacities. Planners can offer comprehensive plans that delve into all financial aspects, or have limited focus. Some are fee based, and others offer products from which they earn commissions. To instill some quality control, planners have developed the Certified Financial Planner (CFP) designation. To achieve this designation, planners have to pass tests, and adhere to a code of ethics and standards to maintain the designation. Planners are not deemed to be fiduciaries.
Bottom Line: As with other important relationships, do your homework before you decide to hand over your hard-earned savings. Start with your circle of friends and relatives for referrals. Review websites, and then meet with prospects to make sure their approach will meet your particular needs. Regardless of what they call themselves, make sure you have answers in writing to the following questions:
Are you a fiduciary? Are you registered with the SEC? (If so, ask to see their most recent form ADV filed with the SEC, which has useful information and required disclosures.)
Are you licensed? If so what licenses do you hold?
What conflicts of interest do you have?
What can I expect to pay in fees and commissions? How will it be disclosed in my statements?
In addition to the fees and commissions I will be paying, what is your compensation from products you recommend?
Do you have any complaints filed against you?
Doing due diligence up front will prevent heartbreak later. To quote Ben Franklin, “Diligence is the mother of good luck.”
Ina Fernandez CPA has over 25 years of investment experience, and is Managing Director at Birmingham Michigan based investment advisory firm, Liberty Capital Management, Inc.