Simplify, Streamline & Save

What Is a Financial Advisor?

It may come as a shock to most of the general public to learn that there is not a legal definition of “Financial Advisor.” This always struck me as odd, even more so the longer I work in the industry. I have also found it very curious on why either FINRA or other regulatory agencies have not yet made formal criteria for some of these frequently used terms. In my 16-year career I have run into insurance agents, registered reps and investment advisors all use the term “Financial Advisor.” This has caused quite a bit of confusion from the general public in who does what role. Hopefully this post helps clear the air and I will share my opinion on the matter.

In my youth as a young “advisor” I always held the assumption that once you were fully licensed (series 7, 65, and insurance) you were now magically considered an “Advisor.” This notion was quickly dashed as a former employer refused to change the title on my business cards once I had acquired these licenses. It wasn’t until a few years later that I realized why. Being a “Financial Advisor” is role that should be held in a higher standard, one that has to be earned. Not by licenses (although that should be a requirement) but in experience and breadth of knowledge. Afterall if you were to ask 100 people on the street what a “Financial Advisor” is you would probably hear something along the lines of a professional that helps manage their money or somebody that gives financial advice. So how can you be a true “Financial Advisor” without having not only knowledge but also the legal ability to help in any financial scenario?

Who Is The Real Advisor?

Insurance Agent

Professionals that fall into this category have typically passed a state’s insurance exam. Meaning they are licensed to sell certain types of insurance products. These can be life insurance, fixed annuities, car insurance, homeowners insurance or benefits.

The key is, all of these products are fixed contracts. Meaning you and the client pays for “x.” You know what you are paying for and the insurance company knows what they are responsible for. 

Insurance agents are compensated by earning a commission for each product they sell.

Registered Representative

Registered Reps, as they are called, are essentially agents that have passed their Series 6 and 63 exams. This means they are now allowed to sell variable contracts. Variable contracts are products such as variable annuities, variable life insurance and mutual funds.

They are compensated by earning a commission for each product they sell.

Investment Advisor

These professionals have at a minimum passed the either the Series 65 or 66. They often times also hold a Series 7. Being an investment advisor can now also kick them into a category called a “Fiduciary.” Often times, they also have their insurance licenses and Registered Rep licenses. 

Unlike the previously mentioned professionals, Investment Advisors typically charge an ongoing fee for service. Historically this has been a percentage of the assets they manager OR a fixed amount on a fixed schedule (i.e. $500 a month). 

I Believe that most people equate "Financial Advisor" with Fiduciary. Accurate or not, that's the case. This means that...
  1. Anyone that is compensated solely by commission, can’t be a “Financial Advisor.” 
  2. Anyone that is limited in the services they are legally allowed to practice, shouldn’t be a “Financial Advisor.” 
  3. Anyone not independent, meaning not bound by one company’s products or services, also shouldn’t be a “Financial Advisor.”
 
Let’s break each of these down in why I don’t believe these people should be called a “Financial Advisor.”

Only Compensated by Commission

This one is my biggest pet peeve and I hear it all the time from insurance agents, specifically life insurance agents. This can also apply to Registered Reps. Each time I hear that, I throw up in my mouth just a little bit. Can they legally call themselves a “Financial Advisor?” Sure. Should they? Absolutely not. 

If you are only compensated by a selling commission, then what you have is a clear conflict of interest. You are motivated to sell a product which means your interests do not align with your client. 

Anyone Limited to Certain Products

My crusade against insurance agents calling themselves advisors continues. Question, if the person you are taking advice from can only talk about “some” things then how can you have any confidence you are getting true advice? 

Let’s say you are trying to plan for retirement 5 years away. You have a pretty decent sized portfolio of stocks, ETFs and mutual funds. How could you have any confidence in the advice an insurance agent or registered rep is giving you knowing that they can’t even talk about the stocks or ETFs? 

Old proverb, if all you have is a hammer than everything must be a nail. Same thing applies here. If all you have to sell is an insurance product, then every solution must be an insurance product. 

Not Independent

Similar to above but now we get to include people that are fully licensed. If your “Advisor” is limited to a certain company’s products, then how can they realistically be a true “Financial Advisor?” Even worse, what if they are compensated differently to sell a certain company’s product or type of product? I won’t name the particular companies in a public forum, but they are out there and they are some big names. 

Unless you are in the industry this one may not be a clear. However, we run into this all the time. Certain companies actually base things like pensions off of selling proprietary products. Or maybe if you sell product “x” you are paid $10 but if you sell product “y” you are paid $12. How can you be an advisor when you are financially motivated to choose one over the other?