A financial adviser is someone you should be able to trust, someone who has complete transparency and who is on the lookout for your best interests. But there are some using bogus titles, misrepresenting their credentials and misstating facts in order to sell you a product or service. There might even be the chance that your financial adviser isn’t licensed — or at best — is barely qualified to give the correct advice.
The Securities and Exchange Commission has warned about such problems before, even issuing an “Investor Alert: Beware of False or Exaggerated Credentials” bulletin a few years ago. The alert warned about the dangers of encountering unlicensed or unregistered sellers of financial products and services. Here are five things to be on the lookout for when dealing with financial advice.
No. 1: Fancy titles
In the last few years there has been a significant increase in fancy titles being used to impress, such as “Private Wealth Adviser,” “Wealth Manager,” “Wealth Management Adviser” and many others. But what do they all mean, and is there any difference? The correct answer can be lengthy, but in short, it all depends on how your financial adviser is licensed.
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In the financial industry, there are basically three types of financial advisers: 1.) brokers; 2.) investment advisers; and 3.) insurance agents. Keep in mind, though, that financial professionals can be dually certified, so that can add a layer of complexity. Aside from fancy titles, they can only operate in a few ways:
- Brokers (or registered representatives) typically are compensated by commissions on investments they sell through their brokerage firms. They are regulated by the Financial Industry Regulatory Authority (FINRA) and can hold multiple licenses, such as the Series 6 (allowing them to sell mutual funds and variable annuities), Series 7 (sell stocks, bonds, mutual funds, hedge funds and options) and Series 63 (solicit orders for any types of security). You might equate several licenses to having more options but that is not the case. It can be difficult to distinguish if they are working for you or their brokerage firms. Brokers are held to a “suitability standard,” which can limit their liability when they are giving advice to you (learn more by reading “7 Questions to Ask Before Hiring a Financial Adviser”).
- Investment advisers (or registered investment advisers) are solely compensated through fees or a percentage of assets under management and are regulated by the SEC. Typically they hold only one license — the Series 65. They are held to a higher “fiduciary standard” at all times, which means that they must put their clients’ interests ahead of their own. The investments and advice that they recommend must not merely be “suitable” for their clients, it must be the best possible option for them. Many times, financial planners who charge a fee for advice fall into this category, because they don’t sell securities.
- Insurance agents are solely compensated by commissions on insurance products sold through insurance companies. They are regulated by their state insurance department — not FINRA or the SEC — and have an insurance license. While an insurance agent might use one of the fancy titles mentioned above, know that they are not allowed to do that and by doing so, they can be fined or disbarred.
- Dually licensed professionals can wear multiple hats, which can blur the lines between the fiduciary standard and the suitability standard. For example, it’s not unusual to see someone registered as both a broker and an investment adviser representative. That means they may earn commissions on investments they sell through their brokerage firm and also charge a fee or collect a percentage of assets under management as well. Brokers and investment advisers might also have their state insurance licenses, allowing them to be compensated by commissions on insurance products — such as term or permanent insurance, annuities, disability and long-term care insurance — through insurance companies.
It’s imperative to ask how your financial adviser is licensed to find out how they are compensated. Depending on the firm your financial adviser works for, you can often make a quick determination as to what category they fit in.
No. 2: Confusing credentials
While some professional designations confirm expertise, many others are misleading and only there to draw you in. Do all the credentials involve the same level of expertise and are they as intensive? The answer is no.
With at least a couple hundred or more certifications available, even industry experts have a hard time distinguishing between all of the designations available. FINRA has a dedicated section on its website titled “Professional Designations,” which provides the organization administering the credentials, their prerequisites, education requirements and continuing education standards.
Some credentials indicate experience or knowledge in key areas of the financial planning process, such as the Certified Financial Planner (CFP) or Certified Public Accountant (CPA) for accounting. CFPs and CPAs hold extensive training in their fields and are often required to have more than a bachelor’s degree worth of training. Others, such as the Accredited Asset Management Specialist (AAMS) or Certified Financial Fiduciaries (CFF), are much less intensive and can be achieved in one day or over the weekend.
With such a widespread use of easily earned titles alongside those more challenging ones, you should research the potential financial adviser’s qualifications and ask questions pertaining to your unique challenges or particular situation.
No. 3: Phony awards or honors
There are plenty of companies ready to sell financial advisers on the idea that they are special in some sort of way and should proudly display the accomplishment. Awards, plaques and certificates are only part of the problem. Even large publications are hurting their reputation by letting third-party companies use their name to sell financial advisers who are willing to pay several thousands of dollars just to be featured on a bogus article or award. Awards that are descriptive, such as “best” or those that give star ratings, are some examples.
You should always research the award or accomplishment your financial adviser is touting to make sure it’s not tainted. Read the fine print at the bottom, and if there’s a company name that isn’t associated with the publication, it’s probably something that was purchased and not earned.
No. 4: Complaints and other activities
A financial adviser might have many designations, but if you dig beneath the surface you might find legitimate complaints or unethical business practices linked to them. The best thing you can do is conduct a simple background check, which can be done in under five minutes. You can either ask for your financial adviser’s Central Registration Depository (CRD) number or search by their name on FINRA BrokerCheck or the SEC Investment Adviser Public Disclosure websites. Doing a little research is the first step to protecting your money.
No. 5: Unlicensed ‘financial advisers’
Unlicensed individuals are often the biggest problem in the financial industry because there is no governing body, such as FINRA or the SEC, to regulate what’s being said or offered. Red flags often include if investments offered seem “too good to be true” or offer a “guaranteed return.” In some cases, even insurance agents might be offering unregistered investments when they aren’t licensed to do so. It’s important to research and not feed into the pressure of doing something immediately.
Whether dealing with financial advisers or investments, preventing mistakes will always prevail against having to cure them.
Just to recap
Here are the three types of financial professionals:
Brokers (or registered representatives)
- Type of Standard: Suitability standard
- Company: Broker-Dealer (or wirehouse firm)
- Type of Compensation: Commissions on investment produces (stocks, bonds, mutual funds, hedge funds or options)
- Licenses (and Regulating Body): Series 6 or 7, Series 63 (Financial Industry Regulatory Authority — FINRA)
Insurance Agents
- Type of Standard: Suitability standard
- Company: Insurance company (or insurance brokerage)
- Type of Compensation: Commissions on insurance products (life, health, long-term care, disability and annuities)
- Licenses (and Regulating Body): Life, health and annuity (state insurance department)
Investment Advisers (or RIAs)
- Type of Standard: Fiduciary standard
- Company: Registered Investment Adviser (RIA)
- Type of Compensation: Fees (for financial plan, investment advice or percentage of assets under management)
- Licenses (and Regulating Body): Series 65 (Securities & Exchange Commission — SEC)
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