New to Investing? How to Tell Your CFPs From Your CFAs

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Confused by financial industry jargon? You’re not alone. Equity, fiduciary, wirehouse, robo-advisers, fixed income and ETFs are a few terms that may be confusing if you’re new to investing. In this article, you’ll develop a better understanding of what these and other terms mean in plain and simple language. My intent is to demystify the industry and provide a sort of “decoder ring” for consumers.

If you’re searching for an investment professional to manage your portfolio or need a financial planner to help with retirement planning, the financial services industry offers two very different business approaches. The “wirehouse” model consists of financial professionals who work for a large firm, typically with a national footprint, and receive support and benefits from that firm. Many wirehouses are divisions of the banking conglomerates. Sometimes these wirehouses will feature proprietary investment offerings along with cross-branded service offerings.

The other model consists of “independent” financial professionals working as independent contractors either in conjunction with a broker-dealer or a registered investment adviser (RIA). These “independents” are business owners, just like locally owned restaurant owners, chiropractors, plumbers or auto mechanics.

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Who are you working with?

In each model, there are different types of professionals, and, depending on their licenses and services, commensurate regulations apply to each type. For example, a registered representative, more commonly called a securities broker or stockbroker, has passed the Series 7 exam and is licensed to sell different securities and products such as stocks, bonds, options and mutual funds.

Registered reps are regulated by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization (SRO) authorized and overseen by the SEC, as transactions-based providers held to a suitability standard. This requires brokers to recommend only investment products suitable for a client’s circumstances. Registered reps generally follow a more sales-oriented model, charging commissions for the purchase and sale of securities, similar to those in a wirehouse.

The other primary type of financial professional is an investment adviser representative, more commonly referred to as a financial advis e r or investment adviser. Financial/investment advisers must pass the Series 65 exam (or a combination of the Series 7 and 66, or possess a professional designation such as the CFP® or ChFC® — see below for more about these) and are regulated by their state or the SEC, depending on the size of the assets they manage. Financial/investment advisers counsel clients on investing and financial issues and are held to a higher legal standard (e.g., than suitability) called a fiduciary standard of duty.

Instead of charging sales commissions for investment products, most financial/investment advisers assess a fee for their ongoing investment advice, typically expressed as a percentage of assets under management. The fiduciary duty requires advisers to place their clients’ interests above their own and to eliminate conflicts of interest and properly disclose to their clients all those that are not.

Here’s the tricky part: Stockbrokers and investment advisers can be found in either wirehouses or broker-dealers or RIAs. In fact, some financial professionals are dual-registered, meaning they can offer financial products on a transactional commission basis as a registered rep, but can also provide ongoing financial or investment advice on a fee basis.

Unfortunately, it isn’t always easy to figure out what type of professional you’re working with, how they’re compensated and what legal standard they’re held to. My advice? Ask, and do your research before hiring someone. The SEC provides a site for consumers to help with that research: www.adviserinfo.sec.gov.

What do those letters mean?

To make matters more confusing, brokers and advisers promote many other designations, some of which are very meaningful and others less so. Perhaps the most respected and significant designations are the CERTIFIED FINANCIAL PLANNER® (CFP®), Chartered Financial Consultant® (ChFC®) and Chartered Financial Analyst® (CFA®) — all of which require college-level coursework, the passage of examinations, extensive time commitments and, sometimes, an experience and ethics criteria.

The CFP and ChFC credentials require knowledge and testing on a broad array of financial topics, including taxes, insurance, investments, employee benefits, retirement planning, educational savings plans and estate planning. If you want to work with someone who has invested time and effort into their career and has a broad financial knowledge base, it might be worth considering a CFP or ChFC professional. Alternatively, CFAs are more specialized in investments and specifically investment analysis.

It’s important to realize that these credentials are distinct from the type of financial professional you’re dealing with. A few registered reps, for example, have obtained a CFP designation, while many investment advisers do not have CFPs or ChFCs or CFAs. More commonly, CFP and ChFC designations are associated with financial/investment advisers who do business as fee-based advisers/planners acting in a fiduciary capacity. And CFAs are more common in the fund management world (i.e., mutual funds, hedge funds, endowments) than in the client-facing world (i.e., stockbrokers, advisers).

Robo-advisers and other confusing terms

Lastly, here’s a brief rundown of a few terms that sometimes confuse consumers unfamiliar with the financial services industry. When brokers/advisers refer to “equities,” they’re generally referring to stocks. Whereas, when they refer to “fixed income,” they’re typically referencing bonds, which is unfortunate because bonds do not have fixed returns like bank CDs, unless the bonds are held to maturity. Investors who sell their bonds in the secondary market before maturity may get more or less than what they originally paid for the bond.

ETFs are exchange-traded funds, a security that’s like a mutual fund but traded on the stock exchanges. ADRs are American Depository Receipts, which is how American investors can purchase foreign stocks listed on foreign exchanges, since each ADR represents a specific number of shares of a foreign-listed stock. Finally, robo-advisers aren’t advisers at all, but rather automated investing services using computer algorithms to build and manage an investment portfolio.

This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Past performance does not guarantee future performance. Investments involve risk. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Investment Advisory Services are offered through Ballast Rock Private Wealth, a registered investment adviser.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Scott joined Ballast Rock Private Wealth (BRPW) as a Senior Wealth Advisor and CFP® (Certified Financial Planner) in October 2023. At BRPW, Scott specializes in financial planning, wealth management and investment strategies for accredited individuals, families, professionals, business owners and company executives. He became a CFP® in 2011, enabling him to offer a broader array of services spanning investments, insurance, retirement planning, estate planning and tax mitigation strategies. 2019 through 2024, Scott has won the Five Star Wealth Manager award from Five Star Professional.