In continuation with last month’s article, "How to Choose an Investment Firm", this month’s article takes it a step further. The next step in the process is actually choosing the individual that best suits you. Sometimes you don’t know who to turn to for this advice, whether it be a friend’s recommendation or the woman from a random ad in a local bulletin. Below we will go over some procedures you can apply when trying to choose and how to read between the lines, as many advisors use the same lingo when describing their actual role and services.
First, figure out what level of service you are looking for: brokerage services, financial planning help, someone to manage your portfolio or a mix of the three. Second, we recommend you should select and meet with multiple individuals. Understand how each one differs and also how each are compensated. You may want to visit one or more of the sites listed below to search for possible candidates in your area. Third, before and/or after your meeting with the prospective financial professionals, research them. Most professionals will have a website providing you with a biography and information about their firm. You can take this one step further and consult their official employment and regulatory history reports, which we will discuss in detail later.
Lastly, make sure the advisor has the qualifications to offer the services they advertise. Individuals that manage money for a living go by a number of titles, with most meaning the same thing. Look past the titles and look for what securities licenses and designations they possess. The industry requires advisors to possess certain licenses and/or designations in order to offer particular services. While there is no perfect license or designation, they will at least provide the advisor with some validity in investment related areas. We go into further detail below.
Registered Representatives (Broker)-Brokerage Firms (Broker-Dealer)
As discussed previously, brokerage firms are usually transaction focused. An individual working for a brokerage firm is normally a broker and is a Registered Representative with the firm, meaning they are normally acting on behalf of the firm. Brokers are only legally required to possess one security license in order to provide brokerage services, buying and selling on behalf of their clients, which is their Series 7 license. Brokers may hold other licenses and/or designations.
Brokers are not held to the Fiduciary Standard, but are instead held to a Standard of Suitability. Thus, they are only required to broker deals that are suitable for their clients at the time of the transaction. Keep this in mind when receiving advice from someone who possesses their Series 7. A broker has to only make sure the investment recommended meets the client’s investment characteristics, but there is nothing that states they must put the client's interest before the firm's. A broker’s responsibility is typically to the firm, not necessarily the client.
Investment Advisor Representative (IAR)-Registered Investment Advisor (RIA)
An individual that represents an RIA and provides investment advice, is an Investment Advisor Representative (IAR). In order to be considered an IAR, an individual must possess either a Series 66 license or one of these four designations:Chartered Financial Analyst (CFA®), Certified Financial Planner (CFP®), Chartered Financial Consultant (ChFC®) or Personal Financial Specialist (PFS™).
IARs are legally required to act in a Fiduciary Standard, meaning they are required to put the client’s interest ahead of their own. They must disclose to the client any conflicts of interest within their investment advice. An IAR’s responsibility is typically to the client, not necessarily the firm. Besides the Fiduciary Standard, each of the designations mentioned above have additional ethical requirements that their designees adhere to. Each of those designations also require a number of other requirements to achieve it, such as experience, education, pass exams and annual continuing education credits.
Individuals Registered as Registered Representatives &
Investment Advisor Representatives
Individuals that work for firms that are listed as both a Brokerage Firm and an RIA that want to offer both sets of services must hold their Series 7 license and one of the IAR requirements (Series 66, CFA, CFP, ChFC, PFS).
While a dually listed individual is held to both the Standard of Suitability and Fiduciary Standard, they can be very subjective as to when they apply a particular standard to a client’s situation. This may create an area of conflict for the advisor/client relationship. Whether the advisor is truly acting in the best interest of the client is not always clear, specifically whether the advisor is following the Fiduciary or Suitability Standard.
The key with all of these titles is to understand the actual duties the person performs and which ones are important to you. You can get a better understanding of this by simply asking them to describe what their typical services are that they provide to their clients. You should consult their official reports with the SEC and/or FINRA. If they’re a Broker, FINRA provides a website with a free database containing every licensed broker’s employment, regulatory action history and licenses they possess. If the individual is an IAR, the SEC has a database with similar information. If the individual is dually registered, IAR and a Broker, then both sites will contain their history.
If you would like to know more about the designations and licenses mentioned, click on the following link to view our chart: CSL Securities License & Designation Info Chart
If you missed last month's piece, "How to Choose an Investment Firm", we suggest reading it first. For all other previous articles, visit our blog page on on Crescent Sterling, Ltd's blog page.
Sites to help you find an Advisor near:
Find Advisor Near
Find CFA Charterholder Near
Find CFP Holder Near
Advisor Background Sites:
FINRA's Broker Check
SEC's IAR Site