Lots of individuals call themselves financial advisors. Even more use the term financial planner, financial coach, or financial consultant. The problem is that none of these have any legal definition. Unlike lawyers, doctors, and other professionals, there isn’t a legal standard for calling yourself a financial advisor. There isn’t an educational standard for those who want to give financial advice either. All you have to do is pass a multiple-choice test. There’s also no experience requirement.
You’re probably wondering, how can you tell the difference between the different types of advisors? Here are the things to look for when considering an advisor.
Your advisor needs at least a Series 65 or 66 license. This gives them the legal ability to provide investment advice with an ongoing relationship. If your “advisor” doesn’t have this, then they’re purely a salesman. You can check any advisor’s registration by going to brokercheck.finra.org. There you can search for the advisor and view their past employment, licenses, and if they have any disclosures on their record. You should check on any potential advisor prior to signing anything.
Ideally your advisor will have an educational background in something related to business, economics, or even psychology. That said, there are plenty of good advisors without this background, particularly those who have been in the industry for years. This is generally more important when you’re speaking to a new advisor who hasn’t been in the industry for long. Basically you want to make sure they have a good answer when you ask them what qualifies them to manage your life savings.
Licenses allow you to legally provide financial planning services. Designations show that you have the knowledge to provide valuable advice. The best advisors will have at least one quality designation to go along with their licensure.
Not all designations are made the same. Some designations can be completed in a weekend and only require an open book exam. Others, such as the Certified Financial Planner designation, require an undergraduate degree, 18 credit hours’ worth of financial planning education, a six hour long comprehensive final exam and three years of experience in the field.
There are a staggering number of licenses available to those who want to call themselves financial advisors. The best analogy that I can make is to liken licenses to tools in a toolbox. Licenses, also known as Series exams or insurance licenses, allow your advisor to use different approaches to solving your financial problems.
· At the very minimum, you want an advisor who has either the Series 65 or 66 license. This will allow your advisor to provide you with advice for a fee, rather than paying a commission.
· If you do want to transact commission business, then you need an advisor with a Series 7. This would include buying individual stocks on a commission basis, purchasing an annuity, or buying individual bonds.
In the end, you’re safer if your advisor has either only the Series 65, only the Series 66, or a combination of the Series 7 and 66. Any of these will allow the advisor to work with you and provide the services that you need.
Watch out for advisors with just the combination of Series 6 and 63, or only their Life and Health insurance licenses. While there’s nothing wrong with either, those with only the 6 and 63 generally tend to be strictly salespeople and rarely have a strong financial background. Those with only their Life and Health licenses who call themselves advisors are pushing it when they do so. I mentioned that licensing is analogous to a toolbox; those with only insurance licenses effectively only have a hammer in their toolbox. They can either push annuities or life insurance; without a securities license, they can’t actually recommend investments. While there are certainly times when life insurance or an annuity is appropriate, it’s necessary to have other tools in your toolbox. Just to be sure though, there’s nothing wrong with buying life insurance from life insurance from a life insurance agent. My issue is when insurance is sold as an investment. You’re better off keeping your insurance and your investments separate.
I’ll be frank. Education is most important early on in an advisor’s career. After a certain point, experience begins to become much more important. That being said, college education is important when an advisor is new to the industry. If considering an advisor with less than three years in the industry, I would look for one with one of the following degrees:
· Financial Planning – This is only offered at a limited number of schools but it really is the best option for someone who knows that they want to be a financial planner.
· Finance/Accounting – Either of these give a good background with respect to taxes and investments.
· Economics or Business – These also give a good general knowledge of taxes and accounting.
The other important part here is continuing education. If you care about bettering yourself and providing better outcomes for your clients, you should always be striving to learn more. Personally, I obtained my master’s degree in advanced financial planning because I wanted more tools in my toolbox for complex planning situations.
Designations are the easiest way to tell if an advisor is dedicated to their profession. That being said, there are plenty of designations which aren’t worth the paper on which they’re printed. I’m going to go over some of the more common designations and then I’m going to explain what to look for if you run across a designation with which you’re unfamiliar.
Let’s start out with the most important designations. As I said, this isn’t a complete list but it’s a good place to start.
· The gold standard in financial advising is the Certified Financial Planner designation. This designation requires an undergraduate degree, 18 hours of financial planning specific education, a comprehensive financial exam, and three years of relevant experience.
· The next is the Chartered Financial Consultant. This designation requires two classes more than the CFP, however it doesn’t require a comprehensive exam. Don’t think that the lack of an exam makes this a gimme designation though. It’s well respected in the industry. Finally, like the CFP, it also requires three years of related work experience.
· If you’re interested in an investment manager rather than a financial planner then you should look for a CFA, or a team with a CFA on it. The Chartered Financial Analyst designation is one of the hardest designations to earn in the financial industry. It requires passing three exams over the course of several years and five years of related work experience. The CFA is equivalent to a Masters in Finance.
· Finally, the PFS is an excellent option as well. The Personal Financial Specialist is a designation restricted to those who are already Certified Public Accountants, so you know that they have an excellent educational background. The PFS takes their knowledge from the CPA exam and translates it to personal financial planning.
It’s easy to be impressed by designations. There are literally hundreds of designations, only some of which are worthwhile. Let’s talk about what you need to look for when you’re researching an advisor.
I. First, check their designations out on FINRA’s website. While not all designations are on there, the majority of worthwhile ones can be found there.
II. If you don’t see it on FINRA’s site, look it up and see what it takes to obtain. Ideally you want to see that it requires experience, education, and an exam. The experience requirement should be at least two to three years in order to provide enough experience to really help. The education can come from the accrediting body of the designation or it can come from a third-party provider. Groups like the American College and the College for Financial Planning are well known education providers for designations. Finally, the designation should require a comprehensive and proctored exam. What good is an exam if you can use an open book?
You worked hard for your money; you don’t want to trust it to just anyone. In particular, you don’t want to trust it to a slick salesperson who doesn’t really understand what they’re doing. You need to look for experience when searching for an advisor. You want to know that your advisor has seen your situation before and knows how to handle it. There are plenty of companies who hire advisors based on their sales ability and not their technical knowledge. You need an advisor who understands your situation and isn’t using your money as a learning tool. Young advisors aren’t always bad though. As far as that goes, I’m a fairly young advisor. The key is to look for someone who has dedication to learning, such as internships or working towards their CFP certification, or one who has partnered with someone more experienced.