Which Financial Professional best suits your purpose?
When searching for a financial professional, it helps to know what it is you need. Your financial needs generally fall into three separate and distinct areas: investments, taxation, and estate planning. Each area has a choice of professionals to help you. For example, if you need tax preparation services, you may want to engage either a
Certified Public Accountant or an Enrolled Agent. If you need a Will or Trust, you really need to engage an attorney. When it comes to investing, professional choices abound.
Are your investment needs to simply purchase a single stock position and hold it for more than 6 years with no activity other than dividend reinvestment?
You may be an excellent candidate for a DRIP (Dividend Reinvestment Program). (See definitions in this section.)
Or do you have 50 DRIPs that you accumulated over 20 years and now you need to unwind this portfolio for your retirement?
You would do well to find a Financial Advisor.
Are you looking for an investment or insurance?
Many types of financial professionals are licensed to sell life insurance and fixed annuities. Insurance professionals must hold a license for the state in which you reside to sell you either. There are usually separate endorsements on the license for things like Medicare Supplements and Long-Term Care. Ideally, when seeking health plans on the Affordable Care Act (ACA) Exchange or Medicare Supplements, you want to find someone who works with these plans daily, not someone who dips a toe into the insurance pool on occasion.
If you seek investment expertise, you will likely need someone who hold a securities license in your state.
Security license holders are required to maintain a document called a Uniform Application for Securities Industry Registration or Transfer (U4). This is a profile of a financial professional kept up to date by the Broker-Dealer or RIA. The U4 is the closest thing to the proverbial “permanent record” that I have ever seen. Members of the public can view the U4 on Broker-Check. In case you are thinking: “Fantastic! All I need to do is look up my prospective professional on broker check and everything will be clear!”
Not necessarily. Broker-Check lists what they call “disclosure events,” but it is not always clear what the “disclosures” were about. Since FINRA does not actually adjudicate every incident reported and expunge those that are meritless, you may be looking at a charge leveled against a hapless employee who had a vindictive supervisor. For example, a boss gets angry when a star performer decides to take his talent elsewhere. The boss accuses the young man of office supply theft and calls the police. The police arrive to find the young man had packed up his desk with office supplies the young man had purchased himself, because the boss was a cheapskate in addition to being a liar. This was an actual case.
At best, broker-check provides a point to start the discussion with your prospective advisor. If there are disclosures, ask them their side of the story.
If the financial professional has the right credentials for the type of investing, I want to do, and no disclosures, what else can I do to assure this is the right professional for me?
Just like finding the right partner in life, your financial advisor needs to work with you the way you prefer to work. You must know yourself and know what you need to ask.
Are you getting straight answers to your questions, or are they being evasive? Do you feel like a person in their presence or a commodity? Training and credentials are important, but so is having a person on your side who truly cares about your life.
Many financial professionals have designations, but I don’t know what these letters stand for or what it took to get them. It seems that everybody has something. Can you explain the alphabet soup I am seeing?
Below are some of the various designations and credentials financial professionals may hold. I’ve limited the list to the most general. The style of your investing may help you choose the designations you will need in your financial professional.
(Skip to the List of General Designations)
Why are there so many designations?
Since the 1980s designations and specialties have proliferated. My own designation CEBS for Certified Employee Benefit Specialist provides a good example of how specialization has created more designations.
I began pursuing my CEBS in 1986 when it required candidates to take ten semester-length graduate level courses on every aspect of employee benefit management including employee benefit law, economics and governmental entitlement programs like Social Security and Worker’s Compensation. Given that the internet did not exist in 1986, these courses were given in person at local colleges or universities.
At the time, I was working for the California Society of CPAs Group Insurance Trust that sponsored an employee benefit suite that member firms could purchase for their own employees. There was no one to give me on-the-job training at the Society, so certificate courses like this one were an easy way for employers like mine to outsource their training function to top experts without having to retain such people within their own organization.
Over time, the designation program was mostly used by employee benefit consulting firms, but most either needed people in just Welfare1 or Qualified Plans2. They didn’t need associates who understood both. In addition, finding students willing to take ten semester-length graduate level courses, half of which they were unlikely to use in their day-to-day work, was asking for a big commitment. By the turn of the century, this designation was split into two separate specialties that required fewer courses and half the time.
1 Life, Health, Dental, Section 125 and 129 Flexible Spending Accounts
2 Defined Benefit Pension Plans and Defined Contribution plans like 401(k), 403(b), 457(b), 401(a), etc.
Many other designations spawned specialties. For example, the Certified Divorce Financial Analyst® is specially trained to assist the client and the divorce lawyer to understand how the decisions that are made during the divorce process may impact the client’s financial future. (CDFA® website: institutedfa.com) So, if you have a very special circumstance, you may find that there is a certificated specialty devoted to your issue.
Most Common Designations for Financial Professionals
Below are just a few of the many, many designations, roles, and definitions in the Financial Service Industry. If you are looking for definitions of financial service terms, please visit the Annotated Investment Glossary. I hope this helps you find what you seek.
This may refer to either the institution or the Registered Representative or General Securities Representative acting as an agent of the brokerage house in a commissionable transaction. The fiduciary duty is owed for the transaction itself, but it ends once the transaction is done. (See FINRA discussion below.)
Commission is an upfront or back-end sales charge for the purchase or sale of a security. Commission varies depending on the type of transaction. Mutual funds of the same fund family normally offer a breakpoint on volume purchases of A Class shares. Individual stock transactions sold via commission will normally have sales charges for both purchase and sell transactions. Unless you know you have a managed account with no sales charges, ask about the commission before you purchase or sell.
This designation requires a college degree, two years of experience in the accounting field and successfully passing a National Board examination. A CPA owes a duty of care to the Public, which means they may not aide and abet a client who wants to hide financial crimes, cheat on their tax returns, or stretch what would be considered Generally Accepted Accounting Practices to a breaking point. CPAs are qualified to provide expert tax advice. Because the Internal Revenue Code changes from year to year, CPAs must complete continuing education annually.
This designation was originally introduced in the early 1970s. Today’s Certified Financial Planners have taken a series of six courses and successfully completed a national examination and a practical planning exercise. Nowadays the courses on ethics, insurance, investments, taxes, and estate planning are mostly taught on-line with the goal of giving the planner sufficient education in each area to consider most aspects of a client’s financial experience. Those pursuing the CFP® designation must have, or obtain within five years, a college degree from an accredited institution before the designation will be granted.
This designation is a generalist designation and individuals with this designation can be from any part of the financial service industry. They may be life insurance agents, CPAs, or Financial Professionals selling investments on commission or a fee basis. Whether the CFP® owes you a Fiduciary standard of care depends on the transaction being performed.
(See Registered Representative and Financial Advisor below.)
Chartered Financial Analyst® (CFA®) is trained in how to analyze investments and generally works for a financial institution such as bank or mutual fund company that puts together investments. Some large Registered Investment Advisers or Broker-Dealers may engage a CFA® on staff to assist the firm in designing a proprietary investment portfolio. The CFA® is seldom a primarily client facing professional, although they may be called upon to provide market insight and explain portfolio construction.
The CFA® designation requires a college degree, 4000 hours (about 2 years) of work experience, successful completion of the Exam, and candidates must hold a passport that would allow them to travel internationally.
requires four core courses on individual life insurance, laws surrounding life insurance, estate planning with life insurance and life insurance planning for the small business owners and professionals. In addition, the successful candidate will choose one elective from five options: Financial Planning, Income Taxation, Fundamentals of Insurance Planning, Planning for Retirement, or Investing. This designation has been around since 1927 and holders of this designation are generally working for an insurance company as an underwriter or life insurance agent.
designation can be earned after the successful completion of eight self-study courses which cover many of the same subjects as the CFP® with less concentration on life insurance than the CLU® designation. Like the CLU® designation, the ChFC® does not have to sit a National Board examination. Unlike the CFP® designation, the ChFC® does not require a college degree. This designation is newer than the CFP® designation.
This is not an individual, but it is a way to invest without using any financial professionals. Many U.S. companies offer direct purchase of their stock directly to the public without the use of a Broker-Dealer or RIA. The transactions are facilitated by a transfer agent such as Computershare. Since 2005 Transfer Agents are required to report cost basis for transactions.
If you inherit an after-tax DRIP account that was established before 2005, please remember that thanks to current (2022) IRS rules, the cost basis of those positions should be automatically updated to the date of death of the person from which you inherited the account.
concentrates on taxation. This designation is awarded by the Internal Revenue Service. Enrolled agents must pass an examination covering the Internal Revenue Code Rules. Enrolled agents generally limit their services to tax return preparation of individuals, not corporations. CPA and Tax preparation firms may employ Enrolled Agents, or they may work independently.
A fiduciary must act in the best interest of the client in all circumstances. A fiduciary must demonstrate to authorities how his/her actions were in the client’s best interest. Not every financial professional is a fiduciary. Whether a financial professional owes you a fiduciary duty depends on the capacity in which they are acting.
Please see Investment Advisory Representative (IAR) below for specific educational information. To use the title Financial Advisor, the individual must hold an SEC license with the combinations described in IAR below or be one of the industry certifications that permit the dispensing of advice for a fee. All Financial Advisors owe their clients a fiduciary duty for as long as the relationship lasts.
Financial professionals who sell solely on commission do not qualify as Financial Advisors and should not be using this title on their business cards, signage or in conversation. If someone calls themselves a Financial Advisor and they do not have IAR credentials, be wary because this individual is misrepresenting themselves.
This is a self-regulating organization of U.S. Securities Dealers. FINRA was formed in 2007 when the National Association of Securities Dealers merged with the regulatory body of the New York Stock Exchange (NYSE). The NASD regulated the over-the-counter market (National Association of Securities Dealers Automated Quotation – NASDAQ ), while the NYSE supervised the so-called Big Board. When these two merged they pretty much supervised every financial professional in the conduct of their work.
FINRA oversees the licensing of financial professionals to execute certain trades. Each candidate must be sponsored by a FINRA member and take classes and an examination These are known as Series. Here is a quick list of which Series need to be successfully completed for an individual to help you with each kind of trade:
Series 6 – Investment Company (Mutual Fund) and Variable Contracts. If your desire is to actively trade individual stocks, you will need to seek a Series 7.
Series 7 – General Securities Representative. Stock trading is a bit more involved than trading mutual funds. Someone with a Series 7 has been trained to sell individual stocks and exchange traded funds, options, Real Estate Investment Trusts, Municipal Securities, and Initial Public Offerings among others.
Series 63 – Uniform Securities Act – These are the rules prohibiting dishonest and unethical Business Practices. (Everybody takes this one.)
Each of the representatives mentioned above must be supervised by a Principal.
Has taken a series of courses (Series 7) either in-person or on-line to learn Wall Street’s trading rules. A General Securities representative can place trades as listed under Series 7 above. They may work on commission or for a fee, so if you are unsure, ask before you place a trade.
an IAR has earned both a Series 7 and a Series 66, or a Series 6 and a Series 65. The Investment Advisory Representative represents a Registered Investment Adviser (RIA). The IAR title on most business cards is Financial Advisor (see above). IARs must take continuing education annually to maintain their license. Periodically, they must renew their SEC licenses by passing a computer-based examination.
This individual supervises client-facing investment professionals. Each principal must pass additional Series to qualify as a supervisor. Virtually every transaction your investment professional conducts on your behalf will be reviewed by their principal.
This is an organization or institution offering both financial products and advice for a fee. RIAs can be captive, meaning that they offer only proprietary products of the sponsor, or independent. Independent RIAs typically offer a platform of products they have vetted and deemed worthy to fill the varied needs of their diverse clients.
Registered Representative – is a general term for someone licensed to execute trades for a brokerage firm. This is a client-facing position. Registered representative means that this individual is registered with FINRA, but you cannot really know this individual’s capacity unless you know which Series the person has taken. Please see FINRA above.
