In a recent article in the Wall Street Journal, the writer compares and contrasts the different training and credentials surrounding financial brokers, advisers and planners. It is important for investors to understand the professional standards and practices that come with each title. The most important point is that investors should interview investment professionals just as they would a job candidate. The writer comments, “People spend more time researching a car for $20,000 than they do when handing over their life savings [to an investment professional].” What are the differences? What are the professional standards? And what can investors expect from each professional? Here’s a breakdown of each professional title:
Brokers. Brokers can buy and sell securities for clients through their own accounts. They must pass exams that qualify them with in state securities and FINRA governing bodies. They often are employed by large wealth management firms whose products they may favor even if there are better options available for their clients. They are not required to give the best advice, but rather recommend suitable investments based on the individual clients risk, age, financial well-being, etc. Often this means they can recommend funds with high fees or conflicts of interest. One financial professional comments, “Unfortunately, when the market is going up in value like it is now, unsuitable investments are really hard to identify.” This is all the more reason to ask the difficult questions and ensure that your broker is advising for your best interest and not for their best interest.
Registered Investment Advisers. These advisers are typically governed under state and federal law and required to pass examinations. They are held to a standard to act solely in the best interests of their clients. RIAs are required to disclose conflicts of interest as well. RIAs who manage less than $100 million must register with the state. Those who manage more than $100 million must register with the SEC.
Certified Financial Planners. CFPs are professionals who help investors develop a plan for reaching their financial goals. Many brokers and RIAs are Certified Financial Planners as well. CFPs must pass a rigorous examination and gather three years of qualifying experience before being able to use their designation marks. CFPs are held the a fiduciary standard that states they must act in “utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client” (CFP Board rules of conduct). A CFP can also manage your wealth and advise on products for their clients.
Who is the best fit for you? Advisers and Planners typically look at the bigger picture of your financial well-being. Brokers who come with strong references and a good track record with state regulators might offer more diversified products for your investments. The answer for investors comes after they determine what they want from the relationship. Second, they should explore the terms of the relationship, fees and commissions and request they be put in writing. But the most important take away, is to be educated and ask the difficult questions of your financial professionals. You want to make sure they will treat your life savings with the same care that you have.