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  • Writer's pictureDAVID SAVAGE, CFP®

2. What is a Financial Advisor?

Updated: Mar 7, 2018

In a previous post I examined the question, “What does a financial advisor do?”

I described how four main types of advisors work: stock brokers, insurance agents, hybrid advisors and fee-only advisors. In this post I’ll go into more detail on financial advisor licensing in an attempt to shed more light on the question, “Just what is a financial advisor?”

Surprisingly enough, anyone can call themselves a “financial advisor”. That’s right—you could make up a business card today with that title on it and go into business without any training or licensing. However, if you give investment advice to more than fifteen clients, you must be licensed.

Securities Licenses

In order to work at a national firm, brokers must hold a Series 7 General Securities Representative license. The test for the Series 7, which is administered by the Financial Industry Regulatory Authority (FINRA), covers all types of securities including stocks, bonds, mutual funds and options. Brokers who have this license can sell virtually any security on commission except commodity futures, real estate and life insurance.

In addition, all brokers must have a Series 63 Uniform Securities Agent License. This license is required by each state and allows the broker to do business in that state. It is administered by the North American Securities Administrators Association (NASAA).

If a financial advisor charges hourly, flat fees or a percentage of assets under management, they are required to have a Series 65 Uniform Investment Advisor Law license. If the advisor is “fee-only”, this is the only license they need. Brokers who charge clients for a financial plan or who managed assets on a “fee-based” basis must have this license.

The Series 66 Uniform Combined State Law license combines the Series 63and Series 65 licenses for brokers who have already passed the Series 7 exam.

Finally, there’s the Series 6 Investment Company and Variable Contracts Products Representative license. This allows a license holder to sell mutual funds, unit investment trusts and variable annuities and variable life insurance. Overseen by FINRA, this license is required for insurance agents who sell any type of variable product. By the way, insurance agents who sell only fixed annuities are only required to have a life insurance license, not a securities license.

That’s a lot of license types, isn’t it? The good news is that if your broker works for a national firm, you really don’t have to worry about checking to see if they’re licensed, since these firms are required to keep track of this. The same is generally true of Registered Investment Adviser firms. The only thing you want to watch for is people who are unaffiliated with any securities company. Believe it or not, I once ran across an unlicensed guy who was charging the widow of his old friend $20,000 per year to manage her investments. Because he had fewer than fifteen clients, this was actually legal!

Product Sales Vs. Advice

Let’s take a minute to distinguish between sales and advice. This is an area I’m passionate about, so if I get up on my soapbox please forgive me.

If someone calls themselves a “financial advisor”, they should get paid to—well, advise, don’t you think?

Here’s where commission-based brokers and the big firms they work for have successfully confused the public. That’s because brokers and insurance agents are employees of the companies they work for and their main business is to generate revenues for their companies and maximize their commissions. So, they sell investment products for commissions at the same time that they offer fee-based investment management which is supposed to qualify as advice.

It’s obvious that whatever hat they’re wearing, advice on matters of financial planning is incidental to their main function of gathering assets. Therefore I propose that anyone who works even partly on commission be called an “investment product salesperson” rather than a “financial advisor”.

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