• Kyle Hill, CFP®

How do you know who that Financial Advisor really is?

Updated: Aug 5, 2019



If you’ve been in the working world for five minutes, you’ve most likely been approached by a friend, family member, or a professional in your network, that’s a financial advisor and wants to “grab coffee to network”. Looking for a mutually beneficial meeting, that coffee quickly turns into their sales pitch that leaves a bad taste in your mouth. You ask yourself, “are all financial advisors like this? What about that financial planner?" Then it gets you thinking, Financial Advisor, Wealth Advisor, Financial Planner, what’s the difference?


BREAKING NEWS, that title… it means nothing! Seriously. In a highly regulated industry, you’d be surprised to know there really isn’t regulation around what financial professionals can call themselves... which adds to the confusion of the financial industry. 


These are self assigned titles that anyone can call themselves. If you want to be a financial advisor, you can be one! If you want to make it “official” you can print off your certificate courtesy of John Oliver. (Disclaimer: This is not an endorsement of John Oliver. I’ve never really watched his show for that matter.)  


With that said, this doesn’t mean that you can get paid to give investment advice. You have to be registered with the proper regulators if you want to provide investment advice AND get paid for it. If you’re unregistered and providing investment advice for compensation, you could go to jail. Just a friendly warning before printing that certificate and hanging out your own shingle. 


Back to the question of what’s the difference between financial advisor vs. wealth advisor vs. financial planner... and all the other titles out there. Since those are essentially self proclaimed titles, the best way to tell the difference as to who an advisor really happens to be, is to look at the advisor's security licenses. You can do this by asking the advisor and/or visiting FINRA's brokercheck.com and the SEC’s IARD.gov websites. 


You’re probably asking, what are Securities Licenses?


To be able to sell financial products (like stocks, bonds, mutual funds, ETFs, etc.) or get paid for providing investment advice, individuals must be properly licensed and registered with the proper regulators. 


To simplify the licensing process, an individual has to pass a specific securities exam and pay a registration fee with regulators. These securities licenses basically say the individual was competent enough to pass the exam, and they paid their fee. Once they have achieved the securities licenses needed, they are now able to conduct the business of selling financial products or providing investment advice…. no experience required. 

In most cases the the Securities Licenses of the advisors you’ll interact with are going to be from the following:


  • Series 6 - This is the "Investment Company and Variable Contracts Products Representative” License

  • Series 7 - This is the "General Securities Representative Qualification” License

  • Series 63 - This is the NASAA (North American Securities Administrators Association) "Uniform Securities State Law” License

  • Series 65 - This is the NASAA (North American Securities Administrators Association) "Investment Advisers Law” License

  • Series 66 - This is the NASAA (North American Securities Administrators Association) "Uniform Combined State Law” License



What do these security licenses mean?


These security licenses define who an advisor is (by industry standards), who they are affiliated with, and what they can sell, wether it be investment advice, financial products, or both.


  • For an individual with a Series 6 license, typically you’ll see this in life insurance and annuities sales, or an advisor that sells only mutual funds. They cannot provide investment advice, with the only exception being if it is solely incidental. In order to obtain this licenses, essentially they must be associated with and sponsored by a FINRA member firm. 

  • For an individual with a Series 7 license, they have the abilities of a Series 6 plus the ability to sell stocks, bonds, ETFs, and other investment products. They cannot provide investment advice, with the only exception being if it is solely incidental. In order to obtain this licenses, essentially they must be associated with and sponsored by a FINRA member firm as well. 

  • For an individual with a Series 63 license, they don’t sell financial products, but provide investment advice.

  • For an individual with a Series 65 license, they don’t sell financial products either, but provide investment advice.

  • Lastly, for an individual with a Series 66 license, they also don’t sell financial products, but provide investment advice.


Seems a little Redundant, right?


You’re probably asking, why are there two different licenses to sell financial products and THREE different licenses to provide financial advice?!? HOW IS INVESTMENT ADVICE DIFFERENT, THREE DIFFERENT WAYS?!? Glad you asked. Mainly, that is due to “who” the license is affiliated with.


The security license is going to be affiliated with either a Broker/Dealer (B/D) or a Registered Investment Advisor/Investment Advisor (RIA or IA).  



Depending on who an advisor’s licenses is affiliated with determines who they are a representative of. If their licenses is affiliated with the Broker/Dealer, they are a representative of the Broker/Dealer, and in the primary business of product sales. If this license is affiliated with the Registered Investment Advisor/Investment Advisor, then they are a representative of the Investment Advisor, and in the business of providing investment advice. 


You might be asking, "then can they be both?” 


YES, and we’ll get to that later, but here is the breakdown on how licenses are often paired in the real world.




Who regulates financial advisors?


So you have all these security licenses, but who regulates them?


There are three main regulators for financial advisors, and they will generally fall under one or two jurisdictions.


For Broker/Dealers:

  • FINRA (Financial Industry Regulatory Authority) - Is an independent, non-governmental organization that writes and enforces rules for Broker/Dealers and Registered Reps. More on Registered Reps below, but this regulator is for Broker/Dealers and the Representatives.


and


For Investment Advisors


  • The SEC… no not the Southeastern Conference…. the Securities and Exchange Commission - is an independent governmental agency designed to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This is for larger Investment Advisors.

or 


  • The State - Depending on the advisor, they may be registered with their state and the states they conduct business in, instead of the SEC. This would be for smaller investment advisors, like my firm. 


An Investment Advisor is going to be regulated by either the SEC or the State(s), not both.

Example: Hill-Top Financial Planning, LLC, my firm, is registered with the State of Missouri because we are based in Kansas City, MO. With that said, I can bring on clients in other states. In most states, if I have 5 or more clients in that state, I would have to register with that state as well. Once my firm grows to a sizable amount where I’m managing $100 million or more, I would flip my registration with the state(s) over and register with the SEC.





Just tell me “Who” they are already!!


I know, your head is probably spinning by now with "Series this" and “Broker/Dealer that”…. So let’s pull the mask off and see what all that really means to you.


When you’re dealing with a financial advisor, financial planner, or {insert personal financial job title here}, they’re going to be one of three things:

  • Registered Representative

  • Investment Advisor Representative (IAR)

  • Both



Registered Representative


A Registered Representative (Registered Reps) is going to have a Series 6 and/or 7 securities license to sell investment products, and a Series 63 securities license to provide investment advice. The Registered Representative (often referred to as a securities broker or stock broker, and should be viewed as a “sales person”) is a representative of a Broker/Dealer (often referred to as a B/D). They are in the business of buying and selling investments (stocks, bonds, mutual funds, etc) for clients, and are typically compensated by commissions they earn for selling clients these investments. Their commission rates may vary based on the investments they are selling clients (getting clients to buy or sell). Therefore they may have added incentives to promote certain investments over another, even when the other investment is similar, and cheaper for the client. 


Currently, registered representatives operate under a suitability standard. According to FINRA (Financial Industry Regulatory Authority), the organization that regulates Registered Reps: 


"FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer."


I know, I know… what does this mean? 


Good question. It means when they make their recommendations it only has to be suitable for you, not necessarily in your best interest. 


Still confused? I understand. 


The best way to describe this is the “Suit Example”… (which is very suitable!)



Imagine going to a tailor to buy a new suit. Under the Suitability Standard, the suit only has to fit, but it doesn’t mean it has to look good. Under the Fiduciary Standard, the suit has to fit AND look good!



Why would someone sell you a suit that doesn’t look good, you might ask? Because they make a higher commission on selling you the ugly suit than the suit you look good in. 


Here is how this might look.


You’re working with a financial advisor that is a registered rep. The advisor has two investment options to choose from and he needs to recommend one for you to invest in:


Investment A or Investment B


  1. Investment A & Investment B are similar investments.

  2. Their objectives are similar.

  3. Their historical track records (investment performance) are similar.


So what’s the difference?


The advisor that is making the recommendation earns a commission on the investment he recommends:

  • Investment A he earns a commission of 5.0% 

  • Investment B he earns a commission of 2.5%


Under this scenario, if you had $100,000 to invest, you would pay a commission of:

  • $5,000 for Investment A ($100,000 x 5.0% = $5,000)

or

  • $2,500 for Investment B ($100,000 x 2.5% = $2,500)


So you’re initial investment of $100,000 in Investment A would look a lot more like $95,000, where as with Investment B it looks more like $97,500. That’s a $2,500 difference from the start! Remember these investments are doing basically the same thing.


Given this, the option that is best for you (Investment B) isn’t better for him (Investment A). However, under the Suitability Standard, the Registered Rep can recommend you purchase Investment A.


Doesn’t sound all that great does it?


This is a commission based fee model.




Investment Advisor Representative

The other type of financial advisor is an Investment Advisor Representative (IAR). This is an individual that is going to have a Series 65 or 66 securities license. They are a representative of the Investment Advisor (the firm, not an individual). They are in the business of providing investment advice and compensated for the advice. They aren’t selling any financial products, and they adhere to a Fiduciary Standard, meaning they place your interest above their own.


Typically, now days, the Series 65 license is for an advisor that is only affiliated with with an Investment Advisor. They have no affiliation with a Broker/Dealer.


We’ll get to the Series 66 license shortly.


So how do they get paid?


While there are several different fee structures, IAR’s most commonly are compensated using an assets under management structure (AUM), that charges a percentage for the assets they’re managing. Generally, you’ll see their fees range from 0.25% - 2.00% on the assets they manage, with 1.00% being the industry standard. 


This is called a fee-only model. 



Here is how that works for the AUM structure:


Your financial advisor (IAR) is managing your $100,000.00 Traditional IRA (Assets) and charges 1.00% (AUM Rate) annually. 

  • $100,000 x 1.00% = $1,000 (Advisor’s fee)

Usually this is paid quarterly or monthly….

  • $1,000/4 = $250 per quarter $1,000/12 = $83.83 per month

and is based on the value of the assets being managed, at the end of the billing period (arrears or in advance). 


So if you paid your advisor quarterly, and in arrears, it might look something like this:


March 31st balance = $100,000

  • ($100,000 x 1.00%) / 4 = $250.00

June 30th balance = $105,000

  • ($105,000 x 1.00%) / 4 = $262.50

September 30th balance = $95,000

  • ($95,000 x 1.00%) / 4 = $237.50

December 31st balance = $110,000

  • ($110,000 x 1.00%) / 4 = $275.00

This is just a hypothetical to show how the advisor’s fee would work, with the fluctuations (or changes) of your account balance (assets they’re managing) during a calendar year.


In this model, you can see how it is in the advisor’s interest to accumulate assets to manage. The more assets they manage, the more they get paid. In this structure, they’re at least interested in growing your slice of the pie (your assets) which is a good thing for you.



Now what about when your Advisor is BOTH?


Your advisor can be both an Investment Advisor Representative and a Registered Representative. This happens when the advisor has the combination of securities licenses, the Series 7 & 66


That’s where it can get a little confusing. An advisor can be a representative of both, the Broker/Dealer and the Investment Advisor.

 

How this works is, the advisor has a Series 7 affiliated with the Broker/Dealer and a Series 66 affiliated with the Investment Advisor.


In this scenario, the advisor takes on and off his imaginary cap for the team (Broker/Dealer or Investment Advisor) he is representing at any given time. 


In order to be a Series 66 licenses holder you also have to have a Series 7 license. This is because a Series 7 licenses is a co-requsite (not a pre requirement) to the Series 66. By default, to have a Series 7 license, an advisor would have to be affiliated with a Broker/Dealer. 


This is often the case with independent firms. They provide financial advice through the Investment Advisor, but they also affiliate themselves with a Broker/Dealer so they can help you implement the advice they are providing. They are typically compensated with a combination of the AUM model and by commissions. 


This is called a fee-based model. 


Example: I previously worked for a Registered Investment Advisor/Investment Advisor (RIA/IA). To be able to implement our recommendations, on our clients’ behalf, we were also affiliated with a Broker/Dealer (B/D). So I had a Series 7 license with the Broker/Dealer and a Series 66 licenses with the Registered Investment Advisor. 

After I left my old firm to start Hill-Top, I decided not to affiliate with a Broker/Dealer. Since I’m not affiliated with a B/D, my Series 7 license is inactive. After awhile, my Series 66 will become a Series 65 license because the Series 66 must be accompanied by a Series 7.



There are three different fee models: Commission, Fee-Based, and Fee-Only

These models, specifically the latter two, can be structured different ways. (Below, you can see how different fee models might be structured.)



Commission Based Fee Model


As previously mentioned, this is where the advisor makes a commission for selling you a financial product. 



Fee-Based


The fee-based model can be structured a number of ways, but has an element of commissions worked into the fee. Some advisors may lean more heavily than others on the commissions, but the advisor’s fee is generally geared more towards the other component of the fee such as:

  • Assets Under Management (AUM) - generally doesn’t include assets like an employer sponsored plans (401k or a 403b, etc.)

  • Assets Under Advisement (AUA) - Similar to AUM, but would likely include assets like an employer sponsored plan (401k or a 403b, etc.)

  • Flat Fee - Annual flat fee paid monthly or quarterly for services

  • Hourly - Charges by the hour for their advice, similar to an attorney



Fee-Only


In the fee-only model the advisor receives no component of commissions or third party kickbacks. Their fee is based solely on what you, the client, pays them. Conflicts of interest should be most minimized when an advisor utilizes this model because their aren’t competing interest. Your best interest is their interest.


Basically the same fee structures as fee based, minus commissions:

  • Assets Under Management (AUM) - generally doesn’t include assets like an employer sponsored plans (401k or a 403b, etc.)

  • Assets Under Advisement (AUA) - Similar to AUM, but would likely include assets like an employer sponsored plan (401k or a 403b, etc.)

  • Flat Fee - Annual flat fee paid monthly or quarterly for services

  • Hourly - Charges by the hour for their advice, similar to an attorney




Fee Structures Gaining Popularity


Gaining in popularity, especially with younger generations, is the Retainer Model (Structure).


The Retainer Model (or subscription model) is like a Netflix subscription for your finances. You pay your advisor a monthly fee to retain their services.


This has really gained traction in the last few years due to the emergence of XY Planning Network, which boasts over 900+ independent advisors nationwide (which includes myself). Advisors that are in this network are required to be Fee-Only, and adhere to a fiduciary standard. In addition, for advisors to be listed on their find an advisor portal, they must be a CERTIFIED FINANCIAL PLANNER™ (or CFP®) professional. 


What’s the reason for the rise in this fee structure? 


Under the two traditional models, AUM and commission, most younger clients aren’t able to meet AUM minimums, and on the other hand, most don’t want to be sold products. Many firms that operate with a strictly AUM model may have a $250,000 minimum, or even higher. My previous firm was in the millions for their minimum. Remember, the more assets, the higher their fee. If you don’t have assets to invest with them, they can’t make any money in this model. To quote the movie Sing, “Daddy need shoes, and kids gotta eat!”


(Yes, as a parent of two young boys, I now quote kids movies instead of funny adult movies. So in addition to my wife not understanding my movie quotes, my friends without kids don't either now.)


Many times, advisors that utilize the retainer model (structure) are Fee-Only, and have no asset minimums, meaning you can work with them even if you’re just getting started and they aren’t going to sell you products. The Retainer Model is the fee structure I utilize, and you can learn more about my offerings by visiting my Services page, including my pricing.


In addition to the increased popularity of the retainer model are:

  • Percentage of net worth and/or percentage of income

Under these models, an advisor may charge something like 1.0% of your net worth or 1.0% of your income, or they might even do a combination of both.



What’s the right fee structure then?


I know, I know, you just want to know who you should work with when the time comes. The truth is, there is no one right fee model out there. 


It’s up to you, the client, to decide what model makes the most sense to you and what you are comfortable with.


Advisors also have to do what makes sense for their situation and the type of client the want to work with when they set up their fee models and how they structure them. 


I chose to utilize the retainer model, with an AUM component, because it gives me the best chance to work with the type of people I want to work with, young professionals and families…. my generation. My goal is to help the younger generations understand all this financial stuff so they can become financially independent. For more on why I started my firm, you can read my previous blog.


This isn’t to say that everyone that is fee-only is perfect, and not everyone that utilizes a commission model is a bad guy. The problem is the financial industry can be rather confusing, and the industry regulators continue to muddy the water with their lack of clarity in their regulations aimed at advisors conduct towards their clients’ interest. So when you work with someone that is fee-only, it inherently minimizes the conflicts and they are adhering to operate in a fiduciary capacity, where they place your interest above their own.


Thank for reading and be sure to subscribe to my blog so you are first to know when the next post drops!


In the meantime, if you’re looking for professional help with your personal finances, to overcome the complexities and confusion they can bring, schedule a free 30 minute Introductory Call. I understand, your personal finances can seem like a giant jigsaw puzzle. At Hill-Top Financial Planning, LLC, I work with clients to build a custom financial plan to help put all the pieces of the puzzle together to bring clarity to your financial picture, so you can stress less and live more.



Kyle Hill, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional that is based is Kansas City, MO and serves clients Nationwide. He is the owner, founder, and financial planner of Hill-Top Financial Planning, LLC, an independent, Fee-Only registered investment advisor in the state of Missouri that provides comprehensive financial planning, and investment management services to young professionals and families. Kyle helps clients build custom, personal financial plans to help them bring clarity to their financial situation so they can build wealth and become financially independent. He helps clients with a range of personal financial topics ranging from: budgeting, cash flow planning, investing, retirement savings, college savings, insurance planning, tax planning, and much more. Hill-Top Financial Planning, LLC serves clients as a fiduciary and never earns a commission of any kind.

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