• 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?