Financial Advisor: The Most Misunderstood Title

Most professions have a measuring stick to quantify a reputation or skill set. Medical degrees, law degrees and teaching certificates represent recognizable benchmarks for their professions. Our proud service men and women use a chain of command that instantly indicates their level of responsibility. So why is it so difficult to determine whether or not a financial advisor is worth their salt?

The term “financial advisor” may very well be one of the most misrepresented professional titles. Reason being: Almost anyone can call themselves one. Don’t get me wrong, the financial services industry puts numerous exams and stipulations in place to license and track advisors, but just like any standardized test, a passing score isn’t necessarily a great barometer for quality. According to WalletHub there are over 250,000 advisors across the country. Thankfully, there are ways to help you to determine the background, experience and type of advisors out there.

Professional Designations for Financial Advisors 

Designations such as the CFP (certified financial planner), CFA (chartered financial analyst) and the already recognizable CPA (certified public accountant) give consumers a basic understanding of the training someone has endured. In any vetting process, educational background combined with a professional designation is one of the first things to look for. It’s not to say the absence of one is bad. I know many advisors who do a good job for their clients and don’t have letters after their name, which brings me to my next point. (For related reading, see: A Guide to Financial Designations.)

Experience

Type can often be more valuable than tenure. While it’s comforting to see lots of years in the industry, that experience may not add up to a whole lot of knowledge. Here’s a shocker: Some financial services organizations allocate more resources to sales training than education. A good way to decipher experience from fluff is to interview. Just like any job interview, pointed open-ended questions help to uncover details. What types of clients have you worked with? What is your investment philosophy and why? Situational inquiries such as, “Tell me about the message you were sending to your clients back in 2008 and 2009 during the financial downturn,” provide a window into what the experience and expectations could look like.

Background

Finance is one of the most regulated industries on the planet, largely because it involves money management. A background check is a great way to examine an advisor’s experience, licensing and whether or not any complaints have been filed against them. FINRA (Financial Industry Regulatory Authority) provides a great reference tool.

Hint: It will also help you to recognize the different types in the next topic.

Fiduciary vs. Suitability

There’s a difference between suitability and fiduciary. Similar to the Hippocratic oath to do no harm that a licensed physician takes, a fiduciary is bound by law to act in your best interest. Believe it or not, this isn’t a requirement for most financial advisors. Reason being: If they sell commission-based products, the only obligation is to make sure the product is suitable for the investor. The phraseology here is interesting. If you were to ask an investor which they would prefer—something that was in their best interest or something that was merely suitable for them—you would likely receive resounding support for the former. (For related reading, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)

Consider the idea of a doctor being solely compensated based upon the treatments or medicines they recommended. The conflict of interest would instantly be apparent. Entering into an engagement with an advisor whose compensation is based upon the commission from a product sale isn’t a heck of a lot different from this scenario. The incentives often work in the opposite direction of what's in your best interest, even if they're trying to do the right thing.

As fiduciaries, fee-only registered investment advisors receive zero commissions because the only product they have to sell is their expertise, something that is quantifiable and transparent, as opposed to sales commissions, which are often wrapped into the complexities of a financial product's expense.

It’s important to point out the dilemma fee-based advisors face. Namely, when is it appropriate to sell products to a client based on a standard or suitability, and when is it appropriate to provide advice as a fiduciary acting in their best interest? Many see this as a contradiction. Why wouldn’t someone want to act in my best interest all the time? It’s the critical question that should be asked of every financial professional. (For related reading, see: Fee-Based Brokerage: Will They Work for You?)

Hopefully this sheds some light on a confusing topic. A word of advice would be to know what type of advisor you are speaking with before you even interact with them. Due diligence up front is key because in a business populated by a litany of salespeople, judgment can sometimes get cloudy after a face-to-face meeting.

Financial professionals are always being mischaracterized, partly due to an industry that intentionally blurs the lines. Most true fee-only financial advisors loathe being inadvertently called brokers, and brokers often do little to clarify that they aren’t actually acting in a fiduciary capacity. I’m not sure if we’ll ever get away from blanket terminology, but I am sure that individual investors are better served when they’re empowered with the knowledge to make informed choices.

(For more from this author, see: The Bull Market Anniversary and Long-Term Investors.)