A very strange aspect of the financial services industry at the moment is that there is no legal definition for the terms financial advisor, financial planner, or private wealth manager. As a result, it’s hard to figure out with whom you are working. It’s not like going to a doctor and knowing that at least this person has been to medical school, has had some post-medical school training, and passed some pretty hard tests, both written and in practice from being observed on the hospital floor.
In the financial services industry, a key distinction is how the advisor defines the offering: financial advice or financial product?
If the offering is advice, the advisor is likely regulated by the U.S. Securities and Exchange Commission (SEC) and is subject to a fiduciary standard. By law, this advisor must act in your best interest.
If the offering is an investment product, the advisor is likely a broker regulated by the Financial Industry Regulatory Authority (FINRA), and subject to a suitability of sales standard. By regulation, this advisor may only sell product that is at least reasonably suitable for you.
If the advisor offers financial advice and investment products, and is regulated by both the SEC and FINRA, the advisor wears two hats and it is up to you as the consumer to discern when the hats switch. No kidding.
The differences in practice are not always easy to see but are very important.
Consider this analogy: If you go to your favorite car dealership, you know that the conversation will be about which of their brand cars you will buy. If you work with an expert salesperson, you will end up buying one of their cars and you’ll leave the dealership feeling great and perhaps also a bit more informed about what’s new in the car industry and with your favorite car brand. The price will be somewhat negotiated; you do your best.
You would not, on the other hand, go to a car dealership looking for transportation advice. The salesperson is not going to make any of these comments:
If you are ready to buy a car, or an investment, and know what you need, you go to a dealership or broker.
If you want personally tailored advice, you go to where the offering is defined to be, and regulated as, advice.
Do you know how your advisor is regulated?
If you’re looking for a financial advisor and want to know the most important questions to ask, download our free guide “How to Choose a Financial Advisor”.
Originally published: February 27, 2013