Guest Post by Cheryl H. Duke, CFA (learn more about Cheryl at the end of this post)
In the aftermath of the recent financial meltdown, investment rip-offs and ponzi schemes have been revealed with disturbing frequency. It is now more important than ever for investors to understand the choices available to them when seeking financial advice. Unfortunately, the financial crisis has not provided the additional clarity that investors need to make the most informed decisions.
Consumers have more choices than ever before for financial advice and differentiating between the providers can be extremely difficult. There are financial planners, retirement planners, investment advisors, retirement specialists, financial consultants, account executives, registered representatives, brokers, wealth managers, estate planners, and more. These providers may have many different names but their message is amazingly similar- to help you through all life’s challenges and ensure that you reach your ultimate financial goals.
With so many different providers vying for business, how can an investor distinguish among them? As difficult as it might seem, there are some key differences investors should be aware of. A better understanding of these differences can help investors make the most appropriate choice for their particular circumstances and avoid disappointments in the future. There are four main areas of differentiation that investors should explore with a potential advisor, before making a commitment.
Most individuals who provide investment advice must be registered with a regulatory agency. Advisors that sell securities as registered representatives, or stock brokers, must register with FINRA (Financial Industry Regulatory Authority). Other investment advisors, who sell advice, register either with the SEC (Securities Exchange Commission) or the state securities regulator where they do business. Advisors may be dually registered with both FINRA and the SEC or state, to provide advice and to sell securities directly to their clients. Financial planners may or may not be required to register as investment advisors, depending on the kind of advice they provide.
Just because an advisor is registered, however, does not mean that they are highly educated or experienced. The regulatory bodies that govern financial advisors determine the minimum qualifications of their registrants. Brokers or registered representatives who sell securities are required to pass the Series 7 exam, which is administered by FINRA. The exam, which tests their knowledge of securities regulations, securities markets, and products, has no educational prerequisites. Advisors registered with the SEC or state, who advise investors about particular securities, are required to either pass an exam or hold a qualifying professional designation. There are no additional education requirements.
An advisor’s qualifications should be fully explored by any potential investor. In addition to experience, an advisor’s education and certifications/designations should be considered as well. The universe of possible professional financial designations is a virtual maze of letters. A few of the most frequently encountered credentials are listed below:
- CFP (Certified Financial Planner): The most widely known designation specifically for financial planners. Holders must have a bachelor’s degree and three years of financial planning experience. They must also complete an educational program, and a two-day, ten-hour exam.
- CFA (Chartered Financial Analyst): The most widely known designation focused on investment knowledge. Holders must have a bachelor’s degree and four years of investment related experience. They must also pass three six-hour exams given over a two year period.
- ChFC (Chartered Financial Consultant): Holders often come from insurance industry. They must have taken a seventy-five hour course, passed an exam, and take continuing education courses.
- CIC (Chartered Investment Consultant): Holders must first obtain the CFA designation, and have significant experience with investment consulting and portfolio management.
- CIMA (Certified Investment Management Analyst): An advanced investment consultants designation. Holders must have three years of financial management experience and complete rigorous educational requirements.
- CLU (Chartered Life Underwriter): Holders specialize in insurance and estate planning.
Holding a designation does not ensure that an advisor will provide excellent advice and service, but it does indicate that the advisor has made the extra effort to further his financial education and distinguish himself from other advisors.
There are several methods of compensation used by providers of financial advice:
- Hourly Charge: This method is most frequently used by financial planners who perform a detailed analysis of an investor’s goals, risk tolerance, resources, and obligations, in order to develop a plan best suited for achieving the client’s financial objectives.
- Commissions: Registered representatives or brokers, are often compensated by sales commissions on products they recommend or on trades executed for their clients.
- Fee-Only: Many investment advisory firms are compensated based on the amount of assets under their management. These fees typically run from .75% to 1.5%, depending on the size of the account.
- Combination: Some advisors are affiliated with broker/dealers and may receive a combination of commissions and fees
Responsibility to Clients
Although most financial advisors are trustworthy, there are still differences in the standard of care that they must legally exercise with client accounts. Advisors governed by the Investment Advisers Act of 1940 (registered investment advisors) are “fiduciaries” by law. This means that they must put the client’s best interest above their own and provide the best advice possible. They must also disclose all fees and any conflicts of interest. In contrast, advisors governed by the Securities and Exchange Act of 1934 (most brokers and registered representatives) must only ensure that investment decisions are “suitable” for the investor. These two standards sound similar but can be quite different in actuality. An expensive investment product that pays a hefty commission might be “suitable” for an investor, in the eyes of a broker who earns the commission, but it might not be the “best choice” in the eyes of a registered investment advisor who has a fiduciary responsibility to provide the best advice.
The financial industry is one of the few where participants providing the same type of service can have such widely different backgrounds, skills, and qualifications. Industry regulators have been unable or unwilling to provide investors with clarity on the subject. It is up to investors to do their own research. By gaining an understanding of the major factors differentiating one “financial advisor” from the next, investors will be better equipped to make this important financial decision.
About the Author
Cheryl H. Duke has been managing investment portfolios for individuals and institutions for nearly 30 years. She currently serves as the Chief Investment Officer of Accredo Advisors, LLC. Cheryl and her business partners, Debbie Ayers and Jayne Holland, founded Accredo, as a 100% women-owned, registered investment advisor. Their decision to form their own firm began with the recognition that women have typically been underserved by the traditionally male-oriented strategies offered at most investment advisory firms. Cheryl and her partners understand that the financial needs of women are often different from those of men and may require customized solutions, not off-the-shelf products.
Prior to founding Accredo Advisors, Cheryl served as Chief Investment Officer at Eastover Capital Management, Charlotte, NC, Research Director at Lowe, Brockenbrough & Co., Richmond, VA, and Director of Equities at the Retirement Systems of Alabama. Cheryl is originally from Alabama and received her B.S. in Business Administration (finance major) and MBA from Auburn University, Montgomery, AL. She also holds the designation of Chartered Financial Analyst (CFA).
Cheryl resides in Charlotte, NC with her husband, dog and cat. She is the mother of twin boys, now aged 23. She enjoys reading and digital scrapbooking.