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We are a fiduciary firm!

(818) 887-6443

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20335 Ventura Boulevard, Suite 125

Woodland Hills, CA 91364

Financial Planner or Sales Rep?

Have you ever questioned the qualifications of your financial planner or advisor? Are they properly licensed and certified? What may initially seem like silly questions become quite important when you realize that an extremely high percentage of all so-called financial advisors are neither licensed to give financial advice nor certified to do so. How do you find out the truth about your advisor? The following paragraphs will give you some insight on what questions to ask.

Let’s start by discussing the difference between a “financial planner” and a “financial advisor.” Are you thinking that they are synonymous? If so, you are among the majority. However, the difference may potentially be critical to your financial future.

While almost anyone can call themselves a “financial advisor” with no certification requirements, you must be licensed as a Registered Investment Advisor (RIA) in order to legally promote yourself as a “financial planner,” at least in California. As a result, there are many investment sales people, such as insurance agents and stockbrokers, who call themselves “financial advisors” when they are neither licensed nor certified to provide comprehensive financial advice.

The first question that must be answered is who your broker or advisor works for. Just because they work for a large firm doesn’t mean that they are licensed to give financial planning advice. It’s important to realize that the large brokerage firms primarily sell stocks as their main product. They may have access to other investments, but in the end, there is a reason stockbrokers are called stockbrokers.

In recent times, however, because of the volatility of the stock market and the recent Wall Street scandals still fresh on our minds, many stockbrokers have begun referring to themselves simply as “brokers” or as “financial advisors.” But make no mistake about it, their primary job is to sell stock.

Additionally, some financial advisors work for a firm that is “captive,” such as New York Life or Banker’s Life, which means they can only sell the products offered by the company they represent. While this fact is often obscure to the consumer who thinks they are receiving unbiased advice, the client often has a significant disadvantage since the salesperson has a limited range of products they can sell.

This same scenario also holds true with brokers or advisors who work with large firms even if they’re not “captive.” Although they are able to offer many more investment products than their captive competitors, in many cases, their firms still limit the investments they are allowed to sell, often because of political or financial motivations. This potentially limits the investments that are available to yousimply because the firm doesn’t sell them. However, you can be sure that your broker will attempt to sell you the products that his firm allows him to offer even though they may not be in your best interest.

Think about it this way: if you walk into a Porsche dealership looking for a Toyota, can you blame the sales person for trying to sell you a Porsche since it’s the only product available to him? You can’t blame him for trying, right? The challenge is that, in the world of investments, it works in a very similar manner. The difference is that it’s not nearly as transparent to the consumer since they aren’t even aware of the limitations of these salespeople.

In addition to firms not allowing their advisors to sell certain products, there are licensing issues that become a factor, so you should know how your advisor is licensed. Not every advisor at each firm is licensed in the same manner. Yet, the license they hold determines the advice and investments they can offer you.

For example, there are many salespeople who have begun only selling fixed annuities under the guise of being safe money experts. When the typical consumer attends a seminar or meeting with such an individual who is often just an insurance agent, they are often led to believe they are getting impartial advice and recommendations based on the entire universe of conservative investments, when the reality is that the only product the person sells is annuities. Therefore, if an annuity is not appropriate for someone, there is nothing else this salesperson can offer.

Another potential conflict is in the securities industry where the two most common licenses are Series 6 and Series 7. If an advisor is licensed as Series 6, they can only sell you packaged investments such as mutual funds. If an advisor is licensed as Series 7, the more comprehensive license, in addition selling you packaged investments, they can also sell individual stocks or bonds which a Series 6 cannot legally sell. Therefore, when you choose an advisor at a brokerage firm, wouldn’t you think it’s important to know whether that advisor is licensed to sell all of the products that the firm offers or whether they are limited? The challenge is that most consumers don’t even know these issues exist and therefore can’t ask the appropriate questions.

The final aspect that should be considered has to do with the level of responsibility that advisors have towards their clients. If an advisor is only licensed as Series 6 or 7, the standard that they are judged by is what is referred to in the industry as a “suitability standard.” This standard indicates that if there are ten investments that are all suitable for you, the advisor can select which one to sell you since they are all suitable.

However, a Registered Investment Advisor, who maintains a Series 65 license, must adhere to a “fiduciary standard.” This standard dictates that although there may be ten investments that are suitable for you, the advisor must select the best one and not simply the one they want. Obviously, the fiduciary standard is much higher, but again, the general public is not aware of these potentially huge differences in the industry.

Lastly, we should briefly discuss the difference in compensation between the various categories of advisors. For starters, as we mentioned earlier, just because an advisor is licensed to sell certain types of investments, it doesn’t mean they can legally provide financial planning advice. It takes a Series 65 or 66 license to do that.

The type of license a broker has determines how they get compensated. For example, a Series 6 or 7 can only be paid via the commissions that are built into the purchase of the product they are recommending. Therefore, if there are ten investments that pay different amounts of commission, the investment that pays the most commission may be the one that gets the advisor’s approval.

This does not imply that it is wrong or improper for the broker to make such a recommendation. Nor does it imply that most brokers wouldn’t choose a particular investment that stands out over the others just because it pays less commission. There are many brokers who are honest and ethical and who have hundreds of loyal clients because they are fantastic at what they do. Still, it is important for the average investor to understand how these licensing and payout structures may play a role in the advice they receive.

On the other hand, a Registered Investment Advisor cannot get paid a commission for the sale of a product, but can only charge a fee or percentage of the assets he is working with. Therefore, if there are ten investments the advisor can choose for a client, since none of these products pay a commission to the advisor, there is no conflict of interest and no financial motivation to select one over the other. And since the product company doesn’t have to pay a commission to the RIA, the fees to the consumer are often reduced or even eliminated in some cases.

This article has not been written to prove that any one method or license type is better than another nor to shine a negative light on brokers. There are many excellent brokers who are great at what they do and the securities industry could not exist without them. But it is important to understand the various licensing issues and certification status that come into play. I trust that you now have a better understanding about how the industry functions.

For those of you who may be wondering about Providence Financial or the licensing/certifications that I, Anthony A. Saccaro, maintain, I am a Registered Investment Advisor and life/health insurance agent. This means I am allowed to provide financial planning advice and charge a fee for that advice. It also means I am capable of offering nearly all of the investment types that are regulated by the SEC (Securities Exchange Commission). As a RIA, I am not allowed to get paid a commission for the securities that I offer as I am only licensed to charge a fee.

Lastly, I maintain the Chartered Financial Consultant (ChFC) designation from the American College for Financial Planning in Bryn Mawr, Pennsylvania. This is one of the industry’s most advanced financial planning designations that takes years of education to qualify for and is considered to be among the best in the industry if not the best. For more information about me or Providence Financial, check out our About page.

 

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