Photo by sunan wongsa-nga on Vecteezy

• Share

PRINT

Registered adviser, fiduciary, independent adviser, investment adviser representative, RIA, licensed, designated, unbiased — what do all these terms mean? As an investor seeking an adviser, it can certainly be confounding.

The many different types of licenses, designations, financial industry jargon and affiliation options are a lot for anyone to digest. Twenty-two years of helping people understand it all has led me to a simple list of questions to help you decide if an adviser is right for you. Here it is:

—Do you know them? (Where they introduced through a trusted friend, family member or other adviser?)

—Do you like them?

—Are they patient with you?

—Is s/he a certified financial planner (CFP)?

—Does s/he have at least 10 years of experience?

A yes to each of these five questions will likely lead to a long-term successful relationship. It can be that simple.

For those seeking deeper knowledge and insight, here is more information about different financial professionals’ various levels of education and training — and the level of their legal duty to you.

1.  Registered Rep, IAR or both

A representative who is registered with the Financial Industry Regulatory Authority (FINRA) brokers investments (that is, arranges for their purchase on your behalf) and is associated with a broker-dealer (a firm).

The acronym for a registered investment advisor is RIA. These brokers generally earn commissions on investments you buy through them, which may include an A share or C share mutual fund, variable annuity, 1031 exchange product, non-traded real estate investment trust (REIT), variable life insurance policy, oil and gas partnership and real estate limited partnership.

The advice RIA advisers give must meet the “suitability standard,” meaning the investment must be suitable for the investor, but not necessarily the best (or least costly) choice for them.

In contrast, an investment adviser representative (IAR) generally works for a flat fee for planning and advice, or for a percentage of total assets under management. There is no commission involved, and the IAR works as a fiduciary, meaning the adviser has an ethical duty to recommend the best investments for you.

An IAR can also be a registered investment adviser who maintains a license with a FINRA registered broker-dealer. Or an IAR can be a stand-alone adviser who does not have a FINRA registration and therefore does not have a FINRA license (see explanation 2 below).

2.  Series 6 & Series 7

Now that we know to ask if an adviser is FINRA licensed and whether s/he is an IAR for a broker-dealer’s RIA or stand-alone, it’s time to evaluate an adviser’s FINRA license, if applicable. This is public information and can found by entering his/her name on the Broker Check site: brokercheck.finra.org.

Two common licenses obtained to implement investment solutions are the Series 6 and Series 7. If an adviser has his/her Series 6 license, they can deal with variable investments (investments tied to the stock markets) but are limited to mutual funds and sub accounts inside variable insurance products.

A Series 7 licensed professional registered with a broker-dealer will be able to offer a substantially wider scope of investments, including individual stocks and bonds, exchange-traded funds (ETFs), private placements, non-traded REITs, and stock options. The suitability standard applies to those operating under both the Series 6 and Series 7 license.

3.  Series 65

What licensure is required by investment advisers (IARs)? Unlike the Series 7 and the Series 6 license holders, an individual does not need to be “sponsored” by a broker-dealer to take the required exam for Series 65.

The Series 65 exam was designed by the North American Securities Administrators Association (NASAA) and is administered by FINRA. This exam and license are required of anyone intending to provide financial or investment advice on a non-commission basis. Those advisers passing the Series 65 exam operate under the fiduciary standard.

4.  Certified Financial Planner

Let’s talk financial planning. Where does a certified financial planner professional fit in with all this licensure info?

In the realm of comprehensive advice and working across disciplines, the certified financial planner designation is commonly held in the highest regard among industry professionals.

Becoming a CFP certificant is one of the most stringent processes and one of the most difficult designations to obtain in terms of the financial advice industry. It requires years of experience, successful completion of standardized exams, a demonstration of ethics, a formal education and ongoing continuing education.

A CFP professional active in the practice of charging clients for advice will at least have his/her Series 65 and operate as a fiduciary.

5.  Compliance considerations

There have been steps taken to curb bias and unsuitable recommendations from FINRA registered representatives. One sweeping legislation was Reg BI, which can be read about on FINRA’s website. These stringent regulations have influenced many advisers to drop their Series 7 license and work only as an IAR through an independent RIA.

It is arguable that there is less oversight of RIAs by the SEC or the states, and therefore there are fewer compliance eyes on the recommendations and solutions being offered.

While IARs still want to bring advanced solutions to their clients that have traditionally been vetted by a significant due diligence team at a FINRA registered broker dealer, smaller RIAs may not have the financial capacity or legal experience to vet investment offerings as thoroughly.

Be certain to inquire about the legal and due diligence process involved in vetting any specific investment, especially those that aren’t open to everyone in the investing community.

Hiring a professional with the intention that he/she and their team eventually earn the role of your trusted adviser is an important decision. Whether you take the profoundly simple list of questions to ask yourself and the potential suitor or take a much deeper approach, having some knowledge will be helpful and should add value in assisting with your decision.

Jeremy DiTullio is a registered representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor.

 © 2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.