Hey everyone, welcome to the most insightful piece of the year.
This piece promises to help you distinguish clearly between who a Financial Advisor is and what an Investment Advisor career is all about.
In the end, you will be able to know which career best suits your personality and future ambitions.
Today, you will learn:
If you have always confused these two roles with each other, this article will help you do justice to it.
Introduction to Financial Advisor vs Investment Advisor
Many people ignorantly assume that a Financial Advisor is the same as an Investment Advisor.
There’s no doubt that they both offer financial advisory services to clients, but they’re still distinct.
The financial planning industry is vast.
You must carefully understudy it to properly understand the numerous career opportunities available to professionals in it.
The essence of this article is to shed light on what distinguishes a Financial Advisor from an Investment Adviser.
Who is a Financial Advisor?
“Financial Advisor” is the umbrella name given to any professional in the financial planning industry.
That is, whether you are a Fiduciary, Broker-dealer, Certified Financial Planner (CFP), or Investment Adviser, you are a Financial Advisor.
There are different ways Financial Advisors help clients meet their financial goals through:
- Estate planning
- Management of retirement accounts (IRAs)
- Investment management
- Risk management
- Budget planning for individuals and institutions
- Mutual funds
- Insurance management
In short, a Financial Advisor covers everything in the wealth management profession.
There is no better Financial Advisor definition than this.
Another word for Advisors is Stockbrokers (individuals and institutions that trade in securities).
Understanding the Meaning of Investment Advisor
An Investment Advisor is an individual or organization that gives investment advice to clients.
This Investment Advisor definition is apt and precise.
Investment Advisers help clients realize their financial goals through the analysis of investment securities.
The U.S. Securities and Exchange Commission (SEC) even made this concept clearer by stating that for an individual to be regarded as an investment adviser, s/he must engage in the business of offering financial advice or preparing reports on individual securities for compensation.
From the above definition, it means that an Investment Advisor is being paid for offering financial advice to individuals or organizations on their financial products.
Beyond individual securities, an Investment Advisor also advises his clients on market trends and asset allocation.
Bank Investment Consultants, Money Managers, and Financial Planners are all regarded as Investment Advisors.
However, all these individuals would not be allowed to practice by regulators until they become Registered Investment Advisors (RIAs).
But the SEC exempts some professionals such as Teachers, Lawyers, Engineers, and Accountants who may incidentally offer investment advice during their business practice.
Similarly, Stockbrokers can give “incidental” financial advice to clients without registering as investment professionals.
But they must not receive “special compensation” for such pieces of advice.
Financial Advisor vs Investment Advisor – The Difference
Apart from the SEC, the Financial Industry Regulatory Authority (FINRA) clearly states that an Investment Planner is different from a Financial Advisor.
“Financial Advisor” is a generic word that encapsulates all financial professionals.
A Financial Investment Advisor is an individual or organization that offers advice on financial products, analyzes, and prepares reports on investments.
But a Financial Advisor or Adviser is a typical Broker who trades in securities for themselves and their clients.
While an Investment Advisor is held to the fiduciary standard, a Financial Advisor is gauged by suitability standard.
While operating under the fiduciary, Investment Advisors must act in the interest of their clients, even if it goes against their interests.
It is in line with the provisions of the Investment Advisers Act 1940.
The fiduciary duty is strident because you have to think of others before defending your interest.
On the other hand, it is less demanding for Financial Advisors operating under the suitability standard.
They are only required to provide “suitable” recommendations to clients.
The recommendation does not have to be the best.
Once the Adviser or Advisor perceives that the idea is not bad for the client, he can sell it to them.
Here, if there are conflicts of interest, the Financial Advisor will think of himself first before considering the plights of his client.
There is no gainsaying that the fiduciary duty is more demanding; an investment professional must think thoroughly of an investment strategy that will fetch their client the highest yield, even if this is at their detriment.
An investment expert is under the regulations of the SEC and other state regulatory bodies.
However, the duo of SEC and FINRA control the activities of a financial advisor.
Before practicing as an Investment Advisor, you must pass the Uniform Investment Adviser Law Examination (Series 65).
But a Financial Advisor only needs to pass the Series 6 or Series 7 Exam.
With this detailed explanation, we hope that the debate on Investment Advisor vs Financial Advisor is now an issue of the past.
It is also crucial to add that investment personnel is different from insurance agents even though they also help clients manage their financial needs.
Insurance agents help to obtain property, health, and life insurance policies, including various forms of annuities.
The Core Duties of Investment Advisors
Investment Advisors render financial services to their clients.
They help individual clients design an investment portfolio that reflects the economic realities of the moment.
An ideal and experienced Adviser will help their client make the best investment selection, whether in estate planning, retirement planning, or management of personal finance.
Most RIAs prefer to interface directly with individual clients, but some professionals prefer to operate from behind the scene.
The latter group is adept in the management of clients’ investment portfolios.
The back-end Advisors also carry out in-depth research to understand market trends and write content-rich reports for the brokerage firms where they work.
They are Financial Analysts per excellence.
Their company relies on them for the latest fail-proof investment strategy.
An Advisor as a Person and an Institution
An Investment Advisor can either be an individual or a firm.
An Advisor as an individual is technically called an Investment Advisor Representative (IAR).
Hence, a professional who provides financial advice to clients is an IAR, while the organization they work for is the Investment Advisor.
You may want to ask: so, how do we refer to a sole proprietor?
Well, a sole proprietor serves as both an IAR and Advisor.
The firm would be registered with the SEC if it meets all the requirements, and the business owner will register with their state authorities.
Not every state gives license to IARs, but most employers make it a prerequisite for employment.
How to Become a Registered Investment Advisor
How to be an Investment Advisor in the US is different from many other countries.
Before you can become an RIA, you must meet some specific requirements:
Licensing and qualifications
First, wealth managers must succeed at the Uniform Investment Adviser Law Exam (Series 65) before becoming Registered Investment Advisors.
FINRA, a highly disciplined, high-standard, self-regulating private firm, administers the examination.
Series 65 is a three-hour examination where candidates are to answer 140 multiple choice questions and correctly attempt a minimum of 94 out of the 130-scored questions to pass.
Ordinarily, a candidate doesn’t require any further designation or licensure to become a Registered Advisor.
But in reality, most Advisors can’t secure meaningful business deals without further qualifications such as the CFA or CFP designation.
Many states waive the Series 65 exam for advisors with an impressive performance in any of the under-listed designations:
- Certified Financial Planner (CFP)
- Certified Public Accountant (CPA)
- Chartered Financial Consultant (ChFC)
- Personal Financial Specialist (PFS)
- Chartered Investment Counselor (CIC)
- Chartered Financial Analyst (CFA)
Of all the designations mentioned above, the CFP, CPA, and CFA remain the most popular professional designations in the industry.
The CFP Board acts in the public interest by ensuring that professionals who earn its designation are worthy in character and learning.
Before an applicant can be certified, s/he must meet the standards set by the CFP Board.
Federal and state registration requirements
If asset or investment management is one of the services you want to offer, the next step is to register with the SEC or the local authorities of the state where you intend to practice.
Eligibility for SEC registration
According to the Dodd-Frank Act 2010, the under-listed requirements must be met for an RIA to register with the SEC:
- Money managers with Assets Under Management (AUM) below $25 million are barred from registering with SEC.
- Save for registration exemption, an Advisor with AUM ranging from $25 million to $100 million with its head office and place of business at Wyoming or New York is to register with the SEC.
- However, a mid-sized Advisor not in either of the two states is not required to register with the SEC but rather in their local state authorities.
- In a state where a mid-sized Advisor does not require registration, they need to register with the SEC.
- Some Advisers to private funds may be excluded from such registration.
- An Advisor with assets under management within the range of $100 million may seize the opportunity of registration “buffers” offered by the SEC.
- An Advisor is obligated to register with the SEC when its assets under management reach the $110 million milestones.
- Unless its AUM falls below $90 million, advisers registered with the SEC should not withdraw their registration.
- Regardless of its AUM, an advisor to an investment company must register with the SEC.
- Apart from filing a notice of registration, an SEC-registered firm does not require state registration.
- They should only inform each state where they have a business presence of their registration with the Commission.
- For most states, a firm with less than five clients and without a business place does not need to file a registration notice.
The importance of the Form ADV
After registering with the SEC, an Advisor will open an account with the Investment Adviser Registration Depository (IARD).
Upon opening the account, FINRA will give the applicant their account ID information and CRD number.
Then, the Advisor will file the U4 forms and Form ADV with the SEC or their state, as the case may be.
The Form ADV is important because it is the government official application document for RIA applicants.
An applicant will complete all the sections but submit just the first section to the government for approval.
The second section is the disclosure document to be distributed to every client.
The section contains all the financial products offered by the firm or individual.
It contains the organization’s code of ethics, fee structure, advisor’s educational background, financial situation, possible points of disagreement, and business associates.
The Investment Advisers Act 1940 requires an Adviser to disclose all the pieces of information to investors.
The Act frowns at companies doing anything in secrecy; everything must be laid bare before investors.
Thus, upon completion, the application must be submitted into the IARD electronically and shared with both existing and prospective clients.
The SEC must give feedback on the status of the application within 45 days of its submission.
Most times, what causes a delay in approval is due to incomplete information or the need for more clarifications.
In addition, all SEC-registered firms are to draft a detailed compliance program covering every aspect of the business.
After the approval of the application, an Advisor is then allowed to work as an RIA.
However, they are to file a yearly amendment to Schedule 1 of the Form ADV.
The process is to ensure that their business information is up to date.
Though the SEC does not have a financial benchmark for applicants, the Commission critically x-rays the Advisor’s financial situation at the point of application.
In most states, for an applicant’s submission to be favorably considered, they must have a minimum net worth of $35,000 if they are in the custody of client money and, if not, $10,000.
Advisors who do not meet this requirement are to post a surety bond.
It is crucial to add that this rule is different from one state to the other.
Again, be reminded that Financial Advisor is the umbrella name for every professional in the industry.
However, an Investment Advisor is a fraction of a Financial Advisor.
The latter has more specific and demanding requirements to qualify as one.
An investment expert specifically performs a fiduciary duty to their clients, but a Financial Adviser renders a “general service” to clients.
Bound by fiduciary standards, an RIA is to prioritize the interests of his clients at all times.
Meanwhile, a Financial Advisor operates under a suitable standard.
In other words, they recommend something just “suitable” for the client, even when it is not the best option then.
We believe you now have first-hand knowledge of the difference between these two finance Professionals, let’s answer some questions you might have.