Financial Planning

Breaking Down The Term ‘Financial Advisor’

Managing your finances can be a hard thing to do on your own, especially when you add in complex topics like stock options, retirement planning, etc. This is why many people choose to hire a financial advisor; to make the complex feel simple.

So, you finally decide to hire an advisor. But then, you start your search and immediately feel overwhelmed again by all the different titles advisors can have. In our profession, the term ‘financial advisor’ is used very loosely, which honestly just leads to more confusion for everyone. To make your search a little less stressful, here’s a breakdown of some of the most common terms and titles you’ll find as you start your search for a financial advisor. 

Fiduciary vs Suitability 

Although the meanings of these two terms may sound similar, they are vastly different in the world of finance. A fiduciary is someone who under the SEC has a legal obligation to act in their clients best interest. The advisor has to put his/her needs behind that of the clients’. 

Now, suitability is where an advisor has to recommend a product or service that is considered merely suitable for the client. This means their recommendation does not necessarily have to be in the client’s best interest or even be the best option, it just has to benefit the client in some way. 

To further illustrate this, let’s say you are a runner and need new shoes, so you head on over to the local Nike store. You go up to the salesman and tell them exactly what you are looking for. The problem is the salesman is only going to come back with a type of Nike shoe since that is all they can sell, even if an Adidas shoe may be a better fit for you. This is the main difference between the suitability and fiduciary standard. A fiduciary would have to tell you the best shoe for you regardless of what brand while the salesmen with a suitability standard would just sell you the Nike shoe even though it may not be the best fit. 

Financial Advisor

A person that provides financial advice to clients for compensation. They help with a range of services related to finance such as: investment management, goal planning, tax planning, retirement planning, and many more. A financial advisor provides both guidance and advice which separates them from a stock broker.

Standard of care; Fiduciary or suitability

Financial Representative or Professional

This is a title that is most commonly used by sales people. The title refers to someone that can sell insurance products, mutual funds, annuities, etc and also can act as a financial advisor. They are typically paid only through commissions on the products their clients choose to implement. 

Standard of care; Suitability 

Fee-Based Financial Advisor

Fee-Based Advisors make money through fees they charge clients as well as through commissions on other products clients implement through them like a Financial Professional. In this relationship, advisors have an incentive to sell you products from their company as they will be compensated additionally from the sale.

Standard of care; Suitability and fiduciary  

Fee-Only Financial Advisor

Fee-Only financial advisors are registered investment advisors who typically engage in comprehensive financial planning. These advisors are only paid from the fee they charge clients, typically through a monthly subscription model or percentage of assets the advisor manages. They do not receive any compensation or commission from products resulting in them having less conflicts of interest. That does not mean they have no conflicts of interest though, they do have an incentive to gather more assets as that is the main way they are paid.

Standard of care; Fiduciary 

Certified Financial Planner (CFP)

A Certified Financial Planner is a financial advisor who has achieved a CFP certification which requires 3 years of work experience plus completion of extensive training and exams. CFP’s are administered and regulated by the CFP board and are required to act as a fiduciary regardless of whether they are fee-only, fee-based, etc. Due to their training, they typically do comprehensive financial planning and help figure out how all parts of your financial picture can work together to help you achieve your goals.

Standard of care; Fiduciary 

Other Designations

There are so many different types of advisors and designations that it is too much to add to this list. But here are some others titles you may see throughout your search:

  • Financial Consultant – Similar to Financial Advisor. They are not regulated nor does the title really specify who they work with.
  • Wealth Manager – Typically work with affluent clients and mostly manage investments.
  • Chartered Financial Analyst – The CFA designation focuses mostly on investments and portfolio design. Known to be one of the most difficult designations to get.

Unfortunately, the titles and compensation models don’t tell the whole story-there are good and bad advisors in each model. Do your research to understand the different types of advisors that exist and then just start interviewing them to find one that best fits your needs. There are going to be conflicts in all models, but what is important is that you are aware of them and find an advisor that you trust.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.