4 Simple Steps to Help You Understand What a "Financial Adviser/Planner" Really Is

Last year, I wrote a blog post to help people figure out whether you need to get some professional help on your finances and if so who you need. A couple of readers asked me afterward:  What's the easiest way to identify the real "Financial Advisors/Planners" without contacting them directly? This week I will show you four simple steps to help you understand what a so-called "Financial Adviser/Planner" really is.

Step 1. Figure out whether he/she is a broker, an investment adviser or both.

Go to Financial Industry Regulatory Authority (FINRA)'s Broker Check and search for the advisor by name.

If you find a "B" mark under his/her profile, it means that he/she is a broker who works for a broker-dealer and is technically known as a registered representative.

According to FINRA, a broker-dealer is a person or company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers (as the broker), for its own account (as the dealer), or both.

In other words, a broker is a security salesperson who only sells the products from or approved by the company he/she represents. The products he/she can sell also depend on the specific licenses he/she has.

If you find an "IA" mark under his/her profile, it means that he/she is an investment adviser who works for a Registered Investment Advisor (RIA) and is technically known as an Investment Advisor Representative (IAR).

According to Securities and Exchange Commission (SEC), an investment adviser is an individual or a firm that is in the business of advising on securities to clients. For instance, individuals or firms that receive compensation for giving advice on investing in stocks, bonds, mutual funds, or exchange-traded funds are investment advisers. Some investment advisers manage portfolios of securities.

It is also very common to see people who are both a broker and an investment adviser. That person is often called a hybrid adviser. It means that he/she wears two hats and can decide which one to wear based on what's the best for you or sometimes what's the best for him/her.

Step 2. Figure out whether he/she is an insurance agent.

Go to your state's Department of Insurance website and check the advisor's insurance license status. Here is the one for California.

Make sure you input the full legal name of the person you want to check. The system is not as robust as FINRA's Broker Check.

The insurance industry is regulated by each state individually. There is no easy way to check an agent's insurance license across the country. Since our goal here is simply to check whether the person is an insurance agent or not, you only need to check the state where you reside.  Or if you see an insurance license number listed on this advisor's website or business card, you could assume he/she is an insurance agent.

Please be aware of that an insurance agent cannot give any securities-related product recommendations or advice without being properly licensed as a broker or an investment adviser at the same time.

Step 3. Figure out how he/she gets paid and whether he/she is required to put your interests above his/her own.

Just like a salesperson in a car dealership, brokers and insurance agents get compensated through commissions from the products they sold. They are subject to a lower level of standard of care, which is called the Suitability Standard, to their clients. Basically, they can sell you anything they think it is suitable for you based on your situation, regardless of finding the best solution for you and disclosing all the conflict of interests.  In the end, brokers and a lot of insurance agents who employed by a specific company owe their loyalty to their employers, not to you.

On the other hand, investment advisers get compensated directly from you through either a fixed fee or a percentage of the assets they manage for you. They are bound to a much higher level of standard of care to you which is called the Fiduciary Standard. It requires investment advisers to always act in the best interest of their clients and disclose any existing and potential conflict of interests. For example, a mutual fund usually has different share classes with the same investment holdings but different fees and expenses. If a broker and an investment adviser recommend a same mutual fund to you, a broker can recommend a share class with the highest cost to you but the most benefit to him/her without telling you anything about the cheaper options. But an investment adviser can only recommend you the one with the lowest fees and expenses among all the share classes available to you.

For hybrid advisers who have two or even three hats, it is very difficult to tell which hat they are wearing at any time. Similar to pure brokers and insurance agents, the recommendations you receive from a hybrid adviser are more likely to be influenced by how much he/she gets paid compare to a Fee-Only adviser which I will talk about below.

Honestly, I don't think getting paid by commissions is evil per say. I know many great Not Fee-Only advisers who always put their interest below their clients' and do great jobs to serve their clients.  However, from the client perspective, unless you know an adviser really well or at least get referred by someone you truly trust, I do believe that starting with a Fee-Only adviser could increase your probability of finding a good adviser in the first place. The National Association of Personal Financial Advisors (NAPFA), XY Planning Network,  and Garrett Planning Network are three major membership associations who only accept Fee-Only advisers.

Step 4. Figure out what his/her professional designations mean to you.

The most common professional destinations in this industry are Certified Financial Planner®(CFP®), Chartered Financial Analyst (CFA®), and Certified Public Accountant (CPA). These designations do not exempt people from being registered as a broker, an investment adviser, and an insurance agent. They represent a certain level of knowledge and experience a professional has in certain areas. You could learn more about these and some other major financial certifications here from Investopedia.

Don't get me wrong here. An adviser can be a great one without any of the designations. But just like starting with a Fee-Only adviser, it may increase the probability of finding the right adviser based on your specific needs by understanding the different designations and trying to find the person who has relevant knowledge and experience. For example, you probably want to talk to a CFP® professional to be the quarterback of your financial plan, ask a CFA® charter holder to help you manage your portfolios, and consult with a Certified Public Accountant (CPA) on your taxes. On the other hand, you probably should not go to a Certified Public Accountant (CPA) for investment advice, especially if he/she is not properly licensed.


These four simple steps should at least tell you what a so-called "Financial Adviser/Planner" really is, a broker, an investment adviser, an insurance agent or any combination of those. Of course, you should be able to find more about his/her background, story, what type of people he/she usually works with, what services he/she provides, how much he/she charges, etc. from his/her website. I love transparency. If you could not find most of the information there, I recommend you just move on, find a different one, and go through the same process again. Once you decide to contact him/her, there are a couple of more questions you should ask if you haven't figured out yet which I covered in my first blog post here in details.


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