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Many investors are confused by who’s who, much less knowing who’s in whose corner. By J Thomas Knight, CFP®, CPA

Advisors, Brokers, Commissions, Designations, etc., can confound many an investor.  There is an abundance of “advisors” and even more “designations” proclaiming or touting some level of expertise.  As you wade into the alphabet soup of the financial world, how will you know who’s who, who’s got your best interest in mind, and how they get paid?  It is vital that you understand the distinctions between the various investment professionals, their compensation structures, and their expertise.

Let’s see if we can help turn this murky soup into a pool of clarity.

No matter how innovative a title they hold, or how many letters follow their name, a financial professional will fall into one of three categories:

  1. Agent
  2. Broker
  3. Advisor

Let’s take these one at a time.

Agent, we know an agent as someone that acts or works on the behalf of another.  Sounds simple enough, until you ask questions like: “Whose agent are they? Are they captive or independent?” They may tell you that they are “your” agent, but the fact remains they are employed by an insurance company.  Most agents sell Home, Auto, Life, Health, Disability, Long-Term Care, etc.  As an agent of an insurance company, they are compensated to represent the insurance company’s interests.  Captive agents represent one company, while independent agents represent multiple companies. Insurance Brokers (not to be confused with Brokers listed below), like independent agents, also represent multiple insurance companies. What’s the difference between an insurance agent and an insurance broker?  Brokers work for themselves and ideally for you; agents work for the insurance company.  Brokers typically cannot lock-in or bind insurance coverage, while agents usually have that authority.

Even though they have been bestowed the title of Insurance “Agent” or “Broker” this does not translate into investment or insurance product proficiency.  Also, agents and brokers are both on the sell side of the buy/sell arrangement and compensated through commissions based on product sold.  Commissions naturally create a conflict of interest.  The agent’s, the broker’s, and the insurance company’s interests are in direct conflict with your interests.  These conflicts could prove problematic for investors when it comes to receiving unbiased advice over a commissioned insurance product.

Brokers also known as Registered Representatives are paid to distribute investment products.  Brokerage, Fund, and Insurance companies pay Brokers to sell their financial products such as stocks, bonds, ETFs, mutual funds, and annuities.  Brokers are on the sell side of the buy/sell equation, which means they are being paid by someone to sell something.  Like Agents, most Brokers are compensated by commissions based on products sold.  Whose interests are on the table?  They are your, the broker’s, and the investment company’s interests.  Both the Broker’s and the investment company’s interests are in direct conflict with the investor’s (your) interests.  Brokers do not work for you.  Once again, these conflicts could prove problematic for investors when it comes to receiving unbiased investment advice over a commissioned investment product.

Advisors, we know that an advisor is someone who provides advice to another on the premise they have their best interest at heart.  Unfortunately, “Advisor” is a generic term and used by a variety of financial service individuals.  It seems that everyone refers to themselves as some sort of an “Advisor”.  When sitting across from someone identifying themselves as any kind of an “Advisor”, ask them to clarify their title.  They may even give you a creative business card where they call themselves a Financial Representative, Financial Advisor, Financial Agent, or some other concoction.  The bottom line is a majority of “advisors” are just brokers (see above).  A true advisor has your best interest in mind and is not influenced by commissions.  In the financial world, that true advisor is a Registered Investment Advisor (RIA).  An RIA is a company; yes, a company, not a person.  The person who provides the investment advice on behalf of the RIA is an Investment Advisor Representative (IAR).  An IAR (person) is an employee of the RIA (company).  The acronym, IAR, represents a position or a title, such as Vice President or Associate.  The acronyms, RIA and IAR, may appear as credentials, but neither should be viewed as such.  Registered means the company and the individual have registered with the Securities Exchange Commission (SEC) or with the State as an Investment Advisor and have met certain SEC or State criteria.  This does not mean the SEC or the State has endorsed the Advisor and it also does not indicate that the Advisor has achieved a proficient level of knowledge or skill.  What RIAs have achieved is a legal obligation to place client interests above their own interests; this is known as a “fiduciary duty.”  Agents and Brokers are NOT bound by fiduciary duty.  Therefore, when an investor works with an RIA, both interests are legally required to be aligned rather than in conflict.  Clients hire RIAs specifically for investment advice, which can be given in a variety of forms such as insurance recommendations, financial planning, tax planning, investment management, etc.  No matter the form of advice, unlike agents and brokers, the RIA works for the client and only the client.  Rather than commissions, which create conflicts of interest, the RIA charges a fee for advice (usually hourly or a management fee).  RIAs want long term relationships with the clients, so it is in the RIA’s best interest to provide advice that is in the client’s best interest.  Both interests are naturally and legally aligned.

IMPORTANT: A financial professional can be an RIA (IAR), a licensed broker, and a licensed insurance agent all simultaneously. Does being multi-licensed taint the RIA’s fiduciary duty? With commissions come conflicts whether the advisor is an RIA or not. If an investor is a client of the RIA who is also selling a commissioned investment or insurance product, hopefully the RIA will retain their fiduciary responsibility even with commissioned products. But there is no legal obligation.

Those are the main players of the Advisor world…but how do you know who knows their stuff?  Which advisor has the right education and experience for you? Perhaps certificates or designations can lead the way?

There are many excellent financial advisors that do not have even one certificate; however, credit should be given to investment professionals who earn credentials because many designations require hours of study plus high ethical and professional standards. Credentials are favorable, but they are not as vital as the level of comfort and trust you have for the Advisor.

Even with a comfortable level of trust in your Financial Advisor, it is wise to understand some of the financial industry’s certificates.  Many designations, sadly, are nothing much more than a “pay for paper” type of certificate; therefore, we have listed, in our opinion, ONLY THE MOST NOTABLE and REPUTABLE DESIGNATIONS in alphabetical order.  No matter the designation an Advisor may have, they are still an Agent, Broker, or Advisor. If a designation is not listed below, it most likely does not require effort much to obtain; so, research it to understand whether the designation has value or not.

  • CFA – Chartered Financial Analyst. This certification is offered through the CFA Institute. CFA holders make great investment analysts, but tend to work in the area of institutional money management or stock analysis, rather than financial planning. The program requires they demonstrate their competence, integrity and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and security analysis. These professionals provide research and ratings on various forms of investments.
  • CFP® – Certified Financial Planner™. This certification is administered by the Certified Financial Planning Board of Standards. The CFP® certification identifies to the public that those individuals who have been authorized to use the CFP® certification marks in the U.S. have met rigorous professional standards and have agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence when dealing with clients. This designation strives to address the client’s entire financial spectrum – insurance, investments, taxes and planning.
  • CFS – Certified Fund Specialist®. This designation is offered by the Institute of Business & Finance and is designed to demonstrate expertise in mutual funds and the mutual fund industry. The study is on advanced topics in fund analysis and selection, asset allocation, and portfolio construction. This certification is focused on and limited to mutual funds.
  • ChFC® – Chartered Financial Consultant®. This program is offered through The American College. It focuses on the advanced financial planning needs of individuals, professionals, and small business owners with an in-depth coverage of key financial planning disciplines, including insurance, income taxation, retirement planning, investments and estate planning.
  • CLTC – Certified in Long Term Care. The CLTC designation, which is owned by the CLTC Board of Standards, Inc., is not affiliated with or funded by any insurance sales or marketing organization. The focus is in the field of long-term care planning and provides professionals with the tools necessary to address Long-Term Care issues with their clients.
  • CLU® – Chartered Life Underwriter®. Courses are offered through The American College. This course of study provides in-depth knowledge on the insurance needs of individuals, business owners and professional clients. It is more sales based than technical.
  • CPA – Certified Public Accountant. Certification and licensure is administered by each State through their Board of Public Accountancy. While it is true that CPAs have passed extensive examinations on accounting, tax law, and tax preparation; it is also true that they have limited training in other areas of finance such as investments and insurance.
  • LUTCF – Life Underwriter Training Council Fellow. The American College and the National Association of Insurance and Financial Advisors (NAIFA) jointly confer the LUTCF designation. The program focuses on life insurance sales training by combining essential product knowledge with basic planning concepts.

We trust we have made understanding the ABCDs of investment professionals almost as easy as 123.
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