Financial adviser
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory body in order to provide advice.
Relationships between clients and financial advisors can be characterized by principal-agent problems, as financial advisors may possess information and conflicts of interest that lead to dishonest advice and misconduct.
Role
Financial advisers typically provide financial products and services, depending on the qualification examinations they hold and the training they have. Financial advisers are registered, not licensed. For example, a licensed insurance agent may be qualified to sell both life insurance and variable annuities, because the insurance agent holds an insurance license and holds the Series 7 qualification examination. A broker may also be a financial planner. Any advisor can say they are a financial planner; they do not have to hold the CFP designation to do so. A financial adviser may create financial plans for clients or sell financial products, or a combination of both. They may also provide insight on savings.Compensation
A financial adviser is generally compensated through fees, commissions, or a combination of both. For example, a financial adviser may be compensated in one or more of the following ways:- An hourly fee for advisory services
- A flat fee, such as $3,500 per year, for an annual portfolio review or $5,000 for a financial plan. This is often referred to as "flat fee advisors"
- A commission on the securities bought or sold, such as $12 per trade
- A commission based on the amount invested in a mutual fund or variable annuity
- A "mark-up": when one buys "house" products, or a "mark-down" when they are sold
- A fee for assets under management, such as 1% annually of assets managed
Advisor vs. adviser
Regulation
United States
Advisors typically fall into two separate categories: broker-dealers who typically earn a commission from sales and registered investment advisers who typically charge a fee based upon assets under management while serving as fiduciaries and are registered at the state or federal level. Additionally, an advisor can be either affiliated with a large firm or be independent. There are also "hybrid RIAs" who are both broker-dealers and registered.The number of independent broker-dealer firms has declined from 1175 in 2007 to 819 in 2018, while RIA firms have grown from 9,538 to 15,645 over the same time period. As of 2016, the largest IBD firm by revenue was LPL Financial followed by Ameriprise Financial and Raymond James Financial. Edward Jones is another large broker-dealer, and in 2017 stopped selling commission-based funds in response to a best interest fiduciary rule by the Department of Labor. As of 2019, Merrill Lynch had not adopted an RIA model while Wells Fargo and Goldman Sachs had opened up to the business model. As of 2019, the largest fee-only RIA firm was Edelman Financial Engines with over $200 billion in assets under management, under the ownership of private equity firm Hellman & Friedman. Other large fee-only RIA firms include Fisher Investments, which has over $120 billion in assets under management. As of 2019, 80% of the $4 trillion managed by RIAs were on one of four platforms: Fidelity Investments, Schwab, and Pershing LLC. Some RIAs operate inside "RIA aggregators" which provide institutional support similar to a wirehouse.
In the United States, the Financial Industry Regulatory Authority regulates and oversees the activities of brokerage firms, and their registered representatives. The Securities and Exchange Commission regulates investment advisers and their investment adviser representatives. Insurance companies, insurance agencies and insurance producers are regulated by state authorities. Investment Advisers may be registered with state regulatory agencies, the Securities and Exchange Commission, or pursuant to certain exemptions, remain unregistered.
In the United States, a financial adviser carries a Series 7 and Series 66 or Series 65 qualification examination. According to the U.S. Financial Industry Regulatory Authority, qualification designations and compliance issues must be reported for public view. Details of formal compliance issues can be found on the Investment Adviser Public Disclosure website and details of non-formal issues can be found on . FINRA specifies the following groups of "investment professionals" who do not necessarily or always represent a "financial adviser:" brokers, investment advisers, private bankers, accountants, lawyers, insurance agents and financial planners. Financial advisors need to be able to take the full picture of the client's financial situation into account.
Fiduciary standard
The anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on Investment Advisors to act as fiduciaries in dealings with their clients. This means the adviser must hold the client's interest above its own in all matters. The SEC has said that an adviser has a duty to:- Make reasonable investment recommendations independent of outside influences
- Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
- Make recommendations based on a reasonable inquiry into a client's investment objectives, financial situation, and other factors
- Always place client interests ahead of its own.
In June 2016, as a way to address adviser conflicts of interest, the DOL ruled in a redefinition of what constitutes financial advice, and who is considered a fiduciary. Prior to 2016, fiduciary standards only applied to Registered Investment Advisers, and did not impact brokers, who previously operated under a less strict "suitability" standard that provided leeway to provide education without "advice". The new ruling requires all financial advisers who offer advice for compensation to act as fiduciaries and meet the fiduciary standard, but only when dealing with retirement accounts such as IRA or 401 accounts. The ruling includes one exemption for brokers, Best Interest Contract Exemption, which can be allowed if the broker enters into a contract with the plan participant and meets certain behavioral requirements. The new ruling does not impact the advice or investment product sales pertaining to non-retirement accounts.
Opposition to the fiduciary standard maintains that the higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers. Other criticisms suggest that consumers with smaller retirement accounts may be less able to access personalized advice due to advisor/broker compensation models, many of which have been restructured to comply with the fiduciary rule.
The decision has caused a massive shift in the financial community. One survey found that 73% of advisors were concerned the rule would have an adverse impact on how they do business, 71% anticipated increased client frustration, and 66% planned to reevaluate the products they recommend.
Enforcement of the rule began on 9 June 2017 but is no longer enforced since the DOL fiduciary rule was officially vacated on 21 June 2018 by the U.S. Fifth Circuit Court of Appeals. On 5 June 2019, the SEC adopted Regulation Best Interest, establishing a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers, with compliance due to begin 30 June 2020.
In July 2020, the DOL proposed a new fiduciary rule, and made two changes to guidance and regulation.
Registration
A Registered Investment Adviser refers to an IA that is registered with the SEC or a state's securities agency and typically provides investment advice to a retail investor or registered investment company such as a mutual fund, or exchange-traded fund. Registered Investment Advisors are regulated by either the SEC or by the individual states, depending on the amount of assets under management.Canada
The financial adviser role in Canada is varied. Most financial advisers carry licenses to sell life insurance, securities, or mutual funds, or some combination of all three. The life insurance license is obtained through successful completion of the life license qualification program, except in Quebec, where licensing is completed through the Autorité des marchés financiers. There are three distinct securities licenses available. Completion of the Canadian Securities Course allows the sale of most types of securities, including stocks, bonds, and mutual funds. More advanced licensing is required for the sale of derivatives and commodities. Completion of a mutual funds course allows the adviser to sell mutual funds only, excluding certain types of very specialized funds and importantly, exchange-traded funds —although recently non-securities licensed financial advisers have gained access to ETFs through new mutual fund products. The third possible license is the exempt securities license.In many, but not all, cases, licensing requires the support of a dealer or insurer. It is also mandatory for advisers to carry errors and omissions insurance. The term financial adviser can refer to the entire spectrum of advisers. In general, the industry in Canada is segmented into three channels of advisers: MGA, MFDA and IIROC. However, there is little regulatory control exercised over use of the term, and, as such, many insurance brokers, insurance agents, securities brokers, financial planners and others identify themselves as financial advisers.
Many financial advisers in Canada are also financial planners. While there are numerous financial planning designations, the most common is the Certified Financial Planner designation although the Registered Financial Planner and Personal Financial Planner designations are also popular in Canada. There is no regulation, outside of Quebec, of the term "Financial Planner".