Understanding the different types of financial professionals
Managing one’s finances is a complex endeavor. Finding the right professional to help save, invest, and preserve assets is also challenging, and it’s made more so by the many types of financial advisors and the array of initials and designations they have after their names.
Below is a rundown of the most common types of advisors, what areas of finance they focus on and the types of services they typically provide their clients. Depending on the complexity of your estate and your financial needs, you may need to employ more than one.
Certified Financial Planner (CFP)
CFPs are generalists who have completed courses on insurance, estate planning, retirement income planning, taxes and investing. To obtain their license, CFPs must have worked three years in the financial planning industry, passed ethical requirements and a 10-hour exam, both administered by the Certified Financial Planner Board of Standards.
Their knowledge and expertise enable them to counsel clients on budgeting, buying the right type of insurance, investing to meet specific goals and addressing estate planning needs.
CFPs can be fee-based advisors, paid by commission or a mix of both. Fee advisors will charge an hourly rate for their services, while those paid by the commission will earn their income from commissions on the investment and insurance products they sell their clients.
Certified Public Accountant (CPA)
CPAs help their clients keep track of their money by maintaining their financial records, preparing their taxes and auditing their books. The CPA designation is granted by the individual state boards of the American Institute of Certified Public Accountants, considered the most difficult designation to earn.
CPAs assume personal liability for their work. Though they do not offer advice on investments, they can help clients determine the best ways to save and organize their assets.
Registered Investment Advisor (RIA)
As their title indicates, RIAs advise clients about different securities and investments, and they often make transactions on behalf of clients and manage asset portfolios. By law, RIAs have a fiduciary responsibility to act in their clients’ best interests, and all their recommendations must reflect that.
RIAs do not earn commissions on any sales or recommendations. Instead, they derive their income from management fees that are usually a percentage of the assets a client has invested with them. Proponents of RIAs say this arrangement better ensures they put their clients’ best interests ahead of their own; the more money you earn, the more they earn in management fees.
Brokers are individuals and companies that conduct securities transactions on behalf of their investor clients, for which they earn a commission. Full-service brokers provide an array of financial services, including retirement planning and tax advice. Brokers obtain licenses by passing exams issued by the National Association of Security Dealers. They must also register with the Securities and Exchange Commission (SEC) and maintain membership with the Financial Industry Regulatory Authority (FINRA).
An individual broker may also be known as a Registered Representative, which is a basic legal title given by the SEC to those who have passed the Series 7 licensing exam and are regulated by FINRA. Anyone who sells securities must carry the Series 7 license.
Licensed insurance professional
Professionals who sell insurance and annuities may have the designation of Chartered Life Underwriter (CLU). Insurance agents are licensed by the insurance departments of the states in which they do business. Some insurance agents work exclusively with one or two companies, while independent agents can sell the products of any number of carriers.
Insurance professionals earn a commission on the policies they sell. Unless they have other financial designations, they cannot advise clients on investments, taxes or other financial matters.
Chartered Financial Consultants (ChFC)
Professionals with the ChFC designation are typically specialists in life insurance and estate planning. The ChFC designation was created by the life insurance industry, but it includes more general financial planning principles and overlaps some with the CFP designation. In fact, many professionals will possess both certifications. One of the differences between ChFC and CFP is that the former does not require a board exam.
In addition to the expertise they possess, potential clients should also know how many companies an advisor represents and how they get paid.
Some advisors are known as independent professionals, and can offer products from any number of carriers, while others are restricted by their contract with one specific company. The advantage of an independent professional is that clients have more products from which to choose. On the other hand, the restricted carrier will know more about that company’s products than an independent carrier who sells several different lines of financial products.
Consumers should also know the difference between a fee-based advisor and one who is paid on commission. The former will charge the clients a fee, either hourly or as a percentage of the assets they manage. Those who are paid on commission earn their money from the carriers they represent by selling their products to their clients. Some people believe fee-based is best because their are no potential conflicts of interest, as there could be with a commission-based professionals.