Investment advisor and financial advisor. Although many investors use the terms interchangeably, they are very different. For the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), investment advisers and financial advisers have separate roles. The training they need to take is different, including the exams they need to take to use their credential. Investment advisers and financial advisers face different standards when working on behalf of clients. Finally, they are regulated by different executive bodies.
The following paragraphs detail the differences between these two roles, not only in definition, but in practical application.
The main differences
The term financial advisor is generic and can refer to many different professionals in the financial services industry. When most people refer to a financial advisor, they may be thinking of a broker, someone who buys and sells securities on behalf of a client.
In contrast, an investment advisor is a person or company paid to provide advice on securities management to clients. Other names of investment advisers include asset managers, investment managers, portfolio managers, and wealth managers. The term “investment advisor” (spelled “advisor” in law) is a defined term that comes with clear parameters. Article 202 (a) (11) of the 1940 U.S. Investment Advisors Act defines an investment advisor as any person or company who:
- “For compensation;
- is engaged in the business of;
- provide advice to third parties or publish reports or analyzes relating to securities. “
This means that an investment advisor can provide individualized investment advice to clients as well as manage their investment portfolios and offer financial planning services.
Training and qualifications
It is not mandatory that financial advisers have formal investment training. The only requirement to become a financial advisor is to pass the Series 6 or Series 7 exams administered by FINRA and the Series 63 exams required by each state to conduct business within state borders. .
The 6 series The exam covers basic information regarding pooled investments, securities regulation and ethics. Once an advisor has passed the Series 6 exam, they may sell “bundled” securities products such as mutual funds and annuities. For this reason, the Series 6 license is referred to as the Limited Investment Securities License.
The Series 7 The exam is known as the General Securities License and gives the license holder the right to sell all kinds of securities. It covers all aspects of securities trading including stock and bond quotes, options, ethics, margins and account holder requirements.
In addition to the exams that a financial advisor must pass, an investment advisor must pass the Series 65 Uniform Investment Counselor Law Examination. The Series 65 exam allows an investment advisor to provide investment advice and services on the basis of a fee-based remuneration system rather than through commissions from the sale of products. Unlike the Series 6 and 7 exams, the Series 65 exam is more comprehensive. It covers all of the following:
- Economic factors and business information, including policies, financial reports and risk concepts.
- Characteristics of the investment vehicle, including all of the following:
- Cash and cash equivalents,
- actions and valuation of actions,
- fixed income securities and valuation of fixed income securities,
- derivative securities, and
- insurance-based products.
- Client recommendations and investment strategies, including advice to individuals, business entities and trusts. Are also covered:
- customer profiles,
- capital market theory,
- Portfolio Management,
- tax considerations,
- retirement planning,
- securities trading, and
- trade and markets.
- Laws and regulations, including state and federal securities rules and regulations, prohibition of unethical business practices, regulations applicable to investment advisers and brokers, fiduciary duties and conflicts of interest .
Investment advisers are regulated by the SEC or their state security agency, depending on the number of funds the investment advisor manages. General information on investment advisers is available at FINRA BrokerCheck or the SEC Investment Adviser Public Disclosure Database. Advisors who also act as brokers are subject to oversight by the SEC and FINRA.
What about financial planners?
Not all financial planners are regulated financial advisers. Financial planners can be brokers regulated by the SEC and FINRA. They may be SEC regulated investment advisers. However, they may simply be insurance agents or accountants subject to the oversight of regulatory bodies in these industries. Unfortunately, some financial planners have no financial qualifications and are not subject to any regulatory oversight. If they are Certified financial planners (CFP), so generally they have been trained and are subject to ethical standards imposed by the CFP Council.
Standards of care: fiduciary to adequacy standard
One of the most important differences between the two types of advisers is the standards of care that apply to investment advisers and financial advisers. Investment advisers must adhere to a standard of fiduciary care. Financial advisers, on the other hand, need only adhere to a more flexible standard of care called adequacy and the SEC’s best interest regulations.
The fiduciary standard of care
As trustees, investment advisers must act and advise in the best interests of their clients, even if it is not in the best interests of the advisor. In other words, the customer always comes first. This means that if an Investment Advisor would make a larger commission on a transaction than another transaction that would be more beneficial to their client, the Investment Advisor should put their client’s best interests first and continue with the transaction that is. best for the customer regardless of the effect. about the investment advisor. In this example, the Investment Advisor would make less money for himself by making the best decision for his client.
The standard of adequate care
In June 2019, the SEC released a new standard known as Best Interest Regulation (Reg BI), which means brokerage firms must now adhere to a new standard of conduct when working with retail entities. The goal of Reg BI is to provide high protection to investors when working with retailers. The SEC does not explicitly define “best interests” in the text of the law, but the fiduciary duties are similar to those in Rule 2111.
New (and improved?) Guidelines on fiduciary relationships
In August 2020, the The SEC reaffirmed that investment advisers must act in a fiduciary capacity on behalf of their clients. The SEC reaffirmed that investment advisers and their clients share a special relationship of trust. This special relationship gives rise to the fiduciary duty. As trustees, investment advisers are responsible for acting in the best interests of their clients, even if it is not in the best interests of the advisor. In particular, this means that they are required to fully disclose any conflict of interest to their clients and also to ensure that no conflicts influence their advice or decision-making for their clients. In summary, the SEC has made it clear, once again, that these rules are meant to protect the investor.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.