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Pop quiz! What’s the difference between a “financial advisor,” an “investment advisor,” and a “wealth manager”?
These are just a few of the job titles you may encounter in the personal finance and investing advice space.
Unlike a doctor, these titles are not regulated by law.
Anyone can adopt one of the titles above or similar.
What is regulated is what an individual can do while using one of these titles.
There are “titles behind the titles” that carry the force of law, and they’re essential for you to know.
The Registered Representative
A Registered Representative (RR) is someone you would typically encounter at a company providing services to individuals who want to buy and sell securities.
In short, a stockbroker (although we seldom hear that title these days). This may be someone at an online broker or a more traditional “wirehouse.”
The firm that employs an RR is registered at the Securities and Exchange Commission (SEC).
The individual who is an RR must pass qualifying exams (Series 7 and Series 63) and is subject to oversight from their state securities regulator.
FINRA is the regulatory body authorized by Congress to oversee the investment industry. It’s the organization that sets standards of conduct for RRs and monitors their compliance.
You can use FINRA’s BrokerCheck tool to see if there have been any complaints or disciplinary actions against either the RR or the company the individual works for.
Notably, per the SEC, Registered Representatives have historically been subject to the “suitability standard” when working with a client.
What this means is that an RR must take measures to “know their customer” and, based on that knowledge, cannot place an investor in a security that would be inappropriate for them.
Quick example? Not selling a volatile, complex derivative security to an 80-year-old retiree who relies upon their savings to meet their basic living expenses.
A Registered Investment Advisor
On the other hand, a Registered Investment Advisor (RIA) is an individual who provides investment and portfolio advice.
Unlike a Registered Representative, an RIA does not actually execute your investment transaction.
RIAs are also regulated by the SEC and their state securities regulator. They must pass a FINRA qualifying examination (Series 65) that allows them to provide advice but not buy and sell securities.
Critically, RIAs are held to a different, higher standard than RRs when providing investment advice. The advice proffered must not only be “suitable” but in the client’s “best interest.”
Because of this higher “best interest” requirement, RIAs frequently advertise that they are “fiduciaries.”
(The law under which RIAs are registered does not actually use the word “fiduciary”; it is a term that has become well-established over the years through legal precedent.)
This means, for example, that an RIA should not recommend a costly, expense-laden investment option when a less expensive alternative is available that meets the client’s goals.
Should you have a complaint against an RIA (either a specific individual or firm), the forum to submit your complaint is the SEC and the state where the RIA is regulated.
A significant point of departure between RIAs and RRs is often how they receive compensation.
Because of their fiduciary duty, most RIAs do not earn sales commissions on the investment products they recommend.
A sales commission can create, at minimum, the appearance of a conflict of interest, if not an actual conflict.
Instead, most RIAs will charge an annual (or quarterly) fee calculated as a percentage of the value of the investment assets they manage on behalf of their clients; 1% is a typical fee.
That is the assets under management (AUM) model.
Alternatively, the flat fee model is increasingly popular with investors who only want advice and not actual account management.
This could be an hourly rate, an annual retainer fee, or a per “task” fee.
On the other hand, RRs are commonly paid through a salary from their firm, in combination with a sales commission on the products they sell.
However, as in the case of RIAs, the AUM model is also possible for RRs.
A person calling themselves a financial, investment or wealth advisor (or anything else) may be either an RR or an RIA. Or they could possibly be both!
As an investor in conversation with a dual-registered individual about your portfolio, you need to understand which “hat” they are wearing at that moment.
Side note: You may be familiar with the well-known and highly respected title “Certified Financial Planner (CFP).” CFPs are experienced, broad-based financial advisors who have completed extensive training and are committed by their professional charter to always act as a fiduciary. Many, if not most, CFPs are RIAs, but these are not synonymous. An individual can be a CFP without being an RIA. And many RIAs are not CFPs.
What can make the advice landscape even trickier is that the media is full of people offering investment wisdom who are neither RIAs nor RRs.
Speaking and writing about investing is free speech protected under the Constitution.
In the main, this is a very good thing.
But it is essential to understand that a person blogging about investing, selling a course, or Tik Tok-ing about how to manage your portfolio, may not have demonstrated through examination and licensing that they’re knowledgeable in their field.
Oh, but the complexity does not end there!
In June 2020, the SEC introduced Regulation BI (for “Best Interest”). Registered Representatives are now subject to Regulation BI.
Following on from the post-Great Recession 2010 Dodd-Frank Act, the laudable goal of Regulation BI is to narrow the gap between the standard to which RRs are held (under the 1934 Securities Exchange Act) and the standard that governs RIAs, which is based on a different law (the 1940 Investment Advisors Act).
You can easily imagine how this leads to confusion in the investment industry as implementing guidance for Regulation BI continues to be written.
Still, for an investor, the upshot is that potential conflicts of interest and fee structures should be more transparent regardless of whether you work with an RR or an RIA.
So, as an investor, what do you do?
The issue is not that one designation is inherently better than the other.
Rather, as an investor, you should be confident that when seeking financial counsel, the person across the desk (or screen) is appropriately credentialed to meet your specific need.
And that regardless of title, they are working in your best interests.
Article written by Lisa Whitley, AFC®, CRPC®.
Lisa enjoys having money conversations every day with people from all backgrounds. After a long career in international development, she brings a cross-cultural dynamic to her current work to help individuals and families achieve financial wellness.