Updated: Oct 15, 2020
Note: This is a reposted article that I wrote about 3 years ago or so... and I've found it plagiarized in various places on the internet. I'm reposting it here so I can re-claim my copyright rights.
There are so many of these nebulous terms out there, that it’s become almost impossible to determine what any of these titles really mean! I’m going to give you my own impressions on these titles and what it really means to you from inside the financial services industry.
A financial advisor is someone who has multiple products available to meet various insurance and investment needs. They are called a financial advisor because they need to use a consulting and advising approach to determine which products and strategies makes the most sense for your situation.
Now, that all sounds nice, doesn’t it? What did I really say? I just said that a financial advisor is a salesperson who has a broad assortment of products. Instead of showing you a ‘menu of products’ for you to choose from (there are hundreds), they use a consulting approach to help determine what you need and what you’ll be most likely to qualify for and buy.
The qualification process is a basic suitability review to ensure that the purchase is not out of line for your financial situation and your current objectives.
In essence, their sales pitch is “We want your money here.”
An investment advisor is a term that applies to those who are investment advisor representatives of a registered investment advisory firm. They are regulated and held to the Investment Advisors Act of 1940 fiduciary standard regarding their recommendations of securities.
This person has an inherent bias towards offering securities and investment management services because, well, that’s what they do. That’s why people met with an investment advisor and hire them for their services. However, once in the relationship, the advisor is to look out for the best interests of their clients, and not their own needs.
Back in the days of offering a ‘hot stock’ and earning nice commissions at a brokerage firm… the investment advisor has a fiduciary obligation NOT to offer this ‘hot stock’ as a way to increase their commissions and potentially not be looking out for their client’s best interests in their overall financial portfolio.
Investment advisors may offer insurance and other products, however, they may be deemed as a ‘conflict of interest’ due to their compensation arrangements. Such “perceived conflicts” should be disclosed in their ADV Part II brochure.
I said “perceived conflicts” because it should be in the heart of the investment advisor to look out for their client’s best interests. Many times a combination approach to solving problems is a great way to advise clients. So, while the commission on such products may present an incentive to offer these products often, they still need to be well-coordinated with everything else the client has going on.
Their sales pitch is also “we want your money invested with us.”
A financial planner works a little bit differently from an investment advisor and a financial advisor. A true financial planner will work with your ENTIRE picture, and not just a lump sum of money that you are looking to invest.
A financial planner will look at the risks that can come to your cash flow – such as a disability, critical illness (heart attack, stroke, cancer), and extended unemployment. They’ll look at your entire retirement plan and determine how much you’re saving and setting aside for the future. They’ll look at your credit situation. They’ll look at your estate planning preparation, such as beneficiary designations on your insurance and retirement plans. They’ll ensure that you’ve taken care of your wills, trusts, powers of attorney, and medical directives.
In addition, they’ll look to coordinate your decisions today to help you benefit from them in the future. It’s like a game of chess and looking down the line at what you want your life to be like in 5 years, 10 years, 20 years, and throughout your retirement, and bringing those choices to you today to help you plan for that future.
In short, a financial planner sees a bigger picture than just a lump sum of money that you want to invest. They also help you plan to ensure that you have money when you need it.
I don’t know if financial planners are trained in helping people to find the money to fund the products and solutions that financial planners often recommend. That’s why it’s important to determine what someone’s financial priorities are. Money is not unlimited. If it was, there would be no need for planning. Yet there also isn’t enough money to do ‘everything’. So, you need to determine and set your priorities.
Some financial planners charge a fee for their advice. For that fee, a large binder filled with analysis, charts, graphs, and recommendations is produced. Yet, just because something is recommended, does it become implemented? That’s up to each individual practitioner.
The sales pitch for a financial planner is: “You have money. What should you be doing with it?”
The insurance agent really gets a bad rap. Why? Because of the term “insurance agent”… implies that all they do is sell policies (products) for an insurance company. Yet “financial planners”, “financial advisors”, and “investment advisors” are viewed as being more financially astute. Why? Just in the terminology alone. FINRA (formerly NASD) and the SEC regulated investment advisors won that marketing war. We can also thank the reputation of agents before us for any misconceptions about who we really are. (Groundhog’s Day anyone? I’d love to punch Ned Ryerson myself.) There are lots of old training recordings with lots of manipulative techniques used to get people to buy. It’s little wonder that people are afraid of interacting with insurance agents. Not because of the merits of the insurance product… but on who they were trained to become in order to make the sale.
All that is in the past… or rather it should be by now.
There are many advanced financial strategies that are only available through today’s life insurance and annuity products. With a well-trained and competent agent, you can have some extraordinary results for your financial life by using these strategies. Of course, for life insurance strategies, one must qualify with their health in order to take advantage of them.
However, training in these advanced strategies is difficult to convey in title alone. Insurance agents are taught to avoid terms such as ‘financial planner’ or ‘financial advisor’ because they could be misconstrued to mean someone who is securities licensed.
The title I’ve chosen to use to represent my services is “Lifetime Wealth & Retirement Manager”. The strategies I can help people with can deliver exactly that – lifetime wealth and retirement income. I help them to ‘manage’ the process over time so that what they want to have happen… does happen.
Other titles for similarly trained advisors are: “Found Money Manager”, “Safe Money Guys”, “Financial Strategist”, “Financial Designer”, “Financial Architect”, and others. We have to be more creative because there isn’t an ‘industry recognized term’ for what we do, how we do it, with the products that we use.
The focus for the insurance agent is to ensure that clients have money when they need it. It’s not necessarily looking for the ‘highest % return’, although we do want a good return. But we also don’t want to take on any unnecessary risks to earn that return.
Many insurance agents may also be securities licensed to offer mutual funds and other investment products. Many more insurance agents let these securities licenses lapse. Why is that? Agents see increasing costs, higher compliance requirements, and lower revenues for offering investments. They simply ask themselves… ‘is it worth it?’
I, myself, held a Series 7 & 66 license for a few years. After I learned how to help people achieve their goals and objectives using fixed indexed life insurance and fixed indexed annuity contracts, I determined that introducing more risk into a client’s financial plan and strategy wasn’t necessary anymore. In the past, securities licensing was required in order to help clients to earn a higher return, before these contracts were developed. But back in those times, the markets were much more forgiving than they’ve been since 2000.
In fact, back when I was taking my Series 7 course, I was thinking about how I could use options to help clients avoid portfolio losses. It didn’t take long to figure out that it would be difficult to manage and costly to the client to execute (which would erode the overall portfolio return). With today’s fixed indexed insurance products, we can have the best of both worlds while keeping it simple to manage.
The sales pitch of the insurance agent is: “We’ll insure your financial future… if you qualify.”
Why Can’t Insurance Agents Be Considered As ‘Financial Planners’?
Because of the nebulous terms out there, a financial planner is determined to have a fiduciary obligation. Fiduciaries are, by definition, supposed to look out for their client’s best interests and not their own interests. Yet, insurance companies pay commissions on their sales, which can appear to be a conflict of interest.
Insurance products (such as life insurance and annuities) are perceived as a conflict because of those commissions. That’s how our competitors view us. They see us as “slamming customers into life insurance and annuities”. There are ads that say “I hate annuities and why you should too” (even though they also sell annuities). Such sensationalistic comments and ads seem to be very effective.
Here’s what they are missing: Life insurance and annuity products are the only financial products out there that guarantee you that what you want to have happen, will happen. They also do so with little regard to outside influences. In my opinion, the only way to have a secure financial future that isn’t at the mercy of the stock markets… is to use fixed insurance products in strategic ways.
After you have met your minimum requirements for safety and security, if you want to have investments grow for the future, you can! And you’ll be able to weather any economic storm a whole lot easier and better because you won’t need to withdraw your retirement income from a deflated account value. You can have better peace of mind by diversifying into life insurance and annuities than if you don’t.
Advisors cannot use the word ‘guarantee’ when talking about investment management. There are no guarantees available with investments, unless you are talking about an FDIC insured CD or a variable annuity contract with a lifetime income benefit. No advisor can say ‘guarantee’ without further explanation… or they can find themselves in hot water.
Most of the other titles that I’ve seen are internal to their organization in nature. Vice President, President, CEO, Financial Representative, Founder… all are internal to an organization that carries very little weight as far as what they actually do for clients. Makesme kind of wonder if their focus is more on the internal organization than on serving their clients? Or is it just to say “I’m a successful advisor. That’s why I’m a Vice President of Investment Services”? Banks have done this for ages. Ever notice that there are ten “Assistant Vice Presidents” for every teller in a bank? Why? It’s mental positioning. If you ever go into a bank with a problem, and you ask to see the manager, you’ll probably first sit with an “Assistant Vice President” who will review your situation, then get the assistant manager, and then the manager to help. It’s a lot better ‘show’ for a customer to see three different people in positions of ‘authority’ to help solve a problem, than to start at the top and then have to go above their head to get a resolution.
A title doesn’t guarantee that you’ll receive these services.
If someone has “financial advisor” on their card (a salesperson) and does planning ot help you make educated financial decisions… then they’re really a planner. If someone has “financial planner” on their card and does no planning… then they’re really just a financial advisor (salesperson).
So, if you’re asking various advisors what they do, and they say “financial advisor”, you may want to ask what that really means, or ask how they do what they do so you can have a complete picture.
What about designations and all those letters after advisor’s names?
Designations show that a given agent or advisor is holding themselves out at a higher level of expertise than those who do not have such credentials. It almost doesn’t matter which letters they have, they are portraying and marketing themselves at a higher level. (For the wrong advisors, this could become a professional liability.)
The organizations that offer these credentials are doing a great job of bashing each other in order to attract the dollars of agents and advisors to buy their credentials. The CFP Board of Standards says “The Standard for Financial Planning”. The American College who issues the CLU and ChFC says “The Highest Standard of Knowledge and Trust”.
Most agents and advisors who have such credentials, do so because their employing firms paid for them and perhaps made them a requirement for continued employment. This helps ensure that you’re working with a more knowledgeable advisor who spent a few years learning and honing in their education.
This does not guarantee competency, but it sure does improve your chances.
However, just because someone has a CFP, doesn’t mean that you’re working with a planner. Just because someone has a CLU, doesn’t mean that you’re working with someone who is only a life insurance agent.
The letters themselves aren’t as important as what they’ve studied. If you should happen to ask what they studied to earn their credential, you want to hear that they’ve studied the following subjects: financial planning, insurance, investments, income taxation, retirement planning, and estate planning.
Some designations are more of a specialist, rather than a well rounded generalist. These could focus more on retirement income strategies, planning for families with children with special needs, divorce planning, estate planning, and many others. Nothing wrong with these, but I do recommend working with someone who has been introduced to the fundamentals of the entire planning process.
Compensation arrangements… does it matter?
I talked a little bit about compensation and the perceptions that commissions can be a deterrent to offering proper advice. However, I’ve also been focusing more on the services being delivered and in helping people making educated decisions that feel right to them.
Financial advice is much more about the person offering advice, than it is about the products they sell and the way they are paid. Paraphrasing a common phrase… “It’s the relationship, stupid.”
However, when comparing fees versus commissions, don’t just take a one-year view. I would recommend comparing everything over a ten (10) year period and see what your net fees would be, compared to a net commission payment (if any) and see where you might come out ahead. The answer may surprise you.
“But I heard on the radio from someone that…”
Let’s take a quick second to talk about financial entertainers. Folks such as Dave Ramsey, Suze Orman, Clarke Howard, Jim Cramer, and many others. Well, it must be nice to be able to offer financial advice to millions of people and not have to take any professional liability for that advice. Watch and listen for the disclaimers at the beginning and end of their shows. You’ll always notice the phrase “for entertainment purposes only” or a similar variation.
One advantage to working with a properly licensed individual, is that you’re working with a properly licensed individual. When you embark on a client relationship (by product purchase or client engagement agreement), you are entering into a professional arrangement, not just listening to someone on the radio expound their own opinion.
Why do these radio and TV show hosts do what they do? They are excellent marketers. We buy their books, kits, attend their shows, and call on their endorsed providers. They, in turn, receive marketing funds from their advertisers and sponsors. They have name recognition that pulls in viewers and listeners, and advertisers know this.
The only person on this list that comes close to having had professional experience, is Suze Orman. Suze worked for Merrill Lynch back in the 80’s. She also earned her CFP certification. However, once she left that world and became a speaker and author, she hasn’t kept up with the latest product developments and strategies. Oh, and while she had kept up with “regulatory continuing education” requirements, those courses are really too basic to be used to help give advice. Basically, her education and experience, which forms the basis of all advice… is out of date.
My professional opinion: Never take advice from someone who isn’t properly licensed and trained, doesn’t know your entire situation, and isn’t current on today’s products and strategies.
The Gold Standard:
If you have a relationship with a competent advisor who is looking out for your best interests, and that advisor is well paid for doing what they do… then it’s a match! This is someone worth working with for an extended period of time and introducing others to them to also take advantage of their services.
When you have someone that is helping you to make educated financial decisions that feel right to you, including the option of doing nothing… you’ve got something special. It’s even more valuable when they can explain their thinking in a visual way, without a lot of jargon, so that you are very comfortable with the process.
Quality financial advice does not need to be complex. After all is said and done, it’s about how you feel about working with the professional. How that professional makes you feel about where you are now… and where you will be in the future can make all the difference.