Brief comparisons of "adviser" types

When I first meet with prospective clients or introduce myself at the beginning of a class, I often take a minute to explain how my work as a fee-only adviser may differ from the approach of other types of financial professionals.  What follows is a quick and informal summary of the most common sorts of roles somewhat involved in the advice industry.


Accountants and tax professionals are primarily engaged in financial management from the perspective of, well, accounting.  They work with companies and people on proper reporting and organization of financial statements, and often have a special care around promoting tax efficiency and compliance with tax related laws.


The term “adviser” can be generic and can apply in some measure to all of the other categories on this list.  However, there is a specific type of adviser -- the Registered Investment Adviser -- that warrants its own description.  My firm, DRW Financial, is organized as a Registered Investment Adviser (RIA for short).  RIAs have a few distinguishing characteristics:

• Fee only: when acting as a RIA, the adviser’s compensation is limited to a fee structure as opposed to a commission or other transactional charge.  Fee structures do vary from one RIA to another, but the rule against transactional compensation is consistent.
  
  
• Fiduciary standard of client care: RIAs must act as a fiduciary in regards to their clients when rendering advice or managing investment accounts.  This standard requires the adviser to give unbiased and transparent advice believed to be in the best interest of the client.
  
  
• Licensing and registration types: RIAs must hold the FINRA license 65 and must also register with either the state(s) in which they do business or with the SEC (SEC registered firms manage one hundred million dollars or more)
  
  

Brokers work to bring together buyers and sellers of something: stocks, bonds, options, commodities, etc.  A person can broker more than one sort of investment product or focus solely on a specialty.  In commodities, in particular, it may be typical for a broker to deal only in wheat, or oil, or pork bellies.  Brokers operate in many different ways, but tend to share a few characteristics:

• Transactional compensation: while the actual compensation scheme can vary considerably, it is common for brokers to collect a payment each time they buy or sell for a client.  In some cases (mutual funds, for instance) there is also an onging compensation or trailing commission.
  
  
• “Suitable” standard of client care: in general, brokers are required to determine if a given investment is “suitable” for a client prior to the transaction.  An investment may be considered “suitable” even if more expensive than a similarly suitable option.
  
  
• Licensing and registration types: brokers are affiliated with broker/dealer firms, either as employees or as independent contractors; brokers hold FINRA licenses specific to the product types they trade.  The FINRA series 6 license allows for the sale of mutual funds, for instance, while the series 7 license allows for the sale of mutual funds plus stocks, bonds, and options (these are not exhaustive lists)
  
  

Insurance agents may be primarily concerned with Property and Casualty insurance (P&C for short, and referring to policies covering cars, boats, homes, etc), with life and health insurance, or a combination of all the above.

• Transactional + ongoing compensation: the details vary along a spectrum, but in very general terms an insurance agent collects a commission at the time of the initial sale in an insurance product, as well as a periodic “trailing” commission when the client renews or maintains ownership in that product.
  
  
• When acting as an investment broker (selling a variable annuity, for instance), an insurance agent would be held to the same “suitability” standard as a broker who is not an insurance agent.
  
  
• Insurance agents are licensed by the state, and hold licenses specific to the products they sell (P&C, Life&Health, or both); in addition, if an agent wants to sell insurance products that involve investments (annuities, for instance, may hold mutual funds in an investment “sub account”) they must also hold the appropriate FINRA license for that investment type.
  
  

Various Combinations exist among all of the categories mentioned above.  It is relatively common for a person licensed as a broker to also have a segment of their business run as a RIA; similarly, many brokers will also hold an insurance license allowing them to sell insurance products to their clients.  Accountants can be brokers or advisers; investment advisers of different sorts occasionally offer tax advice.


When I started DRW Financial, the decision to organize as a fee-only financial adviser came down to my own preferences and views on the industry.  While I believe that there is value in each core role and even some combinations of roles, I prefer the alignment of incentives and transparency of motivation in the RIA model.


A word on designations: The financial industry is absolutely covered up in an “alphabet soup” of designations, certifications, charters, and industry groups.  CPA is pretty recognizable in the tax world, CFP is becoming well known among advisers, CLU pops up on the business cards of some insurance agents...but there are many more out there as well.  The idea behind each (competing) designation is that the holder of those letters has taken coursework, passed an exam(s), and meets “continuing education” requirements to maintain the designation.  The designations in themselves do not enable a financial professional to trade a particular product or serve a given population.  In some cases, the designation requires adherence to a particular code of ethics.