Investment advisor and financial advisor. While many investors use the terms interchangeably, they are very different. For both the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), investment advisors and financial advisors are distinct roles. The training they must complete is different, including the exams they must pass to use their title. Investment advisors and financial advisors must adhere to different standards when working on behalf of clients. Finally, they are regulated by different enforcement bodies.
The paragraphs that follow detail the differences between these two roles, not just in definition, but in practical application.
The Key Differences
The term financial advisor is generic and can refer to many different professionals within the financial services industry. When most people refer to a financial advisor, they may be thinking about a broker, a person that buys and sells securities on behalf of a client.
In contrast, an investment advisor is a person or company paid to provide clients with advice about how to manage securities. Other names for investment advisors include asset managers, investment managers, portfolio managers, and wealth managers. The term "investment advisor" (spelled "adviser" in the statute) is a defined term that comes with clear parameters. Section 202(a)(11) of the U.S. Investment Advisers Act of 1940 defines an investment adviser as any person or firm that:
- "for compensation;
- is engaged in the business of;
- providing advice to others or issuing reports or analyses regarding 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
There is no requirement that financial advisors have formal training in investing. The only requirement to become a financial advisor is passing the Series 6 or Series 7 exams administered by FINRA and the Series 63 exams required by each state to conduct business within the state's borders.
The Series 6 exam covers basic information regarding packaged investments, securities regulations, and ethics. Once an advisor has passed the Series 6 exam, they can sell "packaged" securities products such as mutual funds and annuities. For this reason, the Series 6 license is called a limited-investment securities license.
The Series 7 exam is known as the general securities license and gives the licensee the right to sell all kinds of securities. It covers all aspects of securities trading, including stock and bond quotes, options, ethics, margin, and account holder requirements.
In addition to the exams a financial advisor must pass, an investment advisor must pass the Series 65, Uniform Investment Adviser Law Exam. The Series 65 exam permits an investment advisor to offer investment advice and services on a fee-based compensation system rather than via commissions from sales of products. In contrast to the Series 6 and 7 exams, the Series 65 exam is more extensive. It covers all of the following:
- Economic factors and business information, including policy, financial reporting, and risk concepts.
- Investment vehicle characteristics, including all of the
following:
- cash and cash equivalents,
- equities and equity valuation,
- fixed-income securities and fixed income valuation,
- derivative securities, and
- insurance-based products.
- Client investment recommendations and strategies, including
advising individuals, business entities, and trusts. Also covered
are:
- client profiles,
- capital market theory,
- portfolio management,
- tax considerations,
- retirement planning,
- trading securities, and
- exchanges and markets.
- Laws and regulations, including state and federal securities rules and regulations, the prohibition on unethical business practices, regulations applicable to investment advisors and brokers, fiduciary obligations, and conflicts of interest.
Regulatory Bodies
Investment advisors are regulated by the SEC or their state's security agency, depending upon the number of funds the investment advisor manages. Background information on investment advisors can be found at FINRA BrokerCheck or the SEC's Investment Adviser Public Disclosure database. Advisors who also serve as brokers are subject to oversight from the SEC and FINRA.
What About Financial Planners?
Not all financial planners are regulated, financial advisors. Financial planners may be brokers regulated by the SEC and FINRA. They can be investment advisors regulated by the SEC. However, they may simply be insurance agents or accountants subject to the oversight of those industries' regulatory bodies. Unfortunately, some financial planners have no financial credentials at all and are not subject to any regulatory oversight. If they are Certified Financial Planners (CFP), then generally, they have been trained and are subject to ethical standards imposed by the CFP Board.
Standards of Care: Fiduciary vs. Suitability Standard
The standards of care that apply to investment advisors and financial advisors is one of the most important differences between the two kinds of advisors. Investment advisors must comply with a fiduciary standard of care. Financial advisors, on the other hand, need only comply with a more relaxed standard of care called suitability and the SEC's Regulation Best Interest.
The Fiduciary Standard of Care
As fiduciaries, investment advisors must act and advise in the best interest of their clients, even if doing so is not in the advisor's best interest. In other words, the client 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 his client, the investment advisor must put his client's interest first and pursue the transaction that is better for the client regardless of the effect on the investment advisor. In this example, the investment advisor would make less money for himself by making the best decision for his client.
The Suitability Standard of Care
As of June 2019, the SEC issued a new standard known as Regulation Best Interest (Reg BI), which means brokerage firms now must comply with a new standard of conduct when working with retail entities. The goal of Reg BI is to provide elevated protection to investors when working with retailers. The SEC does not explicitly define "best interest" in the text of the statute, but the fiduciary obligations are similar to those of Rule 2111.
New (and Improved?) Fiduciary Relationship Guidelines
In August 2020, the SEC reaffirmed that investment advisors must act in a fiduciary capacity on behalf of their clients. The SEC reaffirmed that investment advisors and their clients share a special relationship of confidence and trust. That special relationship gives rise to the fiduciary duty. As fiduciaries, investment advisors are charged with acting in their clients' best interests, even if that does not align with the advisor's best interests. In particular, this means they are required to fully disclose any conflicts of interest to their clients and also ensure that any conflict does not influence their advice or decision-making for their clients. In sum, the SEC has made clear, again, that these rules are meant to protect the investor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
