Selecting Investment Professionals

Learn About Different Types of Investment Professionals

Your next step should be to understand which products and services each different type of professional can—and cannot—provide. Sorting it all out may be complicated by the fact that some individuals—and the firms where they work—may wear multiple hats, depending on the licenses they hold and the training they have. For example, an insurance agent may be qualified to sell you both life insurance and variable annuities. A broker may also be a financial planner.

Here's a basic introduction to the major groups of investment professionals.

 

Brokers

  • What they are: While many people use the word broker generically to describe someone who handles stock transactions, the legal definition is somewhat different—and worth knowing. A broker-dealer is a person or company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers (as broker), for its own account (as dealer), or both. Individuals who work for broker-dealers—the sales personnel whom most people call brokers—are technically known as registered representatives.
     
  • Who regulates them: With few exceptions, broker-dealers must register with the Securities and Exchange Commission (SEC) and be members of FINRA. Individual registered representatives must register with FINRA, pass a qualifying examination, and be licensed by your state securities regulator before they can do business with you. You can obtain background information on broker-dealers and registered representatives—including registration, licensing, and disciplinary history—by using FINRA BrokerCheck or calling us toll-free (800) 289-9999. You can also contact your state securities regulator. To find your regulator, check the government listing of your phone book or contact the North American Securities Administrators Association at www.nasaa.org or (202) 737-0900.
     
  • What they offer: Broker-dealers vary widely in the types of services they offer, falling generally into two categories—full-service and discount brokerage firms. Full-service firms typically charge more for each transaction, but they tend to have large research operations that representatives can tap into when making recommendations, can handle nearly any kind of financial transaction you want to make, and may offer investment planning or other services. Discount broker-dealer firms are usually cheaper, but you may have to research potential investments on your own—though the broker-dealer Web sites may have a lot of information you can use.

    Registered representatives are primarily securities salespeople and may also go by such generic titles as financial consultant, financial adviser, or investment consultant. The products they can sell you depend on the licenses they hold. For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities. When a registered representative suggests that you buy or sell a particular security, he or she must have reason to believe that the recommendation is suitable for you based on a host of factors, including your income, portfolio, and overall financial situation, your tolerance for risk, and your stated investment objectives.
     

Investment Advisers

  • What they are: An investment adviser is an individual or company who is paid for providing advice about securities to their clients. Although the terms sound similar, investment advisers are not the same as financial advisers and should not be confused. The term financial adviser is a generic term that usually refers to a broker (or, to use the technical term, a registered representative).

    By contrast, the term investment adviser is a legal term that refers to an individual or company that is registered as such with either the Securities and Exchange Commission or a state securities regulator. Common names for investment advisers include asset managers, investment counselors, investment managers, portfolio managers, and wealth managers. Investment adviser representatives are individuals who work for and give advice on behalf of registered investment advisers.
     
  •  Who regulates them: The SEC regulates investment advisers who manage $110 million or more in client assets. Advisers who manage less are regulated by the securities regulator for the state where the adviser has its principal place of business. Because they primarily engage in the buying and selling of securities, broker-dealers and registered representatives typically do not have to register as investment advisers. But some do, which is why it is so important to find out exactly which services a professional who wears multiple hats will provide for you and what they will charge for their services.

    You can get background information on both SEC- and state-registered investment advisers by using FINRA BrokerCheck or calling us toll-free (800) 289-9999.You can also get background information by visiting the SEC's Investment Adviser Public Disclosure database.
     
  • What they offer: In addition to providing individually tailored investment advice, some investment advisers manage investment portfolios. Others may offer financial planning services or, if they are properly licensed, brokerage services (such as buying or selling stock or bonds)—or some combination of all these services.

Accountants

  • What they are: Accountants are trained to provide professional assistance to individuals and companies in areas including tax and financial planning, tax reporting, auditing, and management consulting.
     
  • Who regulates them: To become a Certified Public Accountant (CPA), the accountant must pass a national examination administered by the American Institute of Certified Public Accountants (AICPA) and meet education and experience requirements set by the state Board of Accountancy where the accountant does business. You can find out whether an accountant is licensed as a CPA in your state by contacting the state Board of Accountancy. Again, check the government section of your phone book to locate your state board, or visit the AICPA's Web site.
     
  • What they offer: A CPA can help you consider the tax implications of financial decisions you make and assist with other tax-related issues, such as preparing annual tax returns. Some CPAs are also certified by the AICPA as Personal Financial Specialists (PFSs), which means they have met AICPA's education requirements for providing financial planning services, including assessing your overall financial situation, developing a budget, setting goals for saving and investing, and developing a plan for monitoring your progress and reaching your goals.

Lawyers

  • What they are: A lawyer is licensed to give legal advice to clients. Lawyers are trained to tell you about the legal impact one financial planning or investment decision might have on another—such as the tax implications of setting up a certain type of trust for your estate.
     
  • Who regulates them: Each state has its own rules that govern whether and under what circumstances a person can practice law. In some states, the courts handle the licensing process. In other states, the legislature sets the rules. Lawyers generally must pass a comprehensive examination—called the bar exam—and meet other requirements before they can be admitted to the practice of law. Although it does not regulate lawyers, the American Bar Association can help you find out whether a lawyer is licensed in your state.
     
  • What they offer: As with other professionals, the range of services lawyers can provide will vary greatly from individual to individual. For example, if one of your financial goals is leaving your assets to particular people or organizations, you will want to work with a lawyer who specializes in estate planning.

Insurance Agents

  • What they are: An insurance agent is a salesperson who can help individuals and companies obtain life, health, or property insurance policies and other insurance products.
     
  • Who regulates them: Every state, along with the District of Columbia and U.S. territories, has an insurance commission that licenses the insurance agents and insurance companies who do business in that jurisdiction. State insurance commissions also impose sales and marketing rules and require companies to file financial reports to assess their ability to honor claims. You can contact your state insurance commissioner by visiting the Web site of the National Association of Insurance Commissioners (NAIC) at www.naic.org. NAIC also offers a database of financial and disciplinary information for insurance companies nationwide. If an insurance agent offers products that are considered securities—such as variable annuity contracts or variable life insurance policies—the agent must also be licensed as a registered representative and comply with FINRA rules.
     
  • What they offer: Insurance agents described as "captive" work exclusively for one insurance company and can sell only the policies and products that company offers. Independent insurance agents can represent multiple companies and typically try to find insurance policies that offer the best coverage for your circumstances.

Financial Planners

  • What they are: Financial planners can come from a variety of backgrounds and offer a variety of services. They could be brokers or investment advisers, insurance agents or practicing accountants—or they have no financial credentials at all. Some will examine your entire financial picture and help you develop a detailed plan for achieving your financial goals. Others, however, will recommend only the products they sell, which may give you a limited range of choices.
     
  • Who regulates them: Unlike other professions discussed in this chapter, the financial planning profession does not have its own regulator. Instead, individuals who call themselves financial planners may be regulated in relation to other services they provide. For example, an accountant who prepares financial plans would be regulated by the state Board of Accountancy, and a financial planner who is also an investment adviser would be regulated by the Securities and Exchange Commission or by the state where the adviser does business.
     
  • What they offer: The breadth and depth of services a financial planner offers will vary from provider to provider. Some create comprehensive plans that delve into every aspect of your financial life, including savings, investments, insurance, college savings, retirement, taxes and estate planning. Others have a more limited focus, such as insurance or securities. Some only prepare plans, while others also sell investments, insurance, or other products. If they sell products, their recommendations typically will correspond with the products or services they sell. For example, an insurance agent will tell you about insurance products (such as life insurance and annuities) but likely won't discuss other investment choices (such as stocks, bonds or mutual funds). You'll want to make certain you fully understand which areas of your financial life a particular planner can—and cannot—help with before you hire that person.
  • prev
    Identify Your Financial Needs
  • next
    Search for Possible Candidates