Financial Advisor

A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors, or advisers, can provide many different services, such as investment management, income tax preparation and estate planning. They must carry the Series 65 license to conduct business with the public; a wide variety of licenses are available for the services provided by a financial advisor.

"Financial advisor" is a generic term with no precise industry definition, and many different types of financial professionals fall into this general category. Stockbrokers, insurance agents, tax preparers, investment managers and financial planners are all members of this group. Estate planners and bankers may also fall under this umbrella.

What may pass as a financial advisor in some instances may be a product salesperson, such as a stockbroker or a life insurance agent. A true financial advisor should be a well-educated, credentialed, experienced, financial professional who works on behalf of his clients as opposed to serving the interests of a financial institution. Generally, a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client’s interests come before his own. Only Registered Investment Advisors (RIA), who are governed by the Investment Advisers Act of 1940, are held to a true fiduciary standard. There are some agents and brokers who try to practice in this capacity, however, their compensation structure is such that they are bound by the contracts of the companies where they work.

Since the enactment of the Investment Adviser Act of 1940, two types of relationships have existed between financial intermediaries and their clients. These are the “arms length” relationship that characterizes the transactions between registered representatives and clients in the broker-dealer space, and the fiduciary relationship that requires advisors registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors to exercise duties of loyalty, care and full disclosure in their interactions with clients. While the former is based on the principle of “caveat emptor” guided by self-governed rules of “suitability” and “reasonableness” in recommending an investment product or strategy, the latter is grounded in federal laws that impose the highest ethical standards. At its core, the fiduciary relationship relies on the necessity that a financial advisor must act on behalf of a client in a way the client would act for himself if he had the requisite knowledge and skills to do so.