Finding the right investment advisor and understanding your investments is daunting. For novice investors or people who want to do more due diligence before investing, we’ve put together simple explanations and tips to help you better understand financial industry jargon and point you to helpful resources.
What’s the difference between a financial planner, broker, and investment advisor?
Workers in the financial industry go by dozens of different monikers—some of which indicate the individual’s qualifications and educational achievements, while others are merely descriptive. Brokers, financial planners, and investment advisor representatives all provide different services. For example:
A person or company that buys and sells stock or other securities. These individuals must be registered with the Securities and Exchange Commission (SEC) and the independent, not-for-profit organization Financial Industry Regulatory Authority (FINRA) and work for firms called broker-dealers.
A person (investment advisor representative) or company (investment advisor) that provides investment advice to clients. Investment advisors must be registered with the SEC or the Wisconsin securities regulator, the Wisconsin Department of Financial Institutions. These professionals may also be referred to as asset managers, investment counselors, investment managers, portfolio managers, and wealth managers.
Unlike investment advisor representatives, there is no precise definition of a “financial planner.” Instead, financial planners engage in a variety of financial activities: some assess a client’s comprehensive financial situation while others sell clients specific investments only. Although financial planners who give investment advice must be registered investment advisor representatives, financial planners can also be brokers and hold insurance licenses.
In addition to the titles listed above, financial professionals also frequently list one of dozens of professional designations on their business cards and firm websites. For example, a person whose business card reads Jane Smith, CFP (Certified Financial Planner) indicates that Jane Smith has (a) a bachelor’s degree; (b) three years of full-time personal financial planning experience; (c) completed a CFP-board registered program or hold, for example, an attorney’s license or CPA; and (d) passed a certification examination. Be sure to look up the designations on FINRA’s glossary of professional designations.
What resources should I use to research a prospective financial planner or investment manager?
The SEC offers an excellent resource to research financial professionals: the Investment Adviser Public Disclosure website. The tool allows consumers to lookup information regarding both individual advisors and investment advisor firms. The database pulls data from the individual’s firm’s filings, FINRA’s BrokerCheck system, and state securities regulators. For investment advisor firms, the database also includes the firm’s Form ADV. The reports include employment history, disciplinary actions, professional registrations, criminal convictions, civil judgements, and arbitration awards—all details you should know before investing your money with someone.
When reviewing the report, pay particular attention to the section titled “Disclosure Event Details,” where any so-called disclosure events are listed, including, “certain criminal charges and convictions, formal investigations and disciplinary actions initiated by regulators, customer disputes and arbitrations, and financial disclosures such as bankruptcies and unpaid judgments or liens.”
What resources should I use to understand a prospective investment firm’s scope of services and strategies?
Reading the firm’s Form ADV – Part 2A and 2B will provide a wealth of background information about the firm’s practices and strategies. Look up the firm on the SEC’s Investment Adviser Public Disclosure search tool and select “Part 2 Brochures.” These brochures, created by the firm, are meant to provide a plain language explanation of the firm’s services. Information you can glean from these filings include information regarding the firm’s: compensation of its professionals, investment strategies, types of clients served, and the educational background of the firm’s professionals.
How do I research the investments my advisor suggests?
First, understand the type of investment your advisor is encouraging by reviewing information from FINRA or the SEC. Then, if your investor has identified a specific mutual fund for your consideration, look up the specific fund on FINRA’s Fund Analyzer database. The database includes information “on over 18,000 mutual funds, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).” The tool allows you to review the fees and expenses associated with the investment as well as average annual returns and the fund’s investment objective. You can also review market data for specific mutual funds, bonds, and companies at FINRA’s Market Data Center, which is powered by independent investment and market analyzer Morningstar, Inc.