Saturday, October 23, 2021

Are You Really a Financial Advisor?

You aren’t if all you do is manage investments or sell securities or insurance, says this advisor.

Andy Panko
Andy Panko

If you’re in financial services and your only business is to sell insurance, sell securities or manage investments, you’re not a financial advisor; you’re an insurance salesperson, a securities salesperson or an investment manager, respectively.

What exactly is a “financial advisor?” I’m not entirely sure. Neither are consumers. Neither are financial services regulators, apparently. And that’s a problem.

Financial advising isn’t a real profession. Or at least, it’s not a real profession yet. There are a host of reasons, including lack of uniform regulatory oversight, lack of a widely adopted logical fee model, lack of consistency across products or services offered, and lack of standardized testing or credentials to enter the business. Furthermore, the fact that we lack something as simple as a single regulated title doesn’t help.

In real professions, there are regulated titles that actually mean something. To say you’re a lawyer means you went to law school, passed the bar exam, and are regulated by your state’s bar association. To say you’re a doctor (of medicine) means you went to medical school, completed a residency, passed a certification exam, and are regulated by your state’s medical board.

In real professions with real titles, clear-cut standards establish who can obtain and use those titles. And consumers generally know what those titles mean and what it took to earn them. In financial services, the lack of title consistency or regulation leads to confusion at best, and intentional misrepresentation at worst.

Car Salesmen Aren’t “Transportation Advisors”

Think about going to buy a car from a car salesperson. Everyone knows that car salespeople are there for the explicit purpose of trying to sell cars. No one walks into a car dealership expecting to get general and unbiased transportation advice. With that in mind, think about how silly it would be for a car salesperson to call himself or herself a “transportation advisor.”

Any rational adult would see right through that title and realize the person is just there to try to sell cars. But, for example, when an insurance salesperson puts himself or herself out to the world as a “financial advisor,” the consumer doesn’t necessarily know that person is just there to try to sell insurance. That’s misleading.

I freely admit I don’t know exactly how to define what a financial advisor is. But I know what it’s not. If your line of business and/or compensation is based purely on one offering one product or service, you’re not a financial advisor.

In my mind — and I think the mind of most consumers — the title “financial advisor” implies someone who’s there to give comprehensive advice about multiple or all areas of clients’ financial lives. What’s more, people expect that advice to be as minimally biased as possible. If you’re paid solely to sell insurance or securities, you’re not as minimally biased as possible. And if you only focus on managing investments, you’re clearly not giving advice about multiple areas of someone’s financial life. Moreover, if your fee is based purely on asset size, you’re not as minimally biased as possible.

Another Conundrum

I also freely admit I don’t know how comprehensive a person’s advice needs to be for that individual to truly be considered a financial advisor. If you work for a wirehouse or insurance company and have licenses to sell insurance and securities and are registered as an investment adviser, does that mean you’re comprehensive enough to be deemed a financial advisor? It depends.

“If you’re just selling insurance and/or loaded mutual funds and allocating clients’ portfolios, your advice probably isn’t as comprehensive as you think.”

If you’re just selling insurance and/or loaded mutual funds and allocating clients’ portfolios, your advice probably isn’t as comprehensive as you think.

Yes, there are obviously broader implications to a person’s financial life when selling such products or managing their investments. But that isn’t necessarily comprehensive financial advice.

In addition to selling products and managing investments, are you giving guidance about how clients can use equity in their homes through HELOCs or reverse mortgages? Are you helping clients make decisions about when to start their pensions and what type of payment they should choose? Are you guiding clients through FAFSA applications when their kids are applying to colleges? Are you helping clients manage their taxable incomes so they can maximize Affordable Care Act premium tax credits or minimize Medicare premium surcharges?

If you give advice on various areas like these AND your pay isn’t tied to you leaning heavier into one type of product or service over another, THEN you’re a financial advisor. Or such is my opinion.

Regulatory Chaos

The underlying problem with lack of consistency or regulation of titles within our industry is that separate and distinct regulatory bodies have jurisdiction over those who potentially call themselves financial advisors. The SEC generally oversees investment advisers with $110 million or more in assets. States oversee smaller ones within their boundaries. Finra oversees securities salespeople. State insurance commissions oversee insurance salespeople who operate within their jurisdictions.

The SEC makes it pretty clear that you need to be registered as an investment adviser representative to call yourself an “investment adviser.” But outside of that, there aren’t a lot of rules or restrictions around what regulatory bodies will or won’t let you call yourself. However, I’ve anecdotally heard that some state insurance commissions do actually prevent insurance salespeople in that state from calling themselves “financial advisors.”

In my opinion, the different branches of financial service regulators mentioned above need to coordinate themselves (or merge into one single governing body, but I know that will never happen!) and sync their efforts and oversight to bring consistency to our industry. Part of that cohesion would be coming up with standardized regulated titles that people would be allowed to use.

Don’t Be Too Coy or Cute

Until there is meaningful restriction and titles that are enforced, labels like “financial advisor” mean nothing and only confuse and/or mislead consumers. If your only business is to sell insurance, do the industry a favor and don’t call yourself a name like “safe-money retirement specialist,” “tax-exempt wealth specialist” or “retirement planning specialist.” Yes, these are all real titles I’ve seen insurance salespeople give themselves. While I’m impressed by the creativity, I cringe at how misleading they are.

Insurance is exceptionally important and many people need insurance. But be proud and upfront about what you do; say you sell insurance. The same goes for folks whose only license and/or compensation is to sell securities or manage investments. These are all important and necessary products and services. However, don’t be too coy or cute about saying the business you’re in. And don’t say you’re a financial advisor if you’re not directly paid to give truly comprehensive financial advice.

I Try to Avoid Labels Too

For what it’s worth, I struggle to know what I should call myself. I’m a fee-only solo operation where I own my own registered investment adviser (RIA) firm. I charge a flat annual fee to 1) manage investments and 2) give broad financial and tax advice about retirement income and distribution planning.

I feel I’m giving comprehensive advice. And I know my flat fee doesn’t directly incentivize me to steer clients toward one product vs. another, or to keep their assets with me vs. using them for something else. As such, I like to think I’d be able to call myself a “financial advisor.” However, given all of the views I expressed above, I try to avoid that label because I feels it’s been cheapened and misused. Therefore, I don’t really call myself anything!

Instead, I just try to tell people what I do. I say I do “retirement planning and investment management.” But I would gladly welcome the opportunity to give myself a meaningful, standardized and regulated title.

Additional Reading: Why the Asset-Based Fee Model Has to Go 

Our not-yet-profession already has enough of a problem with lack of consistency and standardization. We shouldn’t have to be in a position to take it upon ourselves to use generic or misleading titles that only add to the confusion and lack of clarity for consumers; real professions don’t do that.

Andy Panko, CFP, RICP, EA, is the owner of Tenon Financial, a fee-only firm in Metuchen, N.J., that provides tax-efficient retirement planning and investment management. He’s also the founder and moderator of the Facebook group, Taxes in Retirement and creator of the YouTube channel, Retirement Planning Demystified.

What do you think about how the title “financial advisor” is being used in the industry? What do you call yourself? We’d love to hear! Message Rethinking65.

Latest news

Failing: Advisors’ Approach to College Planning

A paradigm shift is needed for paying for college, says this advisor. (By Beth V. Walker)

Not Your Typical Dividend Fund

Guinness Atkinson's active dividend ETF deserves more attention than it’s getting.

The Biggest Mistake Investors Made Over the Last Decade

It was getting out of high-yield bonds, says this Northern Trust manager, who makes a case for them now.

Prepare Clients Now for Possible Trust, Estate and Gift Tax Changes  

AICPA’s director of tax policy and advocacy dissects the recent House tax proposal and shares concerns. (By Eileen Reichenberg Sherr)