Financial adviser
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A financial adviser is a professional who renders investment advice and financial planning services to individuals, businesses and governments. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation. Financial advisers use stock, bonds, mutual funds, real estate investment trusts (REITs), options, futures, notes, and insurance products to meet the needs of their clients. Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry.
A further distinction should be made between "fee-based" and "fee-only" advisers. Fee-based advisers both charge fees and collect commissions. Fee-only advisers do not collect commissions, and thus do not face a conflict of interest created by commissions or referral fees paid by other product or service providers.
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[edit] Financial planning
[edit] Goals
The main purpose of a financial adviser is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. To ensure ethical practices, financial advisers must understand a client's financial situation as well as their need for financial stability. Finance can be complicated and any adviser has responsibilities ethically to see that a client's risk is minimized, and monetarily, that money is maximized.
[edit] Retirement
One of the major services that financial advisers offer is retirement planning. A financial adviser should have knowledge of budgeting, forecasting, taxation, asset allocation, and financial tools and products to establish realistic goals and the strategy by which to reach them. In the United States, this will include the use of several investment tools such as 401(k)/403(b) Roth account(s), Individual Retirement Accounts/Roth IRAs, mutual funds, stocks, bonds and CDs.
The financial adviser determines what percentage of the available income is necessary—taking into account tax liabilities, expected inflation, and projected return on investment—to meet a minimum balance by the client's target age of retirement. This is a fairly straightforward calculation, and many automated tools do this. The financial adviser's greatest contribution is asset allocation: determining how to maximize the return on investment while satisfying the client's risk tolerance.
[edit] Investing
Financial advisers may help their clients invest for both long and short term goals. It is the financial adviser's duty to determine the clients' goals and risk tolerance and then to recommend appropriate investments. Generally, a long time horizon allows for the advisor to recommend more volatile investments with potentially greater risks and rewards. Such investments include direct investment in stocks or through collective investment products such as mutual funds and unit investment trusts/unit trusts.
If the client has shorter term goals, the adviser should recommend less volatile investments with shorter time spans. Such investments could include cash deposits, certificates of deposit, and short term bonds. While these types of investment generally have lower returns there is less volatility and there is less likelihood of losing principal capital. Although short-term investments can guard against loss of capital, their value can be eroded by inflation over longer periods of time.
[edit] Designations
Financial Advisor is a title earned by an individual who has first been sponsored by a FINRA member, and subsequently passed the Series 7 General Securities exam before becoming registered.
The Certified Financial Planner (CFP®) designation, the Chartered Life Underwriter (CLU®), The Chartered Financial Consultant (ChFC®), and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain.
[edit] Independent advisors in the UK
Under UK polarisation rules the concept of the Independent Financial Adviser or IFA was born. To be independent of any insurer or other third party interest allows for recommendation of products from any source. Non–independent (known as "tied" agent) advisers are therefore company representatives who can only recommend products approved by their company. Conflicts of interest may arise where remuneration is linked to the product recommended. Since 1 December 2004 the Financial Services Authority (FSA) has introduced a new classification of multi-tied adviser who may represent more than one company. It is a central and defining criterion that an Independent Financial Adviser must be willing, able, and, crucially, authorised by the FSA to accept payment from clients by fee rather than by commission, and this must be outlined in the introductory meeting. Advisers who are only willing or able to be remunerated by commission cannot call themselves independent.
[edit] Regulation
In the United States of America, the FINRA regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 RIA Registered Investment Advisor Law exam. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner (although care must be taken not to be confused with a Certified Financial Planner), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission in the USA. Anyone in the business of providing financial advice can call themselves a Financial Advisor. There currently isn't any regulation on the use of this title. To be called a Financial Advisor and charge a fee for advice, one must pass the FINRA Series 65 test—The Uniform Investment Adviser Law Examination. An individual claiming to be a "Registered Investment Advisor" (RIA) or "Investment Advisor Representative" (IAR) must pass the FINRA Series 7 and the FINRA Series 65 or Series 66 exam. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.
