Financial adviser

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A financial adviser (UK spelling) or financial advisor (US spelling), is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on Life insurance and other insurances such as income protection insurance, critical illness insurance etc, and/or advice on mortgages.

Ideally, the financial adviser 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 often charge asset based fees but may also collect commissions. Fee-only advisers do not collect commissions or referral fees paid by other product or service providers.

Some investment advisors only charge a fee based on the assets managed for the client. Typically they charge about 1.0 to 1.5% per year to make the investment decisions for the client. They do not collect commissions.

Contents 1 Financial adviser 1.1 Designations 1.2 Financial adviser qualifications - United States 1.3 Financial adviser qualifications - United Kingdom 1.4 Financial adviser qualifications - Republic of Ireland 1.5 Financial adviser qualifications - New Zealand 1.6 Goals 1.7 Retirement planning 1.8 Investing 1.9 Fee-only financial advisors 2 United States 3 United Kingdom 4 Regulation 5 See also 6 References 7 External links

[edit] Financial adviser

[edit] Designations

"Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications and writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities (with exceptions being made for banks, certain professionals, brokers or dealers, bona fide publishers, people dealing exclusively in US government securities, or persons omitted by the SEC)^[1]. A financial planner is one who specializes in outlining comprehensive financial plans and strategies encompassing most or all of a client's financial areas.

[edit] Financial adviser qualifications - United States

The Chartered Financial Analyst (CFA) designation, the Certified Financial Planner (CFP®) designation, the Chartered Life Underwriter (CLU), The Chartered Financial Consultant (ChFC), Chartered Retirement Planning Counselor (CRPC), Registered Financial Consultant (RFC) and the Masters of Science in Financial Services (MSFS) are all advanced specializations that require elaborate course work to obtain. These professional designations are issued by organizations such as the Chartered Financial Analyst Institute, ^[2] the Certified Financial Planner Board of Standards, ^[3] and the College for Financial Planning. ^[4]

[edit] Financial adviser qualifications - United Kingdom

There are three main bodies awarding qualifications for financial advisers in the UK. The main one is the Chartered Insurance Institute, which offers professional financial services qualifications all the way from beginner to degree levels. The IFS School of Finance offers alternative courses/qualifications in certain specialist areas such as mortgages and equity release. The Institute of Financial Planning offers the Certified Financial Planner.

[edit] Financial adviser qualifications - Republic of Ireland

The QFA (Qualified Financial Adviser)designation is awarded to those who pass the Professional Diploma in Financial Advice and agree to comply with the ongoing CPD requirements. It is the recognised benchmark designation for financial advisers working in retail financial services. The qualification and attaching CPD programme meets the Minimum Competency Requirements (MCR), specified by the Financial Regulator, for advising on and selling five categories of retail financial products:

• Savings, Investments and Pension Products
• Housing Loans and Associated Insurances
• Consumer Credit and Associated Insurances
• Shares and Bonds and Other Investment Instruments
• Life Assurance Protection Policies

[edit] Financial adviser qualifications - New Zealand

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The National Certificate in Financial Services [Financial Advice] [Level 5] is currently being introduced in New Zealand. All Individuates and registered legal entities providing financial services must be registered as a RFSP( Registered Financial Service Provider ) Their Directors, retail and sales staff are required to gain the national certificate. ^[5]

The NZQA ( New Zealand Qualifications Authority ) in conjunction with industry groups via the ETITO administers a qualifications frame work for the qualification. Registrations and examinations are conducted by the ETITO . ^[6] All Financial Advisers are required to register with the ETITO by March 31 2011

The Qualifications Framework consists of a core set of competencies sets, A B C followed by 2 electives covering specialist areas such as Insurance and Residential Property Lending . Certain NZQA approved qualifications such as an Accountancy degree may exempt student from competency set A NZQA approved training in the certificate is offered by the New Zealand Open Polytechnic ^[7] as well as several other accredited organizations ^[8]

[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 within the established risk boundaries.

[edit] Retirement planning

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] Fee-only financial advisors

As defined by the review materials for the Certified Financial Planner exam and the National Association of Personal Financial Advisors, fee-only financial advisors are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisors nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.^[9] The fee-only model of compensation reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.

A clear distinction should be made between brokers, who often refer to themselves as "Fee-Based" (receiving both fees and commissions) and Fee-Only (someone who never receives compensation or incentives from a third party.)

A fee-only advisor may reduce conflicts of interest such as:

• advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time.
• an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churning).
• an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a commission.
• an incentive to make recommendations that pay higher sales commissions to the advisor when a less expensive alternative may have been available.

Working on a fee-only basis allows the advisor to:

• Customize an investment portfolio that is designed to help the client realize short-term and long-term investment goals.
• Provide simplified performance reporting, making it easy for clients to monitor their accounts.
• Support the client with ongoing professional advice, timely information about accounts and updates on the world’s financial markets.
• Manage a client's portfolio and make investment changes--without commissions--as a client's objectives or the economic climate changes.

It is worth noting that:

• Operating on a fee-paying basis may make the advice too expensive to obtain for the broader market otherwise catered for by commission-based advisers. If a client must pay a flat fee of $1000 to their adviser as a lump sum, this is less manageable for all but the wealthy, rather than the more manageable option of paying through regular charging and commissions. However this is not to say that fee-only is more expensive than paying by commission; commissions earned by brokers can add up over the course of a year, especially if many changes are made. It is worth noting that many fee-only advisors charge an annual fee that is deducted on a quarterly basis.
• On the other hand, if an advisor charges a flat percentage (e.g. 1% of total assets under management) for all clients, the advisor may not be able to afford to service clients below a minimum net worth.
• Asset based advisors may have the prerogative of managing all of a client's manageable monies. Although this is a particular bias for asset-based advisors, this can also lead to a more streamlined and efficient working relationship and service. However this may create a conflict of interest with regard to questions of the use of client funds. If a client inherits funds and is choosing to pay off debt or invest with the advisor, they should weigh the fact that the advisor is paid if the money is invested and not if the debt is paid off.
• While fee-only advisers cannot accept commissions, they may still have personal favorites amongst product providers and investment houses that lead to one provider being specifically favored over another when competing advice is given.
• If certain restrictions are not in place, there can be an incentive to take too much risk in a portfolio to generate additional gains that translate into "raises" for an asset-based advisor.

[edit] United States

In the United States, a firm registers as an investment advisor with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process.

Certain multi-state advisors may also register with the SEC, as well as certain Internet based advisors. If an advisor does not qualify for registration with the SEC, the adviser must register with the states where it maintains an office, as well as each state where its clients are located. There are de minimus exemptions in most states, typically exempting from registration those advisors with less than 6 clients, but the exemption varies from state to state. ^[10]

Common examples of investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) registered investment advisors.

In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.

In many cases, a registered investment advisor (RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner (CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. [4] or a Chartered Financial Analyst(CFA) holding a charter from the CFA Institute [5] after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a registered investment advisor.

The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors.^[11][12]

[edit] United Kingdom

In the United Kingdom investment advice is given either by a financial advisor or a stock broker.

Financial advisors need to pass an exam and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority, a UK government qango that must be satisfied the advisor is a “fit and proper person” before they may practice.

Financial advisors are either tied, multi-tied, or independent.

As the classifications suggest, tied advisors can only recommend financial products marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work.

Multi-tied agents perform a similar role, except they represent a number of different companies. This is sometimes referred to as the panel system.

An Independent Financial Adviser must offer whole of market advice and, in addition, must offer prospective clients the choice of paying a fee for advice, rather than being remunerated via commission from the financial product provider. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.

In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward certain products that offer high commission.

There are issues of client accountability, as the advisor — either tied or independent — has a moral duty to achieve this for clients. Best advice is difficult to achieve if the advisor is not independent; therefore a type of compromise exists where a tied or multi-tied advisor must recommend the most appropriate financial product available to suit their clients needs, even if a more appropriate product is available in the market place.

In the UK many believe impartial advice can be obtained only by consulting an independent financial advisor.

[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 Series 66 exams or just the FINRA Series 65 exam. Many brokerage firms still claim an exemption for their employees who sell fee based products and services.

[edit] See also

• Registered Investment Advisor
• Stock broker
• Stock trader
• Collective investment schemes
• Mutual funds
• Fee-only financial advisor
• Socially responsible investing
• Collective investment schemes

[edit] References

1. ^ Investment Advisers Act of 1940
2. ^ http://www.cfainstitute.org/
3. ^ http://www.cfp.net/
4. ^ http://www.cffp.edu/index.aspx
5. ^ http://www.business.govt.nz/fsp/
6. ^ http://afacompetence.org.nz/1-who-is-etito/
7. ^ http://www.openpolytechnic.ac.nz/
8. ^ http://afacompetence.org.nz/1-training-providers/
9. ^ NAPFA - The National Association of Personal Financial Advisors - FAQs
10. ^ [1]
11. ^ [2]
12. ^ [3]

[edit] External links

• UK Financial Services Authority
• 10 Questions to Ask When Choosing a Financial Planner
• AAFM American Academy of Financial Management
• IAIA International Association of Investment Advisers
• AIFA Association of Independent Financial Advisers - UK Trade body
• FSA website Financial Services Authority (UK)
• IAA Investment Adviser Association
• NAIFA National Association of Insurance & Financial Advisors
• SEC IA Search SEC Database of US Registered Investment Advisers
• SECLaw.com Financial Advisor Legal Information Center
• €FPA €uropean Financial Planning Association