CFA. Trustee. RIA. These terms are not exactly self-explanatory. But when it comes to finding a financial advisor, you’ll be better equipped if you know the industry jargon and what’s behind a slew of acronyms. So we’ve put together a handy glossary of fundamental financial advisor terminology and definitions that will help you master the language of financial advisors.
Broker. A broker’s primary service is to execute securities transactions on behalf of a client. Brokers must be licensed by the Financial Industry Regulatory Authority (Finra) and the North American Securities Administration Association (Nasaa). These organizations conduct securities qualifying exams.
The scope of service varies between brokers. While discount brokers generally offer rudimentary trading services, full-service brokers will also provide investment and financial planning advice.
Expect to pay more for a full service broker. Most brokers receive a commission per trade rather than charging a flat fee, but some, usually full-service brokers, have a hybrid fee structure depending on what they sell.
Chartered Financial Analyst (CFA). It is a professional designation issued by the CFA Institute. To qualify, advisors must complete an education program and pass a three-part exam on investment fundamentals, how to value assets, portfolio management and wealth planning. While the course material includes aspects of general wealth planning, the bulk of the course focuses on investment management.
Chartered Financial Consultant (ChFC). is a professional designation awarded by the American College of Financial Services. Certification reflects completion of nine basic financial planning courses and passing exams at the end of each course. Ongoing training is required to retain the ChFC title.
Certified Financial Planner (CFP). This is a professional designation for an advisor who is certified by the Certified Financial Planner Board of Standards. To earn certification, advisors must complete a seven-part financial planning educational program and pass a comprehensive final exam. Ongoing training is also required. A CFP is required to behave as a fiduciary in all facets of investing and financial planning to retain the designation.
Commission. A commission is compensation earned by brokers and paid advisors. It is a percentage of the client’s assets that are invested in an investment or insurance product, such as a mutual fund, ETF or annuity.
Paid Financial Advisor. An advisor who uses a fee-based compensation structure is paid primarily in fees, but may also earn commissions for the sale of certain investment or insurance products. Fees can be structured per session, per hour, or as a percentage of a client’s assets in the advisor’s custody.
Paid Financial Advisor. Advisors use a variety of fee structures for their services. Fee-only refers to a structure where the advisor receives service fees based on an hourly or per-session rate, on a regular subscription basis, or on a percentage of assets. The fee-only structure eliminates the potential conflict of interest that accompanies commission-based compensation. Many paid advisors are fiduciaries.
Trustee. A fiduciary is a person or company legally bound to work in the best interests of a client and to provide the highest level of care. Lawyers, guardians, real estate agents, trustees and corporate officers act as trustees. In the advisory industry, Registered Investment Advisers (RIAs) are legally required to meet a fiduciary standard when providing investment advice. This means offering advice in the best interests of clients, providing clear information and reports to clients, charging reasonable fees and disclosing any conflicts of interest. Advisors who are Certified Financial Planners (CFP), a professional designation obtained by completing a training program, must adhere to the fiduciary standard to maintain their certification.
Financial Sector Regulatory Agency (Finra). This agency is a non-profit organization that sets and enforces rules for individual brokers and brokerage firms. Its mission is to protect investors against fraud and unethical practices. Finra administers securities licensing exams and will revoke licenses and impose fines on brokers or brokerage firms that violate the rules.
North American Association of Securities Administrators (Nasaa). This group licenses and represents brokers in the states and provinces of the United States, Canada and Mexico. The membership organization’s mission is to preserve the integrity of the financial markets by regulating broker-dealers, educating consumers, and protecting consumers from fraud.
Open architecture. Open architecture refers to an investment platform that includes an advisor’s in-house and third-party investment products. With an open-architecture company, clients can choose from a large universe of mutual funds and ETFs for the best possible fit. A closed-architecture platform only includes proprietary investments and possibly an assortment of others. Advisors who work in closed-architecture firms are required to select investments for clients from a limited menu.
Registered Investment Advisor (RIA). This acronym refers to people or companies registered with their state securities agency or the federal Securities and Exchange Commission (SEC). RIAs (individuals and companies) are governed by securities laws. They stand out among advisors in that they are legally bound to meet the fiduciary standard.
Securities and Exchange Commission (SEC). The states and the federal government each have their own securities laws. At the federal level, the SEC is the agency that governs the financial services industry.
Wirehouse. A Wirehouse is a brokerage firm. The term, used for full-service brokerage firms of any size, is a throwback to a time when branch brokers were connected via telephone or telegraph systems to their head office for up-to-date market information and to perform timely transactions.
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