Financial vs. Investment Advisor: What’s the Difference?


March 25, 2022

Financial vs. Investment Advisor: What’s the Difference?

March 25, 2022

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Titles do matter—and in the financial services world, so many titles exist that can and do mean very different things for you, the consumer. The terms financial advisor and investment advisor are often used interchangeably, but there are crucial differences between the two. Throw in financial planner, and it can get a whole lot more confusing. Many of the differences come down to the language used in their titles, who regulates each designated body, and the standards they are held to.

The landmark Investment Adviser Act of 1940 outlined regulations for investment advisers, including requiring registration with the SEC and complying with regulations designed to protect investors. According to Kitces.com, “Congress also included in the Advisers Act under Section 208(c) a requirement that it wasn’t even permissible to use the ‘investment counselor’ title, or to ‘represent as an investment counsel,’ without actually being principally in the business of providing such advice services (and subject to the fiduciary standard that would apply to such advice). In other words, advisors weren’t permitted to advertise that they were advisors unless they agreed to be regulated as (fiduciary) advisors.”

Again, according to Kitces.com, the International Journal of Consumer Studies published a recent study exploring how job titles shape consumer perceptions in the financial services industry. They evaluated consumers’ perceptions of the term ‘financial advisor’ and similar titles and how disclosures can provide clarity on an advisor or salesperson’s true role. “The study found that, in practice, titles do matter, consumers do have substantively different expectations regarding both the competency and loyalty (i.e., trustworthiness) of those who use ‘financial advisor’ or especially ‘financial planner’ as their title in lieu of ‘stockbroker’ or ‘insurance agent’, and that more generally consumers do distinguish between sales-oriented titles and advice-oriented titles. On the other hand, the research also shows that disclosures do matter as well, and in fact, when consumers see both a title and a disclosure, it’s actually the disclosure that was found to matter more.”

Before diving in, one important distinction to make is between a registered investment adviser (RIA) and a broker-dealer. Broker-dealers are firms (or individuals) licensed to sell securities; RIAs do not sell securities but instead provide advice on what securities their clients should invest in and/or sell. Broker-dealers are typically commission-based, meaning they are paid based on each purchase or sale of a security. RIAs are generally fee-based, receiving a set fee or percentage of their assets under management. Firms may register as both a broker-dealer and registered investment adviser. According to FINRA.org, “The SEC regulates investment advisers who manage $110 million or more in client assets, while state securities regulators have jurisdiction over advisers who manage up to $100 million. Advisers with less than $100 million in assets under management (AUM) must register with the state regulator for the state where the adviser has its principal place of business.” On the other hand, the Financial Industry Regulatory Authority (FINRA)—a non-governmental entity—regulates brokers and broker-dealers.

Adviser vs. Advisor

One of the first misunderstandings is the use of advisor vs. adviser. Some claim that adviser is the firm entity and advisor refers to an individual. However, adviser—with an e—was first introduced in the Investment Adviser Act of 1940 for both a registered investment adviser (RIA) and an investment adviser representative (IAR). This act created the RIA entity (discussed below) and established the fiduciary standard for these RIAs and the investment adviser representatives that work underneath them. Advisor is commonly used in the financial services industry and is often used interchangeably with adviser when referring to individuals working in that capacity.

Registered Investment Adviser vs. Investment Adviser Representative

The second common misunderstanding is between the acronyms RIA and IAR and where financial advisors and planners come into play in the advisory space. To put it simply, the RIA is the firm and the IAR represents the individual working under the firm. A registered investment adviser (RIA) refers to the legal entity registered to provide advisory services with the U.S. Securities and Exchange Commission (SEC) or a state regulatory agency—or both, depending on the assets under management (AUM) of the firm. The SEC states, “An investment advisor is an individual or a firm that is in the business of giving advice about securities to clients.” RIAs help you select and manage the securities that comprise your investment portfolio, including stocks and bonds. RIAs have a fiduciary duty, meaning they are required by law to put your interests ahead of their own and disclose material conflicts of interest. This means that their financial recommendations must be in your best interest and made to help you reach your goals, superseding how much money they may make from their recommendations. They are often held to a higher standard than other financial professionals.

An investment adviser representative (IAR) refers to the individual underneath an RIA or broker-dealer licensed to formally deliver financial and investment advice and/or analyze investment securities for compensation. By extension, they are also regulated by the SEC and state regulatory authorities. They provide investment advice for an agreed-upon fee. Most states require IARs to pass the applicable licensing exams, including the FINRA’s Series 65, Uniform Investment Adviser Law Exam, or another equivalent according to their state’s regulations. Financial planners and other financial professionals may be registered as investment advisors.

Financial Advisor vs. Financial Planner

With that, let’s shift to financial advisors and financial planners. Financial advisor is a more generic and broad term for someone who helps manage your money (including investments) and can refer to a number of different financial professionals, like insurance agents, financial planners, money managers, stockbrokers, and so on—though it is most commonly used in reference to brokers (those who can buy and sell securities). If we’re using the term financial advisor to mean a broker-dealer, the applicable regulatory bodies are the SEC (if they manage more than 100 million dollars of assets) and FINRA. According to U.S. News, “Brokers are also allowed to advise without needing to register as an investment advisor provided the advice they give is ‘solely incidental to their work as a broker’ and they are not given ‘special compensation’ for it, according to the SEC.”

Another key difference between IARs and financial advisors is that some financial advisors are held to the suitability standard, a more lax requirement than the fiduciary standard IARs are held to. This means that financial advisors are required to provide advice that is “suitable” for their clients; “the recommendation doesn’t have to be the ‘most suitable’ option — there could be a better product out there — but as long as the investment isn’t bad for the client, the advisor can recommend and sell it” (quote from U.S. News). In 2019, the SEC passed a new regulation called Regulation Best Interest, which went into effect in 2020. An SEC press release stated, “Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.” Forbes stated that “Regulation Best Interest aims to hold brokers to a higher standard. The new regulation requires brokers to stop referring to themselves as advisors if they aren’t working under a fiduciary standard.” However, not all advisors are held to this standard depending on their fee structure, assets under management, and the body that regulates them. Plus, the terminology contained in the regulations is vaguer than the fiduciary standard for IARs, opening the door to the dreaded “gray area.”

Financial planners are a type of financial advisor, albeit a more defined term (and note that not all financial advisors are financial planners—a bit confusing, right?). Financial planners can serve a variety of roles, including broker-dealers, investment advisors, accountants, and insurance agents. The Certified Financial Planner Board defines financial planning as “a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.” According to Forbes, the concept of financial planning incorporates a vast range of services: investment planning, insurance planning, cash flow/budget planning, tax planning, education savings planning, retirement planning, and estate planning—plus more. “And at the core of the practice is not products, services, or proprietary strategies—but you. Your hopes, dreams, fears, concerns, priorities, goals, values, and aspirations are the driving force behind everything.”

The term financial planner can be convoluted in the industry, encompassing people from a broad variety of professions. The Certified Financial Planner (CFP®) certification is considered the standard of excellence in the field. Professionals with this designation undergo extensive education and training and are held to certain ethical standards outlined by the CFP Board. Other professional designations could include a Chartered Financial Consultant (ChFC) or Chartered Financial Analyst (CFA), again, among others.

According to SmartAsset, “fee-only planners have a fiduciary duty to their clients,” the same one investment advisers are held to, while “fee-based planners get additional compensation from commissions. Those who are commission-based are required to follow a suitability rule.” Depending on what securities licenses they hold, they are required to pass a variety of FINRA series exams.

So, What Type of Financial Professional Should You Seek Out?

The answer to this question really depends on you and what you’re looking for. If the fiduciary standard is important to you, registered investment advisers and their applicable investment adviser representatives are held to this highest standard. Often, these firms have Certified Financial Planners as part of their overall advisory team—some IARs may even hold this designation themselves. We recommend doing your due diligence to find the right advisor fit for you. This may include researching their designations and overall experience. You can refer to your advisor’s disclosures, ADVs, and CRS, which should all be easily accessible on their website and provided upon request.

Often, a team with an investment professional, tax professional, and financial planner can meet many, if not all, of your financial needs. One simple question—“Are you a fiduciary?”—can help give you peace of mind in a wide world of confusing jargon, fee structures, and available products and services.


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References

CFP Board, (November 21, 2018). The 7 Step Financial Planning Process. https://www.cfp.net/ethics/compliance-resources/2018/11/focus-on-ethics—the-7-step-financial-planning-process#:~:text=Financial%20Planning%20is%20a%20collaborative,Client’s%20personal%20and%20financial%20circumstances.

FINRA. (n.d.) Investment Advisers. https://www.finra.org/investors/learn-to-invest/choosing-investment-professional/investment-advisers

Hicks, Coryanne. (June 13, 2019). Investment Advisor vs. Financial Advisor: There is a Difference. U.S. News. https://money.usnews.com/investing/investing-101/articles/investment-advisor-vs-financial-advisor-there-is-a-difference

Houston, Rickie. (October 6, 2021). Investment Advisor vs. Financial Planner. SmartAsset. https://smartasset.com/financial-advisor/investment-advisor-vs-financial-planner

Kagan, Julia. (January 28, 2021). Investment Advisory Representative (IAR). Investopedia. https://www.investopedia.com/terms/i/iar.asp

Kitces, Michael. (September 20, 2021). Why XYPN Is Petitioning The SEC To Implement Title Reform Under Section 208(c). Kitces.com. https://www.kitces.com/blog/xypn-sec-petition-208c-advisers-act-title-reform-solely-incidental/

Majaski, Christina. (December 19, 2021). Financial Planner vs. Financial Advisor: What’s the Difference? Investopedia. https://www.investopedia.com/articles/personal-finance/040215/financial-advisor-vs-financial-planner.asp

Maurer, Tim. (February 20, 2022). Financial Planning: What It’s Not and What It Is. Forbes. https://www.forbes.com/sites/timmaurer/2022/02/20/financial-planning-what-its-not-and-what-it-is/?sh=24ecd5633a74

Mercado, Darla. (June 4, 2020). A new rule could make it harder to figure out if your financial advisor is on your side. CNBC. https://www.cnbc.com/2020/06/04/a-new-rule-could-make-it-harder-to-figure-out-if-your-financial-advisor-is-on-your-side.html

Nebraska Department of Banking and Finance. (n.d.) Broker-Dealer vs. Investment Adviser. https://ndbf.nebraska.gov/industries/securities/broker-dealer-vs-investment-adviser#:~:text=A%20broker%2Ddealer%20is%20a,a%20person%20should%20invest%20in.

Onramp Invest. (n.d.) RIA vs IAR. https://academy.onrampinvest.com/primers/ria-vs-iar/

Smith, Kelly Anne. (March 5, 2021). What Regulation Best Interest Means For Your Financial Advisor. Forbes. https://www.forbes.com/advisor/investing/regulation-best-interest/

Tharp, Derek. (August 30, 2021). How Financial Advisor Titles Shape Consumer Perceptions. Kitces.com. https://www.kitces.com/blog/financial-advisor-titles-tharp-stockbroker-advertising-disclosure-best-interest-fiduciary-form-crs/

U.S. Securities and Exchange Commission. (October 2, 2019). Investment Advisers Act of 1940. https://www.govinfo.gov/content/pkg/COMPS-1878/pdf/COMPS-1878.pdf

U.S. Securities and Exchange Commission. (2019). SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals. SEC.gov. https://www.sec.gov/news/press-release/2019-89