HOW THE FINANCIAL PLANNING INDUSTRY WORKS^©

Registered Investment Advisor:
An important sub-segment of the securities industry is the “registered investment advisor” or “registered investment advisory firm”, both generally known as RIA (see diagram above). RIAs operate under securities laws, but work a little differently than registered reps. Rather than earning commissions from the sale of securities, they charge their clients flat fees or fixed percentages for managing the clients’ money or doing the investment planning for the client. These fees may be a percentage of the money under management for a given client, say 1.5% per year of the total client money under management, may be hourly, or may be a combination of both. Either way, this is called “fee based planning” or “fee only planning”. Fee based or fee only planning is a common term which RIAs use to describe their services. The advantage for the client is that the RIA will not be tempted to sell the client a security solely to generate a commission. Instead, the RIA’s compensation is often performance based, the more the RIA makes the client’s account grow, the greater the fee earned by the RIA will be. For example, if a client’s account is worth $100,000 in year one, and the RIA charges a 1.5% management fee, the RIA will earn $1,500 for that year. If the account grows to $115,000 in year two, the 1.5% fee to the RIA will grow to $1,725. Many people feel that this fee system tends to keep the RIA more honest in making investment choices and recommendations, and that the RIA works harder to achieve growth vs. how a straight commission rep would work.

RIAs answer directly to government regulators. A series 6 (mutual funds sales) or series 7 (individual stock sales) does not qualify a rep to be an RIA. To qualify to be an RIA, the rep must either complete the series 63 (if the rep already has already completed the 6 or 7) or the series 65 (if the rep has not completed the 6 or 7). In many states, individuals who have completed the Certified Financial Planner TM training and designation (see the next topic) qualify for the RIA license without further examination. The whole RIA program is based on federal law and the SEC has overall charge of and responsibility for the system. But much of the day-to-day regulation is done at the state level. If the RIA has less than $25 million of client money under management, the RIA is regulated by the state securities commission only. For $25 million+ client money under management, the RIA graduates to regulation directly under the SEC.

RIAs are not required to affiliate with a broker dealer. They work directly under their government securities regulator (state or SEC). RIAs work independently of day-to-day supervision. They do not have a broker dealer compliance department reviewing every action they take, and the regulatory system is somewhat looser than BD compliance departments. RIAs are, of course, self employed.

Many, if not most, RIAs have other financial planning licenses. They usually have life insurance/annuity licensing so that they can sell those products when they when they deem it to be beneficial to the client. RIAs often have other securities licenses, besides the RIA. Those other licenses are under a broker dealer. Like the life insurance license, other securities licensing gives the RIA the flexibility of selling a security on commission if the RIA wants to or deems it to be beneficial to the client. In these multiple licensed situations, the RIA shifts from one regulatory environment to another, depending upon the selling and financial planning circumstances. But, when the RIA is working under the RIA or life/annuity license, the broker dealer has no control or say over the RIA activities (except as noted in the next paragraph).

Many RIAs are not actually independent. They have a series 63 or 65 license, but they register with their regulators as a “representative” of an RIA firm. The RIA firm is a company which is registered or licensed as an RIA firm to employ fee based and fee only planners, and the individual planners working for that firm are called RIA representatives. These RIA reps do not bear the full regulatory burden which they would if they worked independently, the RIA firm bears most of the burden. To make things even more confusing, sometimes a broker dealer is also an RIA firm. So an individual planner might be regulated under the registered rep side of the BD when selling securities for commissions, then work for the RIA side of the BD when performing fee planning, and then not work for the firm at all when selling life insurance or annuities.

Certifications:
Life/annuity agents, RIAs and registered reps may, totally at their option, go thru specialized training and testing to receive any of a number of certifications. Neither life insurance/annuity or securities licensing from either the state or federal government require these certifications. These financial professionals often take the training and testing to further advance their skills, but largely they do this to obtain the certification. The certification generally entitles the professional to use the initials of the certification at the end of their name, on their business cards, letterhead, advertising materials, etc. For example, John Doe, CLU, CFP®. The use of these initials is often referred to as “credentials”.

Some common life insurance/annuity related certifications are: Chartered Life Underwriter (CLU), Life Underwriter Training Council Fellow (LUTCF) and Chartered Financial Consultant (ChFC).

There are many other certifications which are used by both the life insurance and the securities industry. These include Certified Financial Planner TM (CFP®), which is the most prestigious credential in the financial planning industry, Registered Financial Consultant (RFC), Certified Senior Advisor (CSA), and many other lesser known certifications.

The Certified Estate Advisor® (CEA®) designation is NAFEP’s own certification covering estate planning. This certification is attractive to life/annuity agents, RIAs and registered reps for the same reasons, the expertise which they gain and the credentials. Also, none of the non-NAFEP, major certifications are estate planning oriented. So the CEA® certifies the professional in an additional area of expertise which is important in their profession.

What is a “financial planner”?
The term, financial planner, is a broad and vague term. Almost any life/annuity agent or securities rep will refer to themselves as a financial planner, regardless of their licensing, certifications, education, experience or their product specialization. The agents and reps are commonly referred to as financial planners by the industry and the media. So the term “financial planner is non-specific and widely used inside and outside the financial planning industry, and generally refers to anyone who is licensed to sell in any part of the financial planning industry.


PREVIOUS | >NEXT | >1 | >2 | >3 | >4