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Different Types of Financial Professionals

Here are some examples of the types of financial professionals or firms that you may encounter. While I tried to list these examples from worst to best, please note that (1) I am biased and (2) there is no perfect way to order these. There are different types of licenses (i.e., broker, advisor, and agent), and there can be overlap between these categories.

In general, I recommend trying to find someone you can trust by investigating public records (e.g., BrokerCheck, FINRA’s arbitration and mediation database, as well as local court records for lawsuits). Once you find someone with a clean record, you want to do your best to ensure they are competent. Of course, this can be a challenging endeavor, but I hope the descriptions below provide helpful context. 

1. Scammers & frauds: This could be a licensed professional or someone without any professional license or designation. Their intent is to help themselves at your detriment. This reminds me of the Samuel Clemens quote “The return of my money is more important than the return on my money.” [###Sign here image###]
2. Brokers and agents: These are licensed professionals who make money when they sell you a financial product that pays them a commission. They are held to a suitability standard.  That is, they can sell you products that are reasonably appropriate even if they know better products or investments are available. In particular, they do not have to uphold a fiduciary standard of care. They are typically focused on transactions and earning commissions, rather than your broader situation and what might be the best overall strategy for you.
3. Dual registrants: These professionals are licensed as both brokers (see #2) and advisors (see #4). You will have to read the fine print to determine whether their advice and services adhere to a suitability versus fiduciary standard. This is the model most large bank wealth management firms pursue. These professionals are typically well-dressed with polished pitches, but they are potentially dangerous wolves dressed in sheep’s clothing. Moreover, their firms will almost never provide, let alone emphasize, financial planning services.
4. “Reformed” mega-bankers: These are professionals who previously worked for the big bank firms (a.k.a., wirehouses). They often jump around from one bank wealth firm to another and tell their clients they were constrained by the previous firm’s policies. In other words, they made the move to be able to provide their clients with better investments or services. At the same time, they are typically securing negotiating sign-on deals and better compensation packages with the new firm. Many will make these jumps every handful of years or so. However, some eventually go out on their own. Unfortunately, they often end up aligning with another broker-dealer firm. That means their clients are just jumping from one frying pan to another, but they benefit from only having to share a smaller chunk of their income with the new broker-dealer.
5. Aggregators: Typically backed by private equity, these advisory firms are focused on growing profits by acquiring independent firms and streamlining operations. While you might interface with a recently acquired smaller firm, they are often linked to a central broker-dealer firm whose growth-oriented business model will minimize other activities. For example, larger entities generally impose gravity away from time-consuming financial planning activities and the more personalized service models that made boutique firms attractive in the first place. [client vs. P&L !]

FIDUCIARY BORDERLINE

6. Independent “pie chart” advisors: These are true fiduciaries who want to do good, but focus solely on portfolios – typically involving a variety of low-cost index funds (e.g., from Vanguard) or some other “secret sauce” investment strategy. Because their services are confined to your investments, their financial plan may be nothing more than a simple pie chart stipulating what is in your portfolio. Despite good intentions, these professionals lack expertise or interest in providing financial planning. This service model can overlook important planning opportunities, often resulting in unnecessary risks and paying significantly more taxes.
7. Independent advisors offering financial planning services: These are typically sharp and entrepreneurial individuals or teams who operate on a fiduciary standard while providing investment and financial planning services. They generally utilize financial planning software to run simulations and make projections for various planning maneuvers. They sound confident while discussing and presenting their planning strategies. However, many of the key planning decisions are made individually.
8. Independent with “optimized” financial planning: These are fiduciaries who offer planning that coordinates (mathematically optimizes) the decisions across Social Security, pensions, portfolios, Roth conversions, withdrawal strategies, and more. Please see our Value Proposition and Tax Strategies pages for more information.

NOTE: Professionals from almost any of the above categories may or may not be a certified financial planner (CFP). While I am a member of the Financial Planning Association, I made the conscious decision not to pursue the CFP designation. I believe the organization has started to focus more on marketing for its members than on promoting higher standards for financial planning. I regularly encounter clients of CFPs who receive little to no planning advice. Moreover, many of them have purchased financial products from their CFP that represent blatant violations of the fiduciary standard. Until the CFP board starts to raise its standards for planning expertise (e.g., integrating optimization) and monitors the behavior of its members (ethics!), I will not pursue the designation.