What is an SEC-Registered Financial Advisor?

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Finding the right financial advisor is like shopping for a tux or dress for a wedding. You can’t just walk into an outlet and find the right one of the rack in five minutes. Instead, you need to make a few decisions and order something tailored to your needs. Shopping for an investment advisor is the same way; you can’t just select the first person or firm you come across.

Different advisors specialize in various areas of finance. Some are trained to handle personal and family finances, while others invest large amounts of capital at the biggest banks and institutions. Navigating this vast spectrum of expertise can be tricky if you aren’t sure what you need. For most investors, the ideal advisor would be a fiduciary registered with the Securities and Exchange Commission (SEC) - a designation known as a Registered Investment Advisor (RIA).

What is a Registered Investment Advisor?

An RIA can have a number of specialties, but the key characteristic of a Registered Financial Advisors is that they are registered with the SEC and act as fiduciaries. A fiduciary is the highest standard in the industry, and advisors must make investment recommendations in their clients’ best interest. Fiduciaries do not accept a commission for their advice, opting instead for flat or hourly fees.

Financial advisors, like broker-dealers, aren’t held to a fiduciary standard. They’re on the next rung down - the suitability standard. When making investment recommendations, advisors must factor in a client’s investment profile (age, net worth, etc.). Still, they don’t necessarily need to be the best possible choices. Broker-dealers are free to recommend products they earn commission on as long as the suitability standard is met, which often presents a conflict of interest.

What are the Requirements to be a Registered Investment Advisor?

To become an RIA, an advisor must attain a certain level of education and experience and commit to the fiduciary standard of care. The specific requirements vary depending on the actual designation of the advisor. 

A Certified Financial Planner (CFP) is an RIA that hosts clients looking for a comprehensive personal or family financial plan. CFPs must complete a 120-course hour bachelor's program and pass the CFP Board exam. They also must log 6,000 hours of professional service and follow the CFP Board ethics code, which will decertify any advisor found guilty of fraud, embezzlement, or other financial misconduct.

A Certified Public Accountant (CPA) is also a fiduciary, but they specialize in tax law and corporate finance. CPAs often work for businesses looking for legal advice, accounting assistance, and tax compliance knowledge. The certification requires 150-course hours and passage of the strenuous CPA exam, which takes 18 months. CPAs are certified through the American Institute of Certified Public Accountants and must register with the state they wish to practice.

Choosing the Right Type of Financial Advisor

Investment advisors don’t fall into a ‘one-size-fits-all’ category. Some specialize in corporate affairs, others with personal needs in a holistic manner. Some will have experience in crypto investing or derivatives trading; others may focus on taxes and estate planning. 

Choosing a financial advisor first requires looking inward at what we want to accomplish. Is the goal to save for retirement and provide a smooth inheritance process to heirs? Then a CFP is likely to provide the best services. But a CPA will be more attuned if you’re looking for ways to manage a corporate balance sheet or reduce tax obligations. Investment portfolios aren’t something to play around with - be sure to hire an advisor who fits your specific needs.

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