14 Types of Financial Advisors: Managing Acronym Soup


A hearty bowl of acronym soup. What could be better? Photo by Chrissy Wainwright.

A hearty bowl of acronym soup. What could be better? Photo by Chrissy Wainwright.

Acronyms. Acronyms everywhere — or, at least, when you’re picking out a financial advisor, that’s what it feels like. (And, if you are picking out a financial advisor, don’t miss my 40 curveball questions to ask a financial advisor.) What do they all mean? What types of financial advisors are there?

That’s where I come in. That’s where I always come in. Like when you asked, “What should I read?” And I gave you 7 must read financial advising websites. Or when you asked, “Who needs a financial advisor?” and co-contributor Austin told you. Or when you asked “What does a financial advisor do?” and I gave you an in-depth look.

I even answered the hyper-specific questions, as evidenced my post on how much financial advisors earn in South Africa.

So, if you’re looking for a financial advisor, and you’re overwhelmed with all the acronym soup that you’re being served, don’t panic.

Once again, I’ve got you covered.

Types of Financial Advisors

Types of financial advisors by fee structure

As I mentioned in my post on financial advisor rates, financial advisors can be sorted into 4 types or groups depending on how they make money. In this way, we can think of the types of financial advisors as:

  • Commission-Based Advisors: Commission-based advisors make money by selling you something. Consider, for instance, someone who sells life-insurance. In general, these people get some cut of the profit of everything they sell. As a result, how they make money can be less than obvious. They may give away their services for “free,” with financial advisor rates of essentially zero. Unfortunately, this means that a commission-based advisor (such as a broker) won’t have your best interests in mind. She makes money when she sells you something, not when she makes you money.
  • Fee-Only Advisors: Fee-based advisors make money by charging clients a fee. Typically, they will have flat financial advisor rates. This is very reminiscent of how you might be billed by a lawyer: x dollars per hour. Generally, fee-only advisors have no reason to persuade you to buy something, an advantage over commission-based advisors, but they still have a limited incentive to make you money. Generally, fee-only advisors are the right choice if you need a few hours of an expert’s time, perhaps to rebalance your portfolio.
  • Percentage-Based Advisors: The most popular fee-structure, when it comes to financial advising rates, is to charge clients a flat percentage. The industry standard is 1%. Thus, for a client with 200,000 in savings, a financial advisor would charge a yearly fee of 2,000 dollars (or 1%). This is also my preferred fee structure, for the simple reason that the incentives match up. When you make money, your advisor makes money. This is a powerful advantage over those who charge a flat fee and commission-based advisors.
  • Combination Advisors: Finally, combination advisors make money both by charging client a fee and via commissions on different sales. As their name suggests, they’re some combination of the above three. Note that there is a difference between fee-only advisors and fee-based advisors: fee-based advisors also make commission money. Fee-only advisors don’t.

As covered in that post, percentage-based advisors, of the types of advisors, the one that I prefer, mostly because their incentives align pretty well with yours: when they make money, you make money. (Although not always — for you, paying off debt might be the best move, but an advisor might make more if you invest that money instead. I mentioned this before in my post on questions to ask a financial advisor.)

Types of financial advisor by acronym

Of course, financial advisors are much more varied than a fee structure breakdown would imply. As I mention in the financial advisor rates post, a fully accurate classification of financial advisors would be way, way more complex than the periodic table of elements. Probably by a couple orders of magnitude.

And, while a breakdown of types of financial advisors by fee structure is simple, it fails to capture a lot of the different financial advisor jobs, and it does nothing to help with acronym soup. But don’t worry. I’ve got you covered.

  • RIA: RIA stands for Registered Investment Advisor. What does that mean? According to The Investment Advisers Act of 1940, an investment advisor is a “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.” To be a Registered Investment Advisor, then, one is both an investment advisor and either registered with the state or with the SEC — registration with the SEC is only required when one manages more than 100 million dollars. Basically, an RIA has done little more than fill out a few forms and jump through some hoops.
  • CFP: CFP stands for Certified Financial Planner. In order to qualify as a CFP, one must jump through many more hoops than to become an RIA, including having a bachelor’s degree (or work equivalent), taking 18 credit hours on a number of topics, pass a 10-hour test, demonstrate 6000 hours of work experience, sign an ethical pledge, and commit to 30 hours of continuing education per year.
  • CFA: CFA stands for Chartered Financial Analyst. A CFA must pass similar, but slightly more rigorous tests than a CFP. However a CFA differs in that the tests are geared much more towards the analysis of different assets, mastery of tools, rather than towards financial planning.
  • CPA: CPA stands for Certified Public Accountant. A CPA must pass the Uniform Certified Public Accountant Examination, which covers, among other things, business law, accounting, auditing, and reporting. A CPA is a good choice if you need help with accounting minutia.
  • CLU: CLU stands for Chartered Life Underwriter. Often, someone will have this in addition to, say a CFP. This indicates that the person has passed some tests about life insurance.
  • ChFC: ChFC means Chartered Financial Consultant. This designation is similar to a CFP, except that they undergo similar-but-slightly-different tests.
  • PFS: PFS stands for Personal Financial Specialist, and is a specialization awarded to Certified Public Accountants (CPAs) who complete more continuing education and pay a yearly fee of several hundred dollars. This designation is similar to a ChFC and CFP, except this person will also have experience in accounting.
  • CIMA: A CIMA is a Certified Investment Management Analyst, which is not a very well known program, as far as I can tell, but it looks to be similar in content to those of a PFS, ChFC, or CFP.
  • CIC: A CIC is a Chartered Investment Counselor. This is a specialization for a CFA who has demonstrated the ability to oversee investments and have investment counseling skills.

 Final thoughts

Phew. Okay. We’ve been through all of those acronyms, so what should you look for? In general, when it comes to financial advising, be on the look out for someone who holds a CFP, a ChFC, a PFS, or a CIMA. Each of these look to be roughly equivalent.

Of course, don’t let these credentials lull you into a false sense of security! Remember, Bernie Madoff had all kinds of credentials, but that didn’t do his investors any good.

In general, when it comes to acronym soup, do your due diligence. Ask them questions. Use my list of curveball questions to ask a financial advisor, make sure that they charge in the right way, so that their incentives line up with your success, as covered in my post on financial advisor rates.

And, then, and only then, can you sit down to a relaxing bowl of acronym soup.

 

 

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