A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory body in order to provide advice.
Relationships between clients and financial advisors can be characterized by principal-agent problems, as financial advisors may possess information and conflicts of interest that lead to dishonest advice and misconduct.
Financial advisors provide a broad range of services that may include investment advice, retirement and estate planning, wealth management, tax‑efficient strategies, insurance solutions, and holistic financial guidance, depending on their licensing, credentials, and scope of practice.
Role Financial advisers typically provide financial products and services, depending on the qualification examinations they hold and the training they have. Financial advisers are registered, not licensed. For example, a licensed insurance agent may be qualified to sell both life insurance and variable annuities, because the insurance agent holds an insurance license and holds the Series 7 qualification examination. A broker (Series 7) may also be a financial planner. Any advisor can say they are a financial planner; they do not have to hold the CFP (Certified Financial Planner) designation to do so. A financial adviser may create financial plans for clients or sell financial products, or a combination of both. They may also provide insight on savings.
In Canada, the regulatory structure differs significantly. Individuals may hold a life and accident and sickness insurance licence, obtained through the Life Licence Qualification Program (LLQP), which permits the sale of life and health insurance, segregated funds, and annuities. Securities advisors are registered under the Canadian Investment Regulatory Organization (CIRO) and may qualify to sell mutual funds, exchange‑traded funds (ETFs), equities, bonds, or derivatives depending on their registration category and completed courses, such as the Canadian Securities Course (CSC). Many advisors are dual‑licensed, allowing them to offer both insurance and investment products.
Financial planning is a separate professional function. In Ontario and Québec, the titles Financial Planner and Financial Advisor are legally protected and may only be used by individuals who hold approved credentials from recognized credentialing bodies. Common planning designations include CFP, QAFP, PFA, CLU, and RFP. Advisors may create financial plans, provide holistic financial guidance, or combine planning with product distribution depending on their qualifications and regulatory permissions.
Compensation A financial adviser is generally compensated through fees, commissions, or a combination of both. For example, a financial adviser may be compensated in one or more of the following ways: An hourly fee, for advisory or planning services A flat fee, such as $3,500 per year, for an annual portfolio review or $5,000 for a financial plan. This is often referred to as "flat fee advisors" or "fee-based advising" Asset-based fee, typically a percentage of assets under management (AUM), such as 1% annually of assets managed. Mutual fund commissions, including front‑end loads, deferred sales charges (DSCs), or ongoing trailer fees (the latter being common in Canada). This is based on the amount invested in a mutual fund or variable annuity. Insurance commissions, including first‑year commissions, renewal commissions, and service fees for life and health insurance products. Segregated fund commissions, which apply to insurance‑based investment products. A commission on the securities transactions, such as $12 per trade, where permitted, including mark‑ups or mark‑downs on fixed‑income products. A mark-up, when one buys house products (such as bonds that the broker holds in inventory), or a mark-down when they are sold.
Regulation
United States Advisors typically fall into two separate categories: broker-dealers (BD) who typically earn a commission from sales and registered investment advisers (RIAs) who typically charge a fee based upon assets under management while serving as fiduciaries and are registered at the state or federal level. Additionally, an advisor can be either affiliated with a large firm ("wirehouse") or be independent (e.g., independent broker-dealer or IBD). There are also "hybrid RIAs" who are both broker-dealers and registered.
The number of independent broker-dealer firms has declined from 1175 in 2007 to 819 in 2018, while RIA firms have grown from 9,538 to 15,645 over the same time period. As of 2016, the largest IBD firm by revenue was LPL Financial followed by Ameriprise Financial and Raymond James Financial. Edward Jones is another large broker-dealer, and in 2017 stopped selling commission-based funds in response to a best interest fiduciary rule by the Department of Labor (DOL). As of 2019, Merrill Lynch had not adopted an RIA model while Wells Fargo and Goldman Sachs had opened up to the business model. As of 2019, the largest fee-only RIA firm was Edelman Financial Engines with over $200 billion in assets under management, under the ownership of private equity firm Hellman & Friedman. Other large fee-only RIA firms include Fisher Investments, which has over $120 billion in assets under management. As of 2019, 80% of the $4 trillion managed by RIAs were on one of four platforms: Fidelity Investments, Schwab, and Pershing LLC. Some RIAs operate inside "RIA aggregators" which provide institutional support similar to a wirehouse.
In the United States, the Financial Industry Regulatory Authority (FINRA) regulates and oversees the activities of brokerage firms, and their registered representatives. The Securities and Exchange Commission (SEC) regulates investment advisers and their investment adviser representatives. Insurance companies, insurance agencies and insurance producers are regulated by state authorities. Investment Advisers may be registered with state regulatory agencies, the Securities and Exchange Commission, or pursuant to certain exemptions, remain unregistered.
In the United States, a financial adviser carries a Series 7 and Series 66 or Series 65 qualification examination. According to the U.S. Financial Industry Regulatory Authority (FINRA), qualification designations and compliance issues must be reported for public view. Details of formal compliance issues can be found on the Investment Adviser Public Disclosure (IAPD) website. FINRA specifies the following groups of "investment professionals" who do not necessarily or always represent a "financial adviser:" brokers, investment advisers, private bankers, accountants, lawyers, insurance agents and financial planners. Financial advisors need to be able to take the full picture of the client's financial situation into account.
Fiduciary standard The anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on Investment Advisors to act as fiduciaries in dealings with their clients. This means the adviser must hold the client's interest above its own in all matters. The SEC has said that an adviser has a duty to:
Make reasonable investment recommendations independent of outside influences Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer. Make recommendations based on a reasonable inquiry into a client's investment objectives, financial situation, and other factors Always place client interests ahead of its own.
Since the financial crisis in 2008, there has been great debate regarding the fiduciary standard and to which advisers it should apply. In July 2010, The Dodd–Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures, including enhanced disclosures and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisers regulated by the 1940 Act. As of July 2016, the SEC has yet to extend the fiduciary duty to all brokers and advisers regardless of their designation. However, in April 2016, the Department of Labor finalized a thousand-page rule holding all brokers, including independent brokers, working with retirement accounts (IRAs, 401(k)s, etc.)Any account designated as a qualified retirement plan under ERISA to the fiduciary standard.
In June 2016, as a way to address adviser conflicts of interest, the DOL ruled in a redefinition of what constitutes financial advice, and who is considered a fiduciary. Prior to 2016, fiduciary standards only applied to Registered Investment Advisers (RIAs), and did not impact brokers, who previously operated under a less strict "suitability" standard that provided leeway to provide education without "advice". The new ruling requires all financial advisers who offer advice for compensation to act as fiduciaries and meet the fiduciary standard, but only when dealing with retirement accounts such as IRA or 401(k) accounts. The ruling includes one exemption for brokers, Best Interest Contract Exemption, which can be allowed if the broker enters into a contract with the plan participant and meets certain behavioral requirements. The new ruling does not impact the advice or investment product sales pertaining to non-retirement accounts.
Opposition to the fiduciary standard maintains that the higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers. Other criticisms suggest that consumers with smaller retirement accounts may be less able to access personalized advice due to advisor/broker compensation models, many of which have been restructured to comply with the fiduciary rule.
The decision has caused a massive shift in the financial community. One survey found that 73% of advisors were concerned the rule would have an adverse impact on how they do business, 71% anticipated increased client frustration, and 66% planned to reevaluate the products they recommend.
Enforcement of the rule began on 9 June 2017 but is no longer enforced since the DOL fiduciary rule was officially vacated on 21 June 2018 by the U.S. Fifth Circuit Court of Appeals. On 5 June 2019, the SEC adopted Regulation Best Interest, establishing a new standard of conduct under the Securities Exchange Act of 1934 ("Exchange Act") for broker-dealers, with compliance due to begin 30 June 2020.
In July 2020, the DOL proposed a new fiduciary rule, and made two changes to guidance and regulation.
Registration A registered investment adviser (RIA) refers to an IA that is registered with the SEC or a state's securities agency and typically provides investment advice to a retail investor or registered investment company such as a mutual fund, or exchange-traded fund. Registered Investment Advisors are regulated by either the SEC or by the individual states, depending on the amount of assets under management.
Canada
In Canada, the spelling "financial advisor" (with an o) is the standard form used by regulators, credentialing bodies, and the financial services industry, including FSRA, CIRO, FP Canada, and major financial institutions.
The financial advisory industry in Canada is regulated through multiple frameworks depending on the products and services an individual is licensed to provide. In Ontario, the titles "Financial Planner" and "Financial Advisor" are legally protected under the Financial Professionals Title Protection Act, administered by the Financial Services Regulatory Authority of Ontario (FSRA). Individuals may use these titles only if they hold an approved credential from an FSRA‑approved credentialing body. Financial advisors may hold insurance licences, securities registrations, financial planning credentials, or a combination of all three.