Financial Professionals: A Breakdown of Crucial Distinctions

Show of hands… Who’s confused about what the different types of financial professionals do?

In 2008, Angela A. Hung and Joanne Yoong published an article in the Social Science Research Network’s electronic journal. At that time, according to the Financial Industry Regulatory Authority (FINRA), financial professionals were using more than 100 different professional designations. Since then, things don’t appear to have improved much…

This title overload leads to quite a bit of confusion among the public, those seeking financial assistance, and even those who are far more financially savvy than most. Heck, if we’re being honest, it’s confusing to those in the industry!

Is this the main reason that, while so many people feel they could benefit from having a professional look at their investment portfolio or overall financial strategy, so few end up seeking outside assistance? Maybe, maybe not. But it can’t hurt to clear up a few things…

The best financial advice I can give to someone who’s
overwhelmed with their finances is “ask for help!”
David Angway

Key Differences

Most people, outside of finance, don’t understand the subtle distinctions between various professionals in the financial industry. And, quite frankly, the industry has not done a fantastic job clearing up misunderstandings.

Distinguishing between key professionals in the financial sphere isn’t as easy as it may seem, partly because, although licenses are very specific, the title a person is using might not be. Consequently, there is significant variation, not only in what people who do the same thing call themselves, but in what people who use the same titles are doing.

A few of the more pertinent distinctions are:

Regulation

Some financial spheres have more rules and regulations than others. Because those roles that are less heavily regulated don’t tend to be as well defined, they have more internal variation.

For instance, to invest funds on behalf of others, professionally, an individual must register with either the U.S. Securities and Exchange Commission (SEC) or state security authorities, depending on the total value of Assets Under Management (AUM) and how many states they have clients in.

Before acting as a broker, someone who plans to buy and sell securities for others must pass one or more examinations, such as Series 6, 7, or 65.

Insurance agents must also pass exams in order to sell products. Most states administer four insurance exams (Life, Health, Property, and Casualty).

Niche

Various individuals who are doing similar things, from day to day, go by a plethora of different titles. Some of these designations indicate something about the clientele.

For instance, wealth managers might exclusively cater to high income and/or high net worth individuals, whereas investment managers have clients from across the socio-economic spectrum.

A few financial planners specialize in higher education funding, there are wealth managers working exclusively with entrepreneurs, and coaches who serve clients that have recently come into large sums of money (financial windfalls).

Scope

One of the most important lines, which may not be obvious based on a person’s title, is the scope of the services provided by financial professionals. There are those who go an inch deep and mile wide, then there are those who go an inch wide and mile deep.

Financial planners are generalists. Both their expertise and services cut across the various personal finance domains.

On the other hand, an investment analyst who researches securities and commodities, or an insurance underwriter who approves coverage amounts for life insurance, is a specialist.

Compensation

Fee-Only financial professionals are paid specific amounts or rates for their services. More financial professionals are moving in this direction because it reduces conflicts of interest.

There are four common fee-only approaches: hourly rates, flat (typically project based) fees, monthly or annual subscriptions, and Assets Under Management (compensation based on a percent of total account value).

Commission Based individuals earn commissions for sales and transactions. They might, for example, receive compensation for selling specific financial products or investing a client’s assets into specific funds. This compensation could come in a variety of forms, from percent of sales to a free vacation.

Financial professionals may refer to their pay package as Fee-Based. This indicates that they are receiving at least one other source of revenue beyond client fees. This term has come into question as being (possibly intentionally) misleading.

Individuals who have Fee-Offset compensation charge a set initial amount for services, which is later reduced for commissions earned from sales and/or transactions.

Duration

A trustee (a person or firm that is overseeing assets or property for the benefit of an individual, group, or organization) might work with the same family for generations.

Financial planners may work with someone “from belly to burial” – when parents, as soon as they confirm a pregnancy, celebrate by opening a 529 educational savings account.

People might use specific financial advisors from their mid-20s on. Alternatively, they may only work with an individual or firm during their tenure with a current employer.

Some financial coaches work with clients for multiple years, while others have three and six month packages.

A financial counselor might work with someone for a single session or a few weeks, during a crisis. On the other hand, they may make themselves available for a few hours, at an event, for drop-ins who would like to get started creating a monthly budget.

A financial educator might have students for a 16-week semester or in a self-paced online course. Conversely, they may only interact with participants for a half-day workshop, audience members for an hour during a webinar, or never interact with someone (at all) who is reading one of their books.

Time Orientation

Financial professionals may be predominantly focused on a client’s past, present, or future.

Financial therapists, although they consider the present, are predominantly focused on the past.

Our history has the potential to reveal where and when we first adopted our beliefs about money. It may explain our current relationship with money and/or reactions to various situations.

Our past offers insights into our financial habits, to uncover patterns or address specific behaviors which are hindering progress. Examining the past can be vital!

Time flies over us, but it leaves its shadow behind.
Nathaniel Hawthorne

Financial counselors, who assist clients during a crisis, may look to the past to help sort out the factors which led to the current situation, but they’re predominantly focused on the present.

That’s where financial triage must occur. Perhaps, once the crisis is averted, others can look to the future or take a deep dive into the past. Financial planners also tend to be present focused, but the reason they evaluate someone’s current situation is to ensure they’re on track to achieve long-term goals.

Financial coaches are predominantly focused on the future. The process is solution and action-oriented. A financial coach motivates, guides, and supports clients as they take steps toward a future of their design.

Although they might dabble in the past, and acknowledge present obstacles, ultimately, coaches are focused on internal and external change (usually in that order).

Don’t Assume, ASK!

For the aforementioned reasons, and also because it isn’t uncommon for financial professionals to wear multiple hats, it’s a good idea to ask clarifying questions about scope, background, credentials, licenses, and/or education prior to committing.

Key Financial Professionals: A Comparison

Note that this is not an exhaustive list. Also, as you read the descriptions, keep in mind that I’m focusing on the differences between these positions. In practice, there’s often more overlap between the various positions than these or other descriptions might imply.

INVEstment Advisor | Adviser

Anyone who is compensated for providing advice pertaining to or managing a client’s investment assets falls into this category.

In this capacity, someone may buy and sell stocks and bonds, determine what percentage of a client’s portfolio should be invested internationally, explain the difference between pre and post-tax IRA accounts, or determine if someone meets the eligibility requirements for a Health Savings Account (HSA).

Alternate titles include investment representative, broker, investment banker, security sales agent, and either portfolio, asset, or wealth manager.

Financial Planner

Planners help clients develop comprehensive plans, taking into account insurance, personal finances, investments, retirement goals, taxes, and estate planning.

Certified Financial Planners (CFPs) have to meet specific educational requirements, experience requirements, pass an exam, and agree to uphold certain ethical standards. They have a fiduciary duty, a responsibility to act in the best interest of their clients.

Not all financial planners are CFPs and those who engage in planning don’t all use the title.

If you don’t know where you are going,
you’ll end up someplace else.
Yogi Berra

FINANCIAL CONSULTANT

Nerd Wallet defines a financial consultant as a professional “who helps clients create a battle plan for their overall financial well-being”. The title may be used as an umbrella term, a catch all for financial services that do not fit neatly into the other professional designations.

Consultants often have a specialty. They tend to offer more targeted advice or work within a specific market segment. They could help small businesses identify opportunities to optimize cash flow or cater to the specific wants and needs of millennials.

Prior to having the 4,000 to 6,000 hours of experience needed for their CFP designation, a financial planner might use this title. To confuse the matter further, the terms consultant and financial advisor might be used synonymously.

FINANCIAL Therapist

There’s more than one path to financial therapy. Put another way, financial therapists have varying backgrounds, which often determine their approach and the scope of their practice. Some financial therapists move into the area from another, such as marriage counseling or family therapy, while others start in financial planning.

Since this is a newer area in psychology, it is developing, expanding, and redefining itself more than some of the older, more formalized fields in finance.

The Financial Therapy Association describes the process as one “informed by both therapeutic and financial competencies that helps people think, feel, communicate, and behave differently with money to improve overall well-being through evidence-based practices and interventions.”

Financial therapists can treat a level of emotional discomfort and money disorders that are beyond the capacity of other financial professionals, such as pathological gambling, hoarding, compulsive buying, workaholism, and financial enabling, dependance, or denial.

FINANCIAL Coach

In addition to providing information and offering advice, financial coaches inspire and empower their clients. They encourage understanding of, not only the practical aspects of finance, but also any associated emotions.

Financial coaches use techniques from life coaching and financial psychology, from visualization to Cognitive Behavioral Therapy (CBT). They’re often experts at identifying internal obstacles. Coaches understand how (and why) we get in our own way through the external manifestation of our thoughts and beliefs, i.e. our financial habits.

The real voyage of discovery consists in not seeking new landscapes,
but in having new eyes.
Marcel Proust

Alternate titles include personal finance coach, financial wellness coach, financial health coach, wealth coach, personal wealth coach, executive coach, business coach, money coach, and money mentor.

FINANCIAL COUNSELor

Financial counselors address facets of personal finance and money management, from tackling student loan debt and creating a budget to providing referrals to other financial professionals and reviewing options with clients in crisis. There’s nearly always a financial literacy component to their work.

Military OneSource offers free financial counseling to service members face-to-face, over the phone, and online because “Financial security at home helps you be more focused and mission ready.”

Some counselors, on college campuses, specialize in financial aid. At hospitals, financial counselors assist patients trying to navigate the complexities of insurance coverage. Habitat for Humanity connects selected applicants with counselors who know the ins and outs of affordable housing.

FINANCIAL Educator

Someone with three or more years of experience in the field of finance, as well as in the education of adult learners (who’s in good standing with regulators), is eligible to sit for the Certified Financial Educator (CFEd) exam.

Earning the Certified Financial Education Instructor (CFEI) designation involves 40 – 60 hours of online education and an exam.

The American Association of Family & Consumer Sciences (AAFCS) offers a pathway to become a Certified Personal & Family Finance Educator (CPFFE).

Those who educate others on money matters have varying levels of expertise that run on a spectrum from finance professors, on one end, to social media finfluencers, on the other. Somewhere between the two you’ll find those who are writing books, being interviewed on podcasts, and filming documentaries.

If you think education is expensive, try ignorance.
Robert Orben