Financial Advisor Glossary: Terms You Should Know When Shopping for an Advisor

CFA. Fiduciary. RIA. These terms aren’t exactly self-explanatory. But when it comes to finding a financial advisor, you’ll be better equipped if you’re familiar with the industry’s lingo and what’s behind a slew of acronyms. So we’ve assembled a handy glossary of fundamental financial advisor terminology and definitions that will help make you fluent in the language of financial advisors.  

You’ll be better equipped to find an advisor if you knwo the terms in this glossary.


Illustration by Chris Gash

Broker. A broker’s core service is to execute securities trades on behalf of a client. Brokers must be licensed through the Financial Industry Regulatory Authority (Finra) and North American Securities Administration Association (Nasaa). These organizations conduct qualifying securities exams. 

The breadth of service varies among brokers. While discount brokers typically offer bare-bones trading services, full-service brokers will also provide investment and financial planning advice. 

Expect to pay more for a full-service broker. Most brokers are paid a commission per transaction rather than charging a flat fee, but some—usually full-service brokers—have a hybrid fee structure depending on what they are selling. 

Chartered Financial Analyst (CFA). This is a professional designation issued by the CFA Institute. To qualify, advisors must complete an educational program and pass a three-part exam on the fundamentals of investing, how to value assets, portfolio management, and wealth planning. While the education material includes aspects of general wealth planning, the bulk of the coursework focuses on investment management.

Chartered Financial Consultant (ChFC). is a professional designation awarded by the American College of Financial Services. The certification reflects the completion of nine foundational financial planning courses and passing exams at the end of each course. Continuing education is required to maintain the ChFC designation. 

Certified Financial Planner (CFP). This is a professional designation for an advisor who gets certified through the Certified Financial Planner Board of Standards. To earn the certification, advisors must complete a seven-part broad-based financial planning educational program and pass a final comprehensive exam. Ongoing education is also required. A CFP is required to behave as a fiduciary in all facets of investment and financial planning to maintain the designation. 

Commission. A commission is compensation earned by brokers and fee-based advisors. It is a percentage of client assets that are invested in an investment or insurance product, such as a mutual fund, ETF, or annuity. 

Fee-based financial advisor. An advisor who uses a fee-based pay structure gets paid primarily in fees but can also get paid commissions for selling certain investment or insurance products. Fees can be structured per session, hourly, or as a percentage of a client’s assets that are under the advisor’s care.

Fee-only financial advisor. Advisors use various fee structures for their services. Fee-only refers to a structure in which the advisor collects a fee for service based on a per-hour or per-session rate, a regular subscription basis, or a percentage of assets. The fee-only structure removes the potential conflict of interest that comes with commission-based compensation. Many fee-only advisors are fiduciaries. 

Fiduciary. A fiduciary is an individual or company legally bound to work in the best interest of a client and provide the highest standard of care. Attorneys, guardians, real estate agents, trustees, and corporate officers act as fiduciaries. In the advisory industry, registered investment advisors (RIAs) are legally required to adhere to a fiduciary standard when giving investment advice. This means offering advice in the clients’ best interests, providing clear information and reporting to clients, charging reasonable fees, and disclosing any conflicts of interest. Advisors who are certified financial planners (CFPs), a professional designation earned by completing an educational program, must adhere to the fiduciary standard to maintain their certification.

Financial Industry Regulatory Agency (Finra). This agency is a nonprofit organization that establishes and enforces rules for individual brokers and brokerage firms. Its mission is to safeguard investors from fraud and unethical practices. Finra administers securities licensing exams and will revoke licenses and enforce fines for brokers or brokerage firms that run afoul of rules. 

North American Securities Administrators Association (Nasaa). Ths group licenses and represents brokers in the states and provinces of the U.S., Canada, and Mexico. The membership organization’s mission is to preserve the integrity of the financial markets by regulating brokers, educating consumers, and protecting consumers from fraud. 

Open architecture. Open architecture refers to an investment platform that includes an advisor’s in-house and third-party investment products. With an open-architecture firm, clients can choose from a broad universe of mutual funds and ETFs for the best possible fit. A closed-architecture platform includes only proprietary investments and possibly an assortment of others. Advisors who work at closed-architecture firms are obligated to choose investments for clients from a limited menu. 

Registered Investment Advisor (RIA). This acronym refers to individuals or firms registered with either their state securities agency or the federal Securities and Exchange Commission (SEC). RIAs—individuals and firms—are governed by securities laws. They are distinct among advisors for being legally required to adhere to the fiduciary standard.

Securities and Exchange Commission (SEC). States and the federal government each have their own securities laws. At the federal level, the SEC is the agency governing the financial-services industry. 

Wirehouse. A wirehouse is a brokerage firm. The term, used for full-service brokerage firms of any size, is a throwback to a time when brokers at branch offices were connected through telephone or telegraph systems to their headquarters to get up-to-date market information and transact timely trades.

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https://www.barrons.com/advisor/articles/financial-advisor-glossary-terms-you-should-know-when-shopping-for-an-advisor-51652381812

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