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Licenses issued by FINRA – Financial Industry Regulatory Authority, a self-regulatory organization overseen by the SEC.  See website for background check (https://brokercheck.finra.org/)

Series 6 (63 also required) – Salesperson or broker for Mutual Fund and Insurance companies who earns a commission for sales.

• “A securities license entitling the holder to register as a company’s representative and sell mutual funds, variable annuities, and insurance premiums. Holders of the Series 6 license are not permitted to sell corporate or municipal securities, direct participation programs and options.” – Investopedia.com

Series 7 (63 also required) – “Registered Representative” able to sell everything the Series 6 broker sells, plus charge trade commissions on individual corporate securities including stocks, bonds, and options. Excludes commodities and futures.

• “Because the Series 7 Examination intends to measure competence at an entry level, every effort is made to avoid including questions that can only be answered correctly by a small proportion of candidates. The measurement purpose of the Series 7 Examination is to determine whether or not a candidate has attained the level of competency required to function as a Registered Representative (RR), not to rate the candidate in relation to the candidate group.” – Investopedia.com

Series 65 or 66 – An adviser who is required to keep client interests above their own when recommending investments tailored to client financial goals and objectives. Compensation is paid in fees (hourly, flat, asset based) with no incentive to recommend any specific investment or product over another.  This is the minimum license to be considered an objective fiduciary adviser.

• “Completion of the Series 65 Exam will qualify an investment professional to operate as an Investment Adviser Representative. The exam focuses on topic areas that are important for an investment adviser to know when providing investment advice. These areas include topics such as retirement planning, portfolio management strategies, and fiduciary obligations.” – Investopedia.com

There are hundreds of designations out there for Financial Professionals.  Some involve years of training, studying, and testing.  Others simply involve paying a fee and filling out an application.  It all depends on the accrediting organization.  That’s why having the professional describe their designations is important.  A quick list of relevant designations:

• College for Financial Planning – AAMS (Accredited Asset Management Specialist), APMA (Accredited Portfolio Management Advisor), AWMA (Accredited Wealth Management Advisor), CMFC (Chartered Mutual Fund Counselor), CRPC (Chartered Retirement Planning Counselor), CRPS (Chartered Retirement Plan Specialist), LUTCF (Life Underwriter Training Council Fellow), FPQP (Financial Paraplanner Qualified Professional)
• American National Standards Institute – CIMA (Certified Investment Management Analyst), CSA (Certified Senior Advisor) -> However, beware any designation with the word “Senior” in it.
• National Commission for Certifying Agencies – AFC (Accredited Financial Counselor), CFP (Certified Financial Planner), CRC (Certified Retirement Counselor), CRFA (Certified Retirement Financial Advisor), CSA (Certified Senior Advisor)

Commissions, fee-based, fee only are the principal ways financial professionals get paid.  It’s imperative you sort through the professional’s answer to get to the root of the compensation as it’s indicative of the level of service you will receive.

• Commissions – As discussed in Answer 1, commissions are paid to sales people. Sales people have an inherent conflict of interest in when it comes to “products” they sell.  One mutual fund may pay them 5.75% of the investment up front and 0.25% per year thereafter, while another mutual fund share class, with the EXACT same investments may pay them 1.5% per year forever.  The second one (typically a C share) will pay them a total of 15% over 10 years, while the first one (typically an A share) will pay them only 8% over the same period.  Most importantly, this money isn’t coming from the goodness of the mutual fund company’s heart, it’s coming directly from your investment returns!  Don’t even get me started on annuities… some of them pay 15% commission up front in exchange for locking up your savings for up to 15 years while charging you over 4% in each of those years!
• Fee-based – This sounds good to the ear, but be very careful. Let's look at a metaphor in the medical industry, let’s assume you went to the doctor for an illness.  The doctor asks you questions, does some tests, lab work, refers you to a specialist, and writes a prescription for you to take to the pharmacy.  In the fee-based metaphor, what if I told you the doctor received kickbacks on the tests, lab work, referral to a specialist, the pharmacy and pharmaceutical company that makes the drug?  What if I told you that the doctor’s practice was owned by a parent company that owns all the other providers under a plan and the doctor is managed under quotas pertaining to the amount of each of those kickbacks?  You may be skeptical of such a system and wish for transparency.  This is the fee-based option, and there is transparency, all of this has been disclosed to you in hundreds of pages of fine print that most people receive and throw away.
• Fee Only – This is the arrangement of fiduciary investment advisers. You pay a fee either hourly, per analysis and recommendation, or as a percentage of investable net worth.  In return, the adviser must determine the optimum investment allocation and plan based on exactly what the client’s goals and objectives are with consideration of taxes, investment costs, risks, and how unused assets would be inherited, as if he/she is in the exact same scenario as the client.  These fees are open and obvious and in nearly all cases, lower than those in commissionable products that are hidden in prospectuses and mountains of paperwork.

This is an important question because it implies that the advisor has taken the time to understand your current financial situation and goals.  It also should reveal their level of comfort and frequency in dealing with clients in similar situations to yours.

• Mutual Funds – These are funds that are managed by a third-party that are meant to accomplish a stated investment objective (i.e. growth and income, aggregate bonds, global commercial real estate…) Each mutual fund family (i.e. Oppenheimer, Columbia, T. Rowe Price) has hundreds of funds with all different investment objectives.  Each fund also has different share classes depending on whether a commissionable broker, 401k, or institutional investor is investing in the fund on behalf of the client.  A, B, and C Share funds are commissionable, R Shares are typically in qualified plans, I, Inv, Inst Shares are the lowest cost and used by fiduciary investment advisers for active fund management.
• ETFs – Exchange Traded Funds have become incredibly popular in the last decade or so, as they take the concept of Index Funds and apply additional investment objectives with low costs. As opposed to mutual funds which has a third-party manager, and thus, additional costs, ETFs buy a stated fixed ratio of underlying investments, and don’t buy and sell those investments as the markets change.  This type of investing is known as passive because there is no one behind the scenes determining when to buy or sell.  Be careful when using inverse (expecting an underlying asset type to decrease in value) or leveraged (doubling or tripling the gains or losses of the underlying assets) as they are considered speculative and typically not part of a comprehensive financial plan.
• Annuities – “If it sounds too good to be true, it probably is.” Annuities, in their most basic form take a lump sum of money and convert it into a stream of income.  Think of a pension, or when you win the lottery and they give you $100,000 a year for life.  A fixed annuity takes a long term portfolio of government or corporate bonds and pays an interest rate based on those bonds in return for getting to hold onto your money for 5, 7, or 10+ years.  An indexed fixed annuity pays interest based on the price of options on an investment index like the Dow Jones, S&P 500, or gold.  A variable annuity invests the money directly into mutual fund “subaccounts”, charges a life insurance premium, and sells riders that guarantee that your pension income down the road will be based on a withdrawal or income base and your life expectancy.  Be very careful with variable annuities as they typically have 4-6% fees PER YEAR, making it difficult to ever change your mind later.  They also are not very well regulated as recommendations aren’t audited by the state’s department of insurance or the Securities Exchange Commission until lawsuits are filed.
• Individual Securities – Individual stocks, bonds, options, futures, commodity contracts, warrants, etc. are purchased directly from an issuer, over the counter, or on an exchange. Interest and dividends are also paid directly to the owner of the security and have no costs associated with holding the investment over time, as opposed to the above types of investments.  To purchase and sell the securities, firms typically have trade fees from $3.95 up to a percentage of the value of the trade.  Trade fee free or commission free trades are becoming popular since 2019.  Individual securities are the purist and simplest type of investing.
• Alternative – These types of securities are known for their complicated tax structures and in some cases illiquidity. As such, only “accredited investors” with sufficient net worth or income are permitted to invest in these products.  Limited partnerships in oil and natural gas have become popular over the last 7 years or so.  Private Real Estate Investment Trusts (REITs) are partnerships that pool assets from numerous investors to purchase commercial, retail, residential, storage, or lifestyle real estate and pay dividends based on rents collected by tenants.  Unless underlying assets are sold or the fund is liquidated, it’s difficult to “sell” and get your investment back out.  Hedge funds, managed futures, private equity, and derivatives are other types of alternative investments.  Most Alternative Investments are considered to be suitable for more sophisticated investors who are willing to take on more risk than the average retail investor.

Most financial professionals think in terms of percentages because it is the best way to compare returns, fees, losses, taxes, inflation, etc.  Most investors and clients think in terms of dollars because that is what is listed on statements and what they earn in paychecks and give to grocery stores and auto repair shops.  Click here for an example of what the costs would look like when a client is retiring with $1,000,000 and they talk to 3 professionals.

Fiduciary Investment Advisers are required to meet with clients at least annually to update client profiles, life changes, progress toward goals, risk tolerance, investment management, and amend agreements as applicable.  Depending on your net worth, many advisers meet with clients semi-annually or even quarterly.  Some advisers offer additional meeting time throughout the year but reserve the right to charge hourly for those meetings.  If a financial professional responds with, “I try to meet with clients every…” that’s a dead giveaway you’re dealing with a broker.

Deliverables are another good way to see what kind of financial professional you’re dealing with.  Fiduciary Investment Advisers are required to deliver a summary of the client’s current financial situation, state the client’s goals, objectives, and risk tolerance, and lastly, recommendations that put the client on a path from A to B.  You will also receive prospectuses, annual and/or semi-annual reports, shareholder proxies, and statements from custodians (Schwab, TD Ameritrade, Fidelity, etc.) in the mail or by email, depending on what form of delivery the investor chooses.

Some advisers provide ongoing performance reporting, benchmarking, probability of objective success progress scenarios, net worth and cash flow tracking, and many other helpful deliverables to assist clients with tracking their financial situations.

Cash management, tax planning, estate planning and insurance are key ingredients for managing a complete financial plan.  Taking distributions from IRAs while withholding the proper amount of federal and state income tax can be daunting.  Make a mistake after age 72 and your penalty can be up to 50% on top of the income tax!  Leaving behind all of your assets to your children and grandchildren in an inherited IRA may net less than expected when they are required to start withdrawals (over a maximum of 10 years,) which increases taxes on their current earned income.  What are you supposed to do with Medicare or plan for Long Term Care expenses?  What about pre-paying for your funeral versus buying life insurance?  If a financial professional says, “We don’t do that,” be very careful.  At the very least, they should be able to work with your tax adviser and attorney, or point you in the right direction.

Matthews Wealth Management is not in the business of providing tax or legal advice.

The real question that everyone wishes they had an answer to.  What if there were a public registry that would show how every financial professional performed compared to their peers for similar clients when the stock market went up by 21.83% in 2017, or when it was down by -22.10% in 2002 or -37.00 in 2008?  What if it showed what percentage of clients were on track to reaching their goals?  What if it showed how much they were able to reduce their client’s lifetime income tax liability?  What if there were client reviews and comments like Amazon or Yelp?  It’s too bad that this kind of registry doesn’t exist, however, there are some statistical factors that begin to answer this question.  If a financial professional is willing to go over these measures with you up front and during periodic performance reviews, you’ve found someone worth working with.  If you have a financial professional that rattles off how much one of their clients made last year, run for the hills!