Beating the Index

There’s a whole bunch of terms in the financial industry to describe individuals who provide financial advice. And up until recently, those terms have been unregulated. I could have called my dog a financial planner. Good boi! Good financial planning!

And that’s pretty much what the state of the industry was. Financial planners and/or financial advisors (the terms were used interchangeably) could be a life insurance salesperson selling you life insurance and seggregated funds. Or they could be your clerk at the bank. Or they could be a mutual fund salesperson who just sold investments. Most/many of them didn’t do any planning they mostly did sales of whatever they were pushing.

Well, the sales part hasn’t change – you should be aware of how your financial person makes their money. Nobody’s providing you free advice without the expectation of making some money and since most (but not all) don’t charge for their advice, they’re making money when you purchase a product or service from them.

The good news is that the government regulators have stepped in recently to regulate the two terms ‘Financial Planner’ and ‘Financial Advisor’. There are now requirements for anyone to use those titles. My dog is now no longer a financial planner, and neither is the life insurance agent selling life insurance plus seggregated funds (or anyone else for that matter).

The new requirements still allow anyone to call themselves either Financial Planner or Financial Advisor – IF they meet some minimum educational requirements and expertise.

Financial Planners

Anyone using the title financial planner must be knowledgeable (both in breadth and depth) of a variety of areas including estate planning, taxes, retirement & investment planning, financial management and insurance/risk management.

Financial Advisors

Financial advisors need only have technical knowledge of a single investment product type such as mutual funds or stocks. Plus, they need to be able to develop suitable financial recommendations for consumers.

I don’t really understand why a financial advisor needs to be able to develop financial recommendations but only needs to be expert in a single type of investment product, but them’s the rules.

Actual Requirements to use Financial Planner or Financial Advisors Title

So, the government dictates you need to be knowledgeable, but they’re not going to define specifically what those requirements are. Instead, they’ve hoisted that responsibility off onto the industry, and in particular a variety of educational organizations that provide industry education and credentials. Basically, as long as you qualify for one of the designated credentials (which requires education) then you meet the government requirements and can then use the title Financial Advisor or Financial Planner.

In the past, as I mentioned earlier, even someone with a life insurance agent license could call themselves a financial planner. And the requirements to get licensed as a life insurance agent are a pretty low bar, you hardly even need to understand life insurance. But that’s changed – the new requirements for Financial Planner are not erroneous. They’re going to take some serious work for someone to qualify.

To use the term Financial Planner, you’ll now need to have a CFP, CLU, and a few other options. These credentials are not inconsequential, people can take a few years to gain the credentials, and they cover a pretty exhaustive list of educations topics. These credentials have long been the top tier credentials in the industry, and generally only obtained by long term senior advisors.

There are other routes available, but they all require substantial investment in education.For example, a 2 year diploma centered on the financial industry plus an exam will qualify you for the title of Financial Planner.

Long story short, the term financial planner is now going to require some serious credentials and education. I’d suggest that if you see someone using that credential, they’re likely well qualified.

Not so much with the term Financial Advisor. This credential/title can be obtained with much lower requirements, i.e about the same as the traditional requirements for a mutual fund dealer rep licensing.

So no longer does a simple license for life insurance or mutual funds allow you to use the term Financial Planner. People in the industry can likely obtain the title Financial Advisor without much work, but Financial Planner – that’s going to take some substantial work and experience. The title Financial Planner is now going to really set some advisors apart from the crowd.

Other financial terms

So that’s just financial advisor and financial planner. There are other terms and modifiers.

Fee based ‘financial planner/financial advisor’: These people charge a flat fee – generally a percent of your investments – for their services. i.e. a fee based financial planner might charge 1%/year. These people are generally advising on and handling your investments and savings.

Flat fee based ‘financial planner/financial advisor’: These people charge a flat dollar fee to provide advice – say $3000. This is intended to suggest that they’re unbiased, as they don’t make money on how big your account is, the performance, or any specific investment type. Again, these people are typically advising on investments.

Financial Coaches: When people think financial advisors or planners, this is likely to be what they’re actually thinking of. Financial coaches provide unbiased holistic overall advice, for a flat fee. i.e. they’ll take you through budgeting, investing strategies, retirement and tax planning, all sorts of stuff. And it’s done for a flat dollar fee. They don’t make commissions, often aren’t licensed to sell products and as a result often won’t advise on specific investments. i.e they might say ‘you should consider index funds for investments’, but they won’t say ‘you should consider TD index funds specifically’.

The term financial coaches remains unregulated. I suspect many financial coaches were previously using the terms financial planner or financial advisor, but they’ll be walking away from that. Ironically, financial coaches are often highly educated and experienced and many of them already meet the requirements to actually use the financial planner term – often you’ll see these folks with CFP’s and CLU’s.

There’s the vegetable soup of designations going forward, I hope I’ve cleared up some of your confusion.