What is a Financial Advisor (and what is Not)?

Episode Description:

Before you hire someone to help with your retirement portfolio, you need to know what you're actually hiring. This episode breaks down the four main categories of financial professionals—investment advisors, financial planners, brokers, and insurance agents—and explains what each one actually does, how they get paid, and which standard of care they follow.

If you're a DIY investor considering professional guidance, or if you need specific products that require working with a licensed professional, this primer will help you understand who does what and avoid costly confusion.

Episode Highlights

[00:00 - 02:21] Welcome Back to Season 2

• Introduction to the topic: hiring professionals for retirement planning
• Why this matters even for DIY-minded investors
• Some retirement income strategies require working with licensed professionals

[02:21 - 05:14] What Is a Financial Advisor, Really?

• The confusion around the term "financial advisor"
• Four categories of financial professionals: investment advisors, financial planners, brokers, and insurance agents
• Warning signs: titles like "financial professional," "financial representative," or "financial consultant" often aren't true financial advisors

[05:14 - 08:25] Investment Advisors: The True Financial Advisors

• Legal definition and licensing requirements
• How they're compensated (typically 1-1.25% annual fee charged quarterly)
• Discretionary portfolio management authority
• The Fiduciary Standard: Must act in your best interest
• The Suitability Standard: Only needs to be "suitable," not optimal (used by non-fiduciary professionals)

[08:25 - 11:16] Financial Planners: Big Picture Guidance

• Focus on broader financial advice, not just investments
• Services include budgeting, debt management, major financial decisions
• Comprehensive planning using specialized software
• May or may not hold investment licenses
• Often compensated through flat fees, hourly rates, or retainer arrangements

[11:16 - 17:45] Brokers/Registered Representatives

• Transaction-based compensation model
• Follow suitability standard, not fiduciary standard
• Load mutual funds and commissioned products
• Increasingly being replaced by self-directed platforms
• Often work with employer 401(k) plans and prospect through workplace seminars

[17:45 - 21:50] Insurance Agents: The Product Specialists

• Specialize in life insurance (term and permanent) and annuities
• Commission-based compensation
• Follow suitability standard
• Products you can't easily buy on your own—you need a licensed agent
• Generally lack deep investment or broader financial planning expertise

[21:50 - 29:32] How to Choose the Right Professional

• Why one person rarely does everything well
• Financial advisors excel at portfolio management but may lack insurance expertise
• Financial planners excel at comprehensive planning but may not actively manage investments
• Insurance agents are product specialists but typically don't handle investments
• Look for teams of professionals or strong referral networks
• Understanding these distinctions prevents mismatched expectations

Host: Brandon Roberts, with nearly 20 years of experience in retirement and financial planning

Subscribe: Available on all major podcast platforms YouTube: Yield to Reason YouTube channel Website: yieldtoreason.com

"Real wealth doesn't just add up. It writes checks."

Transcript

00;00;20;18 - 00;00;48;27
Brandon
You are listening to the Yield to Reason podcast, where we help you build a bulletproof retirement by focusing on investment income, because independent wealth hinges on your ability to pay the bills. I am Brandon Roberts and welcome to season two of the Yield to Reason podcast. I'm sure many of you thought I was just done forever, but no, we took a little bit of a hiatus and, here we are back at it and back, helping you build the retirement that you want.

00;00;48;27 - 00;01;40;27
Brandon
And as I have said before, the retirement you truly deserve. So today we're going to spend a little less time talking about the actual building of income and focus in on the process of hiring the individuals that might help you in your journey of building your investment portfolio. Now, while this show has largely spoken to people who skew in the DIY direction, those who want to roll up their sleeves and get in to the details about building their portfolio, there are definitely some of you out there who want to implement some of these strategies, but are a little hesitant to do them on your own, and there are even certain products that you might put

00;01;40;27 - 00;02;21;20
Brandon
in your portfolio for the sake of income that you will absolutely need. Some of the professionals that we talk about today in order to to do that, because you just can't get the products any other way. But I want to first start by addressing the notion of hiring a financial advisor. This is something that I think has a lot of good connotations behind it, but there's a substantial amount of confusion that people face when it comes to what exactly a financial advisor is and what they do, and how you would even go about finding one if you were in pursuit of a financial advisor.

00;02;21;23 - 00;02;50;11
Brandon
So we're going to talk about the various professionals who are involved in the process of dispensing investment or financial or retirement advice, because they do differ, and their categorization is important when it comes to understanding the role that they play and therefore the consequences of putting that person in action for you. So let's start with a very seemingly simple question.

00;02;50;15 - 00;03;29;14
Brandon
What is a financial advisor? There is actually a simple answer, but it's somewhat technical and it causes a certain amount of confusion for people because there's one specific role that a financial advisor generally fills. But there are a number of people out there who will at least lead you to believe that they are themselves a financial advisor, or at least a financial professional, and they may not do exactly what you're thinking.

00;03;29;17 - 00;03;56;29
Brandon
So, broadly speaking, there are four categories of financial professional that you will find if you go out to hire someone, they break down into investment advisors, financial planners, investment salespeople. These are people who we used to commonly referred to as brokers and insurance agents. Now, when I say insurance agent, I want to be clear. I'm not generally talking about the person who sells you home and auto insurance.

00;03;57;06 - 00;04;22;11
Brandon
While it's possible for some of those people to be engaged on the periphery in this sort of discussion, for the most part, when I say insurance agent, I mean people who are generally engaged in selling life insurance and or annuities. Those are the insurance agents that typically get involved in some degree of retirement planning or financial planning.

00;04;22;14 - 00;05;14;14
Brandon
Now, a number of these people may use titles that insinuate that they are a financial advisor, but they are not technically a financial advisor. These are things like financial, professional, or financial representative or financial consultant. Those are all terms that are used to suggest that they may be a financial advisor, but they probably aren't. And there's actually some argument within the industry about how individuals should in fact go about advertising themselves to the broader public so as not to confuse an individual into believing that this person is, in fact, a financial advisor when they really aren't.

00;05;14;17 - 00;05;51;06
Brandon
So, generally speaking, individuals who are recognized by law as financial advisors are people who are themselves technically investment advisors. These are people who hold a specific license or credential to advise you on individual investments. These are people who can also take over your portfolio and trade the assets inside that portfolio at their discretion for your benefit. So they're doing it on your behalf.

00;05;51;09 - 00;06;27;15
Brandon
These individuals are normally compensated as a fee, taken as a percentage of your investment portfolio. So that might look something like they charge you 1.25% of whatever the entire portfolio balance is that they themselves manage. And practically speaking, that fee is almost always charged against your account quarterly. So 1.25% annually would would come out to 0.3125% being deducted from your account every quarter.

00;06;27;16 - 00;07;01;21
Brandon
And that gets paid to them. Now these individuals are also, well known by the fact that they follow a specific standard of care when it comes to the advice that they give to their clients. This standard is the fiduciary standard. It means that in general, they must make recommendations to their clients that are, to the best of their knowledge, in the best interest of their client.

00;07;01;23 - 00;07;28;23
Brandon
Now that all on its own sounds interesting, I think we have to address what the non fiduciary, standard is, which is what we call the suitability standard. And so the suitability standard which is not what financial advisors would be using, but several other professionals could be using, simply says that the recommendation to the client is suitable.

00;07;28;25 - 00;07;57;00
Brandon
It's not concerned over whether or not that recommendation is the best possible recommendation that they could make to the client. It's just suitable. It makes sense. So as a really dumb example, if it were really hot outside and you were looking for something refreshing, it is suitable. I think most of us would agree to recommend that you have some ice cream, or that you have a cold drink.

00;07;57;02 - 00;08;25;04
Brandon
It is generally not suitable for us to serve you hot soup. That is how the suitability standard operates. It's not concerned about the best option. It's concerned about things that are reasonable for the circumstances. Suitable. Fiduciary on the other hand. See it says no, no, we're not just going to do things that are suitable. We are going to do things that are the best possible solution for your circumstance.

00;08;25;06 - 00;09;08;16
Brandon
That is the standard that investment advisors and therefore financial advisors must hold themselves to when they make recommendations to a client. The next category of professional is what we will call financial planners. Now, financial planners generally work by offering advice that is not investment advice, but financial advice in general to individuals. So this might look like budgeting. It might look like answering questions about finances, like should I buy a new car or should I refinance my mortgage?

00;09;08;18 - 00;09;28;27
Brandon
They might also offer generalized planning that takes a look at where somebody is and where they are headed, so to speak. So this might look something like, hey, we look at all of your accounts. We add up all the balances. We take into consideration how much money you're saving each and every single month, quarter, year, whatever it is.

00;09;29;00 - 00;09;55;10
Brandon
And we will do an analysis that determines how on track you are when it comes to arriving at a comfortable retirement later on in life. These individuals are normally compensated by a fee that is paid to them directly by the client. So you sit down with the financial planner, and the planner says, these are the services that we provide, and you will pay us X amount of dollars to do that.

00;09;55;12 - 00;10;30;24
Brandon
This could be a one time fee for a plan. It could be an ongoing fee that you pay to continuously engage and interact with the financial planner. It could also be something like a retainer that the planner charges against as they render services. Now, the standard that financial planners follow is somewhat muddied. Most, I think, would strongly argue that they follow a fiduciary standard, and in certain circumstances, there are certain imperatives that exist that would force the fiduciary standard for them.

00;10;30;26 - 00;11;01;10
Brandon
That said, it's not necessarily the same consequences as exists for investment advisors in all situations. Now, financial planners really don't have much of a reason to give you suitable advice, so to speak. You are paying them to tell you what they honestly believe is the best bet for you, or to analyze your circumstance and tell you how well or how not well you're doing.

00;11;01;12 - 00;11;28;04
Brandon
So there isn't much necessarily from a foundational standpoint that would suggest conflicts of interest may get in the way of the way they analyze or make recommendations to you. But we are going to get into a discussion about duly registered individuals in just a little bit. That could complicate things. But before we go there, we'll just categorize these professionals and give you the lay of the land.

00;11;28;07 - 00;12;00;29
Brandon
So the next group of people are brokers, investment salespeople. These are individuals who transact business. They don't make recommendations. Well, they don't make advice, recommendations so that that means that they're not really supposed to look at your circumstances and say, hey, the best thing you can do is buy this stock or this ETF or this mutual fund. What they normally do is market the various investment products, namely mutual funds, sometimes stocks, very rarely bonds.

00;12;01;01 - 00;12;33;18
Brandon
With the exception of bond funds to the buying public, these individuals are technically known as registered representatives and they work through a broker dealer in order to transact business. They are normally compensated either by commissions for the majority part, or by fees that are associated with the investments that they sell. Most notably what we call 12 for one fees, and with some limited exceptions, these individuals work mostly under the suitability standard of care.

00;12;33;21 - 00;13;06;14
Brandon
Lastly, we have insurance agents. These are individuals who are licensed to sell insurance products. So life insurance and annuities are typically the ones that would come up in the context of financial planning in life insurance, more specifically as it relates to things like whole life insurance or universal life insurance, term life insurance to some degree. Obviously, if you are doing some planning and you discover that you need additional life insurance to protect your family from the loss of your income, and you want to incorporate that as part of your financial plan, you would engage with a life insurance agent who could sell you life insurance.

00;13;06;18 - 00;13;29;18
Brandon
Doesn't matter what it is as far as the type, term or cash value style. So you would interact with a life insurance agent in this case, who could sell you that policy? Annuities. That's kind of a different discussion as it relates to insurance. But people who hold a license to sell life insurance almost always hold a license to sell annuities.

00;13;29;23 - 00;13;54;29
Brandon
So that's why they tend to come packaged together insurance agents. Again, there are some some exceptions to this, but for the most part they operate under the suitability standard of care. Now I want to take just a minute and talk about regulation of these four professionals, because we've already dived into the fact that there are different standards of care that they use, but there are also all regulated differently.

00;13;55;02 - 00;14;33;16
Brandon
The financial advisors, the investment advisers, they are regulated either by state investment regulation agencies or the Securities and Exchange Commission. So these individuals have a relatively powerful regulator that oversees what they do day in and day out. Financial planners are in a bit of a different boat. They do have one self-regulating body in the CFP board. If they choose to become a certified financial planner, you don't have to be a CFP to be a financial planner, though most are.

00;14;33;18 - 00;15;05;14
Brandon
And the CFP board will absolutely take complaints from consumers and act on them. And we'll will certainly review circumstances and can even strip an individual from their CFP designation if they are found to be in violation or gross violation of the rules upheld by the CFP board. Brokers. The registered reps. They are regulated by their own regulating body, known today as Finra, the financial industry's regulatory authority.

00;15;05;14 - 00;15;28;17
Brandon
It used to be called the National Association of Securities Dealers, or the NASD, so that is an organization that that oversees their conduct. It is the organization that would normally get involved. If there is a consumer complaint, and it is the organization that would render an opinion on whether or not the broker did something wrong, and what the consequences of that bad behavior are.

00;15;28;19 - 00;16;03;25
Brandon
Insurance agents, they are regulated by the state Department of Insurance. So the process of bringing complaint against an insurance agent starts normally with your state department of insurance. They look into the matter and they decide what consequences the insurance agent should face if they deem behavior bad. I mentioned earlier that there there are efforts, or there are circumstances where confusion sets in because of the way individuals refer to themselves.

00;16;03;28 - 00;16;36;27
Brandon
It's very common for investment advisers to refer themselves to financial advisers. They're allowed to do it, and it's a fairly marketable term. But if somebody is a financial planner, an insurance agent or a broker, they're not allowed under securities regulation to refer to themselves as financial advisors. And that is why they commonly use other terms financial professional, financial consultant, whatever it is, to give you the impression that they are in fact, some sort of advisor worthy individual.

00;16;36;29 - 00;17;08;22
Brandon
And this certainly causes a little bit of frustration both on the consumer and regulatory side of the financial planning industry. Additionally, there is a significant amount of overlap that exists because once you pick one of these four categories, you don't necessarily have to remain exclusive to it. You can obtain multiple licenses, allowing you to conduct business in multiple ways.

00;17;08;24 - 00;17;48;02
Brandon
You can be an investment advisor and an insurance agent. You can be a broker and an insurance agent. You could be a broker and a financial planner. So there is the option to mix these things and have kind of overlapping authorities. If you will. That further causes confusion for people. But generally speaking, when someone is duly registered, they're supposed to inform you when they are conducting business as one professional versus another.

00;17;48;05 - 00;18;31;05
Brandon
So investment advisors, if, for example, they hold an insurance license and decide they want to sell you an annuity, are supposed to inform you when they stop being an investment advisor and start being an insurance agent. Now, practically speaking, the process that gets used to identify when this happens, it's not always super clear to the consuming public. And there are a number of financial advisors who don't always explicitly go out of their way to point out that their recommendation for the individual to buy an annuity is not necessarily falling under the same standard of care.

00;18;31;12 - 00;19;10;16
Brandon
The fiduciary standard that they follow when they are dispensing investment advice. So it is wise to acknowledge here that these different professions are largely tied to specific products or even specific transactions, and it would be prudent for you to recognize that if you are, for example, buying an annuity, you are not necessarily conducting business with a financial advisor in the traditional context of what a financial advisor does.

00;19;10;19 - 00;19;53;28
Brandon
Now, there are some exceptions. There are some, for example, annuity products that are specifically designed to kind of be folded into the portfolio that the advisor would oversee and collect a fee off. And could at that point be considered part of them dispensing fiduciary labeled investment advice. And I would be super remiss if I didn't point out that a number of investment advisors are going to act in a fiduciary standard even when conducting insurance business, because it's just ingrained in what they do.

00;19;54;01 - 00;20;28;26
Brandon
And I also want to point out that while these other professionals, brokers and insurance agents especially are not necessarily beholden to the fiduciary standard, that doesn't mean that conducting business with a broker or an insurance agent means that you're going to get a lesser standard of care in all cases. There are a number of people out there who are not compelled to follow the fiduciary standard, who still uphold its basic tenets, and they do, in fact, try to come up with the best possible solution for an individual situation.

00;20;28;28 - 00;21;04;14
Brandon
I merely want to point out that they're not all required to follow the exact same standard of care, and some of them might not. But the more important context here is that your options to grieve something that you feel was not right for your situation does differ depending on the standard of care somebody has to follow. So if you determine that a financial advisor has done you wrong, you actually have a lot more firepower in the pursuit of litigating the situation.

00;21;04;16 - 00;21;29;25
Brandon
If, on the other hand, you've decided that a life insurance policy you bought was not really a good recommendation for you personally, there's not as much you can do to complain about that and receive some sort of of compensation for damages, because the insurance agent does have the ability to fall back on the fact that they're usually only held to the suitability standard.

00;21;30;01 - 00;21;50;17
Brandon
And if they can prove that the recommended purchase for you was suitable, you don't really have much of a case. So how do you go about choosing the right person for your circumstances? Because it would be super nice if you could just find one person who did all of these things and could just take care of them for you as you needed them.

00;21;50;19 - 00;22;21;15
Brandon
But I'm here to tell you, those people don't really exist in general. Financial advisors spend their time investing for their clients. They don't have a lot of time to do other things. So they're not usually going to do financial planning all that well. They're very rarely going to engage in selling you transactional investments. And while some are definitely licensed to sell insurance, they generally have a very poor understanding of the marketplace for insurance products.

00;22;21;21 - 00;22;44;09
Brandon
So they're not always the best person to choose. In that case, when you need to buy an insurance product now term life insurance pretty widely available in terms of pricing. So most anybody with a license can figure out what the cheapest term life policy is for a given circumstance. And if that's all you need, you might be just fine buying term life insurance from your financial advisor.

00;22;44;12 - 00;23;11;22
Brandon
But if you're looking at annuities, there is a chance that you might need to speak to somebody else who's a little more finger on the pulse of the annuity industry in order to figure out what the best options are for your circumstances. And if you're looking at a permanent life insurance, there's a really good chance that your financial advisor is not going to have a very great level of deep expertise on that, because it is a relatively complicated subject that requires specialization.

00;23;11;24 - 00;23;49;05
Brandon
At the same time, financial planners, even those who do hold an investment license, don't generally spend that much time investing assets for their clients, but instead engage more heavily in the financial planning process. So if you're looking for somebody who has a very good process of finding great investments in executing those trades for you, and you hire somebody who spends 80% of their time doing financial plans, they're probably not going to be that great on the discretionary investing side of things.

00;23;49;07 - 00;24;23;26
Brandon
They may be excellent for building a plan, having software that will allow you to check on the plan. They may also be really, really helpful when it comes to big financial decisions like changing jobs, refinancing debt, buying big purchases, whatever the thing is. That is where financial planners tend to shine brightest. Now, on the subject of brokers, they're becoming much more of a dying breed, at least when it comes to consumer facing, help, advice or transactions.

00;24;23;29 - 00;24;58;17
Brandon
In truth, there really isn't anything that most brokers can sell you that you can't just go buy all on your own outside of some of the more restricted investments. Examples of that being things like private placements or hedge fund, investments. But in general, if you're just looking to buy your standard mutual fund from a big name company or an ETF or a stock or bond fund, you could purchase those all on your own on all of the major brokerage platforms that have self-directed options.

00;24;58;19 - 00;25;46;28
Brandon
We're talking The Fidelity's, the Vanguard's, the Charles Schwab's, and all of the other names that are out there that people have discretionary or, sorry, self-directed, brokerage accounts with. Now, sometimes brokers or registered representatives will often communicate with general consumers through their employment because it's very frequent or very common for a registered broker to be in charge of a 401 K plan that the company offers, and those individuals very frequently prospect for business by coming to your place of work and doing little seminars or doing little financial check ups.

00;25;47;00 - 00;26;23;01
Brandon
And really, they're looking for a couple of different things, either an opportunity to take over or sell you some investment that from a brokerage account that you have outside of your 401k, or if you terminate employment or retire, they would certainly love to help you roll the 400 and K over into an IRA right now. A lot of these people are much more frequently becoming investment advisors in addition to being brokers, which means they too can offer the discretionary investment advice that investment advisors give.

00;26;23;03 - 00;26;58;04
Brandon
But still, the majority of them are brokers first and investment advisors second insurance agents. They're really good at insurance, but generally do not have much background on investments and broader financial planning subjects. There are limited exceptions to this, but for the most part, insurance agents do insurance. They can sell you term life insurance, they can sell you permanent life insurance, they can sell you annuities.

00;26;58;06 - 00;27;22;25
Brandon
And there are some insurance agents who engage in a home in auto insurance, who are also licensed to sell life or annuities. And they offer that and even some more who may have a securities license and look to act as a broker. Those those do exist that that is out there. Now, insurance is one product that is extremely difficult to purchase all on your own.

00;27;22;28 - 00;27;43;17
Brandon
So you will if you want to buy an annuity or some life insurance, you will need to engage with somebody who holds an insurance license at some point. Even if you're buying term life insurance from one of the companies that you fill out a questionnaire online from, you will ultimately buy that from an insurance agent, whether that be on the phone or sitting at your kitchen table.

00;27;43;23 - 00;28;10;24
Brandon
It is still a licensed insurance agent, but in general, these people don't have the resources to do multiple things really, really well. And so they tend not to do that. And you probably don't want them to try most of the time because you're going to find they're really good at one thing, but not so great at the other things that you're looking for or might be looking for.

00;28;10;27 - 00;28;32;18
Brandon
But one thing you might be able to find is a team of professionals who work together to provide these specific, products when indicated. So this might look something like it's a financial advisor slash broker or a financial planner, an insurance agent, and you will talk to the specific individual who makes the most sense at the time that you need their thing.

00;28;32;20 - 00;29;03;08
Brandon
Those organizations do exist, and there are some larger financial advising firms that have certainly brought on insurance professionals or financial planners to help build out the services that they offer individuals. And don't overlook the fact that a number of these professionals have relationships with other professionals that are tangential to what they do, so they may be able to refer you to a financial planner if you need one, or an insurance agent if you need one.

00;29;03;15 - 00;29;32;11
Brandon
And it's good to ask, but ultimately understand that a financial advisor is a specific thing that offers a specific service. Typically, investment management and everybody else who tries to call them sells something differently, is primarily trying to sell you something, a service or product that is related, but not perhaps exactly what you're thinking. That's all we have time for today.

00;29;32;11 - 00;29;43;08
Brandon
Thanks. So much for joining me. We will be back next week. In the meantime, you can check out the Yield Terezin YouTube channel. And remember, real wealth doesn't just add up. It writes, checks.