There are close to 650,000 people in this country that have passed their Series 7 exam. Passing the Series 7 exam allows an individual to associate with an investment firm and trade securities. It is a necessity in our business.
Without the Series 7 license, we could not legally navigate through the various processes needed to handle our clients’ accounts. If we were doctors, the Series 7 would allow us to write prescriptions, use the facilities at the hospital and perform procedures on patients.
All of this is very important, but it does not do much in teaching us how to diagnose the financial illness of our clients. That kind of training comes from other sources and can vary greatly from firm to firm and from advisor to advisor around the country. It makes it hard for the client to really know what they are getting when they begin a relationship with a financial advisor.
To complicate things even more, the same firms can have investment advisors in the same office, sitting side by side, that do completely different things. It’s not that unusual, just think of attorneys. They all have the same license, but some are criminal attorneys and some are estate planners, and it is very hard for the average person needing help to know one from the other.
Sales or consulting?
In our business, there are almost as many business models as there are advisors, but you can put most advisors into one of two categories, salesmen and consultants.
Let me say right off the bat that I don’t think one side is inherently worse than the other; however, if you need one kind of advisor and get the other, it can have some very unfortunate consequences.
The salesmen are what we have always known as stockbrokers. They broker securities from one client to another. They are always buying and selling a product. They start their day looking for something that their clients might buy or looking for a reason why a client might sell something they already own. The product comes first. Once they have a product, then they find the clients that may need that product.
For investors who want to do their own work, this is a vitally important function. Our industry is constantly coming up with new types of securities, and it is crucial for there to be people educated in the intricacies of those securities that can inform the public and facilitate the usage of those products.
On the other side of the business is the consultant. The consultant starts with the client. They work for the client, and on the clients behalf they create an investment strategy and then work to implement that strategy.
Only after they have come up with the appropriate strategy will they start looking for the appropriate product to fit that strategy. The client comes first and the product comes second.
I know this sounds pretty basic, but getting the right kind of professional to work with is one of the hardest tasks in the investment process. It is made even harder by the fact that many investment firms, banks and insurance companies are touting their prowess as consultants as if the salesman in their ranks doesn’t exist. Their commercials are some of the best on the air, but the message can be misleading.
So how can you tell which side of the fence your advisor is on? There is a lot that goes into knowing for sure, but one way to start is by looking at what your advisor wants you to invest in. If he/she has personal ties to a product that would make it difficult to tell you when you need to sell it, then they aren’t consulting, they are selling a product.
For instance, if they are recommending that you buy an investment that has been created by their own firm, it would be a red flag. It doesn’t mean that they are doing anything wrong, or even that they are just trying to sell you something, but it can help to define where their priorities lay.
It is impossible to be objective when recommending the liquidation of an investment will also cause you to lose the account. For example, if an advisor works for the XYZ Company and the only mutual funds he recommends are the XYZ mutual funds, then he is not really sitting on your side of the table.
If the XYZ funds start performing poorly, what incentive would he have for you to change investments? Can you imagine that advisor suggesting that you sell your investments and move to another firm?
I’m not saying that the XYZ funds are bad funds, I’m just saying that the advice you are getting could be less than objective.
A little blurry
The lines are blurred between the brokers and the advisors in our business, and the industry has done little up to this point to help you know who is who. That could be changing soon, and I think it will be good for everyone.
It is not a matter of who is right or wrong, it is a matter of who is the most appropriate advisor for what you are trying to accomplish.
The easier it is for you to make that determination, the better for everyone.
Contact MBJ contributing columnist Scott Reed, CIMA, CWA, AIF, of Hilliard Lyons, member NYSE & SIPC, in Tupelo at firstname.lastname@example.org.