Delving into the subtle ­difference between ­'advisors' and 'advisers'

David Peartree, BridgeTower Media Newswires

Baseball Hall-of-Famer and legendary wit Yogi Berra once said: "If you don't know where you're going, you'll end up somewhere else." In the search for a financial professional, we might say, "If you don't know who you're looking for, you'll end up with someone else."

What does "professional" mean in the field of investment and financial services? Does it mean someone who has gone through a prescribed program of training, testing and credentialing, as we have come to expect of doctors, lawyers and engineers, or does it simply refer to someone who gets paid for providing a service? The answer is complicated but, in general, it seems to be less the former and more the latter.

Financial professionals are not all the same. They come in a variety of titles-the use of which is lightly regulated, if at all. There are registered investment advisers, registered representatives, financial advisors, financial planners, money managers, insurance agents, and a host of other types and titles.

Financial professionals come from a variety of educational and professional backgrounds. They do not share a uniform set of credentials or all possess the same skill set. They do not all provide the same services or products. They may be regulated by different governmental agencies.

The wide array of titles in the financial services industry reflects the fragmented nature of the business and regulatory models from which investors must choose. By business model, we principally mean how a financial professional is compensated. For many decades, the predominate compensation model was based on commissions.

A broker, for example, could be compensated by the commissions generated from placing trades for individual securities, by one-time commissions at the point of sale, as with mutual funds sold with a sales charge, or by residual commissions paid to a broker over a period of years. Commissions in some form are still widely used, but over the past 20 years much of the business has shifted to a fee-for-service model. Some professionals are paid strictly on a fee-for-service basis, an approach commonly referred to as "fee-only." Others may be paid a fee-for-service in addition to commissions for products sold.

Two of the most basic titles-investment adviser and registered representative-are derived from the regulatory scheme under which these financial professionals operate. Investment advisers are regulated by the SEC; registered representatives are regulated by both the SEC and FINRA.

Investment professionals whose firms are registered with the SEC or the relevant state securities regulator will often represent themselves as an "investment adviser." The title suggests that they are a "fee-only" adviser. You will need to probe further, however, because investment advisers and registered representatives are not mutually exclusive. One person can function both as a representative of a broker-dealer and a representative of an investment adviser. The firm they represent may be dually registered, both as a broker-dealer and as an investment adviser. In that case, their compensation model is known as "fee-based" because in addition to fees, they may also be authorized to sell products for a commission.

Another challenge for the investor is that investment advisers are not required to identify themselves as such and may use some other description. You might encounter any of the following, among others: wealth manager, wealth advisor, money manager, investment manager, asset manager or portfolio manager. All suggest that you may be dealing an investment adviser.

Investment professionals who are aligned with a broker-dealer will often be referred to as "registered representatives" or "registered reps." This title tells you that they can charge commissions on products they sell. Registered reps may also use other titles, and the one you will encounter most often is "financial advisor."

The "financial advisor" title is widely used at the major brokerage firms and at many smaller, broker-dealers to refer to a registered rep who is fee-based and may charge both fees and commissions. If the financial professional you are looking is a "financial advisor," very likely you are dealing with a registered rep or someone who uses a hybrid compensation model. At the very least, you have a starting point for asking more questions.

What we have, then, is a subtle distinction between "advisor" and "adviser." Both terms are acceptable English. Adviser apparently has a longer history in English usage, but advisor also is commonly used in the United States in job titles across a variety of professions. Why does it matter?

It matters because the spelling used is a useful clue. The principal statute governing registered investment advisers is the Investment Advisers Act of 1940. Most professionals who are registered with the SEC or their state agency will refer to themselves as an adviser simply because it aligns with the statute. They are not required to use that version of the spelling and the SEC does not care whether they call themselves advisers or advisors, so long as for regulatory compliance purposes they comport themselves as advisers.

Nonetheless, if you see "adviser" it probably means you are dealing with a fee-only investment adviser. If you see the term "advisor," there is a good chance you are dealing with a registered rep who charges commissions exclusively or a mix of commissions and fees. The spelling used is a subtle clue, but it is not definitive. You'll need to ask more questions.

Once you get past investment adviser and registered representative, and adviser v. advisor, the meaning of titles gets even murkier. The use of titles is largely unregulated and there is no commonly understood meaning to any of these titles. How does a wealth advisor differ from a wealth analyst or an investment management associate or a wealth management advisor? We have no idea.

At one firm we identified different individuals with the following titles: private wealth analyst, investment management associate, private wealth advisor and wealth advisor. At another firm we found a financial advisor, a financial representative and a wealth management advisor. What does one do that the other does not? We have no idea, and neither will you unless you ask more questions. Most of these titles lack any objective meaning that is readily discernable by the public.

For the most part, professional titles obscure more than they reveal. Most titles are self-appointed designations that serve a marketing purpose by conveying status or are otherwise trying to impress prospective clients. In short, the use of titles in this business is a caveat emptor mess.

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David Peartree is a registered investment adviser offering fee-only investment and financial planning advice. This column is a collaborative work by Patricia Foster and David Peartree. Patricia Foster is a securities law attorney who represents clients in various sectors of the financial services industry, including broker-dealers, investment advisers and investment companies. The information in this article is provided for educational purposes and does not constitute legal or investment advice.

Published: Tue, Apr 09, 2019