How Are Financial Planners Regulated?

If you decide to hire a financial advisor, you are entrusting them with an important part of your life and your family’s future. Your kids’ college plans, your retirement, and your legacy are all part of the equation that depends on a skilled financial advisor. Therefore, it’s very important to learn as much as your can about a financial professional before agreeing to work with them.

To make things more difficult for the investor, many people in the industry use titles like financial planner without having any industry certifications. Although you should not agree to work with a financial advisor or broker before looking at their complaint record and verifying their credentials, it’s challenging to know what exactly to look for. This begs the question of how the financial services industry is regulated and what type of controls are in place to protect the average investor.

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Are Financial Advisors Subject to Regulation?

Unfortunately, financial planners are not regulated as a profession even though they advise millions of Americans about some of the most important financial decisions they will ever make. While certain areas of financial planning such as trading securities and selling insurance products are regulated, integrated financial advice is not directly regulated at either the federal or state level. Basically, anyone can call himself or herself a financial advisor without being held to even basic standards of competency.

Clearly, the financial services industry is in need of greater regulation, especially considering how closely it’s linked to the financial futures of so many Americans, particularly older ones. Since we hold lawyers, accountants, and doctors to ethical and competency standards, it is more than reasonable to hold financial professionals to similar standards.

Differing Standards Within the Financial Planning Industry Add Confusion

Without a firm federal standard, financial services providers can choose a standard that is financially beneficial for them instead of what is best for their clients. As a result, many clients wind up getting narrowly focused, single-product financial guidance that is not part of a broad-based long-term financial plan in the client’s best interest.

Differing standards and titles make it that much more difficult for investors to find competent, ethical financial planners. Absent any type of government oversight or regulation, investors are ripe for exploitation by unqualified and unscrupulous individuals.

What Can Investors Do to Vet Financial Advisors?

Find Out Which Agency Oversees Their Business

One of the things that clients can do before hiring a financial planner is to find out which regulatory agency provides their oversight. The answer should be either the SEC (Securities and Exchange Commission) or FINRA (Financial Industry Regulatory Authority).

Find Out Which Professional Designations They Have

You can always verify the credentials a financial advisor claims to have by going on FINRA’s website. It has a page with helpful information to help investors understand the different professional designations and what they mean.

While designations are important, you should also find out if an advisor has a track record of working with investors similar to you. So, you need to ask the right questions. In other words, quiz them on their compensation structure, how their investments perform compared to the market, and their success record.

Without a doubt, the industry needs to adopt to some type of uniform regulation that mandates a fiduciary duty for all professionals providing financial planning advice. Requiring professional standards akin to the CFP certification would make it easier for investors to find a competent and trustworthy financial advisor. In the way that we expect lawyers, doctors, and accountants to have specialized degrees and professional designations, a financial services professional should be held to a similar standard of care by his or her industry.

Until such time, however, consumers need to beware and ask the right questions of their financial advisor before entering into any kind of a business relationship.