Today, anyone can hang out a shingle and call themselves a financial advisor. This tends to annoy those in the field who have spent decades learning how to help their clients prosper; nonetheless, there’s no law against the guy at the gas station touting a mutual fund when you try to pay for your gas if he is properly licensed. So it’s up to you to filter out the static.
Simply stated, do not even consider dealing with anyone without a Series 7 license. Only a Series 7 producer is legally authorized to discuss in detail all types of investments-stocks, bonds, mutual funds, limited partnerships, and so on.
For instance, you may already be hooked up with a really great guy-call him Al-who handles all your insurance needs. Al does a good job on your car, home, and life-insurance policies. But for his company-we’ll call it Allied United National Mutual Insurance Corp, a financial services conglomerate based in, say, Delaware. The firm doesn’t want to miss out on a single dollar in potential income. So they may have helped Al get a Series 6 license-impressive sounding, but essentially only a simple permit that allows him to sell mutual funds. You walk in his door next time with a question on your auto policy and you walk out invested in Allied United’s new company-run mutual fund that the broker is pushing that day.
Fine-that is, until that fund runs into difficulty and you need to decide whether to dump the investment. You want someone who can explain all your financial options, not just the ones he can sell-and that makes 7 infinitely better than 6. Also ask your potential advisor if he or she has a Series 8 or Series 24 license under their belt. This is known as the Securities Principal License. The holder of this one has the power to supervise other advisors’ activities-but more to the point, it hopefully means they know better than to make foolish suggestions with your account.
Finally, always ask if he has a Series 65 license. Most states require a Series 65 to legally qualify as an investment advisor. Why? Because, among other things, a Series 65 license makes a person a Registered Investment Advisor and allows him to charge you fees by the hour rather than on a commission basis. Do not accept such answers as “I’m registered under my firm as an investment advisor”; this is definitely not the same as having a Series 65 license of his or her own. Most major wire houses prohibit their advisors from even setting up such a fee arrangement.
You should ask if the financial advisor is covered by SIPC (Securities Investor Protection Corporation) insurance. This is the same general type of insurance that banks provide through FDIC insurance. If the entity holding your securities goes broke, the insurance will pay you up to $500,000 per account; $100,000 of this can be in cash. Remember, this is insurance only against the firm going broke, not you going belly-up in your personal account.
SPIC is nice, unless your account is valued at upward of $500,001. As a result, most advisors carry extra insurance that will bring total protection to $10 million or more. But not all do carry this insurance, which is why you must ask. If your potential financial advisor is not covered for at least $10 million or more, it’s a deal breaker. Get up and walk out the door, immediately.