Investment Advisor vs. Financial Advisor: What’s the Difference?

Man doing research on his laptop with a cup of coffee on his desk: investment advisor vs. financial advisor : what's the difference?

At Good Life Financial Advisors of Mt. Pleasant, one commonly asked question we hear is, “What’s the difference between an investment advisor vs. financial advisor?” Although they may sound like the same thing, each role has a unique background, specialty, and educational requirement. Let’s dive in and compare the roles these professionals have!

And remember, if you’re searching for your next financial advisor, Good Life Mt. Pleasant is here to help! Whether you’re new to investing and want some guidance, saving for a new home, planning for retirement, or have some other financial goal in mind, we can help you build a plan for success. Contact us today to learn more.

What’s the Difference Between Advisors?

The term “financial advisor” isn’t a one-size-fits-all designation. Like doctors, advisors all have different specialties and expertise in specific fields. Would you visit a cardiologist if you needed a knee replacement? Likewise, if you’re planning for retirement, you wouldn’t want to hire an advisor specializing in corporate taxes. 

The names might be similar, but FINRA and SEC consider financial and investment advisors to be two very distinct entities. An investment advisor is much more specific in scope, while a financial advisor can refer to a broad range of money managers, brokers, and advisors.

Investment Advisor

An investment advisor is a financial professional who makes recommendations on individual securities for compensation. To become an investment advisor, a candidate must pass the Series 65 Uniform Investment Advisor Law exam, one of the more stringent tests in the financial services industry. This is an addition to the more generic Series 6 or 7 exam that gatekeep the industry. Investment advisors make recommendations on securities, asset allocation, and wealth management. Passing Series 65 means the investment advisor will have in-depth knowledge of securities like equities, fixed income, and derivatives. Investment advisors are fiduciaries regulated by the SEC and their state’s regulatory authorities.

Financial Advisor

A financial advisor is a much broader term. Other than passing the required exams, no formal training or education on investments or money management is required to become a financial advisor. While financial advisors must still perform their duties to their clients, they aren’t held to the same ethical standard as registered investment advisors. Investment advisors are fiduciaries; financial advisors MAY be fiduciaries but also may operate under the suitability standard.

Fiduciary vs Suitability Standards

The key difference between these advisor types is the enforcement of fiduciary and suitability standards. These terms may seem like legal jargon, but they’re quite easy to understand and help differentiate the type of service a client can expect from their advisor.

The Fiduciary Standard

The fiduciary standard is a strict one. Under current US regulations, a fiduciary advisor must act in the best interest of their client. “Best interest” does some heavy lifting in this definition since only the most appropriate securities and investments can be recommended by a fiduciary investment advisor. If two similar securities make sense in a client’s portfolio, the fiduciary advisor must recommend the most cost-effective one. For example, if two ETFs with similar holdings and prospectus goals are on the table, the fiduciary must pick the lowest cost one to recommend, even if the alternative security is issued by the advisor’s firm. The goal of the fiduciary standard is to remove all conflicts of interest when making investment and financial recommendations.

The Suitability Standard

The suitability standard works a little differently. A financial advisor operating under the suitability standard can recommend any security or asset to a client as long as it is suitable for their goals and risk tolerance. If the client wants their capital in low-cost index funds, the advisor held to the suitability standard only needs to choose a low-cost index fund that fits those parameters – not the LOWEST cost fund available. As you can probably guess, this creates potential conflicts of interest.

Advisors held to the suitability standard are often brokers who make commissions based on the products they recommend. For example, an advisor working for a firm that issues index funds may make extra money to recommend their securities. As long as it’s suitable for the client, it doesn’t need to be the best option. If the advisor’s firm offers a fund that’s slightly more expensive than a competitor but still fits the client’s goals, the advisor can suggest the more expensive fund, earn their commission, and remain on the right side of the law. These advisors can’t recklessly make recommendations, but conflicts of interest can arise when commissions come into play.

Non-Fiduciary Financial Advisors

Why do people choose non-fiduciary financial advisors? Because these advisors are still knowledgeable professionals and tend to charge lower fees than fiduciaries. If a client can save money hiring a financial advisor over an investment advisor, a few extra basis points on fund expenses may not move the needle on the equation. Still, it’s important to consider your goals and expectations as an investor when selecting an advisor. If you want only the best possible recommendations, choose an advisor held to the fiduciary standard.

Get the Help You Need Today

We hope this guide has helped you understand the difference between an investment advisor vs. financial advisor. If you have additional questions, remember to contact our team at Good Life Mt. Pleasant. Through an initial consultation and an ongoing relationship, we will work closely with you to understand your current situation and lead you toward solutions that can help you reduce risk, build wealth, and be prepared for key milestones. Contact us today to get started!