Registration as an investment adviser can happen one of two ways: either registering with the primary state in which you do business, or registering with the Securities and Exchange Commission SEC. Notably, though, to become an IAR, you must also pass the Series 65 exam or have the Series 7 and 66 if you are coming from a broker-dealer.
But ultimately that means to get started, you must both pass the Series 65 exam or possess one of the requisite designations , and go through the registration process. And the registration process in the advisor's home state itself should be done before actually going into business. As the financial advisor adds clients in other states, and crosses more than five clients for most states , it's also necessary to extend the registration in those states.
But soliciting the first client requires the advisor to at least create the initial RIA in their home state, first. Fortunately, it's still fairly inexpensive to get up and running as a financial advisor at least relative to the income potential it brings, and the cost of starting a business in other industries.
However, that doesn't mean it's easy to make the transition - because the real challenge is not just the startup cost to become a financial advisor, but filling the "income gap" of launching a business with no clients or revenue, and needing to build up to the point where you can actually pay yourself a fair wage! On the other hand, in the long run, successful financial advisors still have the potential to make many times the average household income in the US!
Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners , a turnkey wealth management services provider supporting thousands of independent financial advisors. You can also submit your question in advance through our Contact page! Today I want to talk about what it takes to become a financial advisor. Or actually, an investment adviser, since it's the investment adviser laws that cover most of those who get paid for giving financial advice.
Which means if you want to get licensed as a financial advisor, most likely you'll be getting licensed as an investment adviser.
And with more and more people looking to become financial advisors these days, given both the potential for working with people and helping them which is psychologically rewarding and the sheer financial compensation potential for being an advisor which is very financially rewarding!
A good example of this was a recent question I got from Jeff, who's graduating from a financial planning program soon and about to become a financial advisor. Jeff had inquired to the blog and asked:. I don't have any clients yet.
Is it true that I can wait to reach the five-client minimum in my state before I need to set up my RIA? This is a great question and one that I'm hearing a lot. So let's delve a little into some of the technical terms and rules that apply to becoming a financial advisor or an investment adviser that's going to get paid for financial advice.
Under the Investment Advisers Act of , an investment adviser is defined as an individual or entity who, for compensation, engages in the business of advising others on investments. Number one is that you have to do it for compensation. Free advice does not trigger registration and licensing requirements. That's why media personalities don't have to register Part two is that you have to actually be in the business of advising.
So if one day I gave someone a little bit of advice and they bought me dinner as compensation, doesn't necessarily trigger investment adviser registration, either. You have to be in the business of giving advice, ostensibly aiming to do it on an ongoing basis. Though once you're launching a business to do it and you're holding out as being in the business of advice, you have to register. The third component is that you have to be advising on investments i.
Technically, that means generalist financial advice, or even comprehensive financial planning, doesn't necessarily trigger a requirement to register as an investment adviser and get the license, if you give no specific advice about investments.
This is important because we're now seeing the rise of areas like financial coaching , where people advise on cash flow, spending, debt management, and general financial behaviors, but they don't give investment-specific advice, and so they don't necessarily have to register as an investment adviser. Click To Tweet. Notably, many states just presume that if you're holding out as a financial advisor and especially if you're putting "CFP" on your business card , you must be giving some kind of investment advice at some point along the way.
As a result, they'll require you to register, simply because you're holding out in a way that implies investment advice will be part of the services offered. But technically, it's the giving of investment advice that's the portion of financial advice that really triggers a registration requirement.
It's also important to note here that when we talk about the compensation for getting paid for advice that requires you to become an investment adviser, it means actually getting paid a fee for financial advice.
If you're looking to get paid commissions to sell investment products and work under a broker-dealer, then you'll need to get sponsored by a broker-dealer and pass the Series 6 or Series 7 exam to be able to legally get paid commissions to sell investment products. Similarly, you have to get a state insurance license to sell insurance products. In other words, the rules for getting paid to sell products are completely different than the rules for getting paid for financial advice.
Sometimes they are overlapping, as there is such a thing as being a hybrid advisor who does both, but, functionally, what we're talking about here is getting paid for financial advice. And this can get confusing sometimes because people across all of those different types still use broad labels like "financial advisor" to characterize all the different structures.
If you actually want to be in the business of engaging investment advice for fee compensation, then you'll be acting as an investment adviser.
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