You may not believe it: the term “financial advisor” is a free title. Anybody can use it; there is no legal requirement, nor educational qualification. In practice, though, generally there are three types of people who use this title: insurance agents, stockbrokers, and registered investment advisors (RIAs). Whether they are required to disclose fees all depends on what type they are.

Insurance agents

They could work for major insurance companies like New York Life or MetLife, or they could be independent agents that represent multiple insurance company products. They earn their keep on commissions from the insurance companies. They are under no obligation to disclose how much they make or how they make it. They are the insurance companies’ agents; they are not your agents.

Stockbrokers

They could work for major Wall Street brokerages like Merrill Lynch and Morgan Stanley, or they could work for independent broker/dealers. Regardless, their job is to be middlemen who facilitate transactions. They earn their keep when transactions happen. They are at best intermediaries, at worst counterparties. In fact, “counterparty” is the word Lloyd Bankfein used to describe Goldman Sachs in relationship to their clients. How much they make off of you is their trade secret.

Registered investment advisor representatives (RIAs)

They are the only ones who are licensed to give financial advice. Insurance agents and stockbrokers are not allowed to give advice other than incidental to the products they sell. RIAs are regulated by the Investment Advisers Act of 1940. By law, they must disclose their fees and any other compensation in their Form ADV filing.

Many RIAs also have insurance and broker licenses; they earn commissions, but as RIAs they must disclose them. A small minority of RIAs are so-called “pure RIAs” who avoid all forms of conflict of interest. They don’t have broker or insurance licenses, so they can’t earn commissions. These RIAs are also called “fee-only financial advisors.”

To check if a financial advisor is an RIA, go to http://www.adviserinfo.sec.gov. You may also ask him or her to furnish a Form ADV Part 2 disclosure brochure.

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