Regulatory Restrictions
To charge fees for analysis, a financial planner, or his or her firm, must be a Registered Investment Advisor (RIA) listed with the Securities and Exchange Commission (SEC). State registration may also be necessary. To become an RIA requires a fee, filling out form ADV in triplicate, and submitting both to the SEC. At this time (1986), there are no specific testing requirements. Charging fees for specific investment advice without being an RIA is a violation of the Securities Act of 1940.
For those who sell products, it is essential to possess the appropriate license. For example, to sell securities it is necessary to pass one of the exams administered by the National Association of Securities Dealers (NASD). There are numerous categories of tests that must be passed, depending on the type of product one wishes to sell. A Series 7 exam enables planners to sell stocks, bonds, mutual funds, real estate investment trusts, and limited partnerships. The other exams are more limited in scope and allow only a specific product to be sold, such as mutual funds (Series 6), commodities (Series 3), and limited partnerships (Series 22). A word of warning: Planners should not attempt to circumvent these registration requirements by selling products that they do not personally classify as securities. However, determining whether an investment should be classified as a security is not always easy. According to one official from the California Department of Corporations, “when in doubt, consider everything to be a security.” Thus, if financial planners wish to sell products, they must be properly licensed.
To take the securities exam, an individual must first be associated with a broker/dealer. Broker/dealers are individuals or organizations that have met the SEC’s financial and regulatory requirements. They are engaged in buying and selling securities, both for their own accounts and for those of others. As a matter of course, the NASD will not allow individuals the opportunity to sit for most of the exams unless they are sponsored by a broker/dealer. (Note: an exception is provided through the Series 2 exam, which is for non-broker/dealer members.) On successful completion of the test, the individual is then a registered representative of the broker/dealer.
To promote high ethical standards, broker/dealers are required to join the NASD, which is a self-regulating organization. The NASD oversees the professional conduct of its members. Furthermore, all broker/dealers must become members of the Securities Investor Protection Corporation (SIPC). The SIPC is a nonprofit corporation created by Congress in 1970. It offers certain protections against financial loss to the clients of broker/dealers that fail. Protection limits are $500,000 per client, with the exception of cash accounts which are limited to $100,000 per customer.
Broker/dealers are important to financial planners. They serve as the first screening level for products. If a security is not on the broker/dealer’s list of approved products to sell, it is illegal for a financial planner to sell the investment to clients.
There are many legal restrictions on selling products or charging for financial advice. However, government regulatory bodies are uncertain as to their overall responsibility in terms of financial planning. Compounding these legal issues is the fact that, although warned against earlier, some planners claim immunity from security laws and therefore do not register.
Against this background, many states have introduced legislation to regulate financial planning. Regulation is becoming a hotly contested issue, with certain industries seeking to be excluded. However, it appears legislation may eventually require that individual financial planners:
• Pass an examination.
• Possess at least minimum education or training.
• Have a certain level of experience (as through an internship).
• Participate in continuing education courses.
• Provide written disclosure of commissions, fees, or special interests.
These regulations indicate that, as with all emerging professions, financial planning is undergoing dramatic changes. Currently, there are no “typical” or “required” methods of performing services. But, as fiduciary responsibilities are better defined and the industry achieves more recognition, financial planners will need increasing knowledge. The basic information financial planners must possess is the subject of this book.
