Can Sales Reps Claim to be Financial Advisors? – updated September 2014

You bet they can and they do. I checked the legality of the claim with FINRA, the SEC, and California (my state of residence) to ask them this straightforward question. After one and a half hours of being on hold and talking to seven different people I concluded there is no regulation that prohibits reps from calling themselves financial advisors. No regulation creates a major source of risk for investors.

Why is there no regulation? Wall Street does not want one and it usually wins because its companies spend hundreds of millions per year on lobbyists who make sure regulations favor companies and not investors.

A regulation may not even matter if the rep claims to be a financial advisor in a sales pitch. Investors have no record of what was said to them so it would be very difficult to enforce the regulation. It would be their word against the reps. A regulation would be easy to enforce if investors require reps and financial advisors to document their role in writing before selecting them.

Obvious Differences

I thought the differences between real financial advisors and reps were pretty straightforward. Financial advisors provide financial advice and ongoing services for fees. Sales representatives sell investment products for commissions. This sounds simple enough until a sales rep with substantial sales skills manipulates the two roles so they sound similar if not identical.

Why the Confusion? 

In the absence of regulations, Wall Street is in a position to create a substantial amount of confusion. Why confuse investors? Confused investors are dependent investors so they are more likely to buy what Wall Street reps are selling.

Why does this form of deception work? Most investors have no idea there are major differences between sales reps and real financial advisors. If they did, they would never select sales reps to invest their assets in the securities markets.

The second form of deception is even slicker. Sales reps are allowed to make recommendations. Advisors are allowed to provide advice. What is the difference between investment recommendations and investment advice? There is no difference. The rep recommends investing in a load fund. The advisor advises investing in a no-load fund. The results are the same. Investor assets end-up in mutual funds. The principal difference is the method of compensation for reps and financial advisors and future services you receive. If you selected a rep there aren’t any future services. His role stops at the sale.
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Three Critical Questions

There are three critical questions you should ask the person who wants to sell you investment products:

1. Are you a registered investment advisor or an investment advisor representative? If the answer is no, the person is a sales rep.
2. Are you a fiduciary when you provide financial advice for fees? If the answer is no, the person is a sales rep.
3. Are you compensated with fees for your knowledge, advice, and services? If the answer is no, the person is a sales rep.

You do not want sales reps investing your assets. Why? Regardless of what they say in sales pitches, they are paid to sell you investment and insurance products. They are not paid to help you achieve your financial goals because they do not receive any continuous compensation. Only real financial advisors receive ongoing compensation for providing ongoing services.