This will be the first part of a multi part series concerning various types of financial planners and financial advisors. The first part will discuss various types of advisors. In the second part we will discuss how various advisors are paid for their services. The third part will discuss how to pick an advisor or various advisors to help you with your financial situation.

Special agent sounds good, doesn't it? The FBI and the CIA have special agents. They are supposed to be the good guys,  so if one of my advisors is a "special agent",  it must be good, right? What about various certifications? What if one of my advisors is a "Certified" whatever? Isn't that a good thing? Doesn't that person know more than others in a particular field? A few weeks ago I heard a radio advertisement touting the services of a "Financial Coach". Even Tiger Woods has a personal coach, doesn't he? Shouldn't I have a professional "financial coach" to help me? What about an Account Executive? That sounds impressive, doesn't it? I could use a persona banker, to help with some of my investments, couldn't I?

There are a lot of names for people who want to help you with your money. How do you know which one to use? Well, let's take a look at the financial services industry and find out what all of this means. We will discuss the securities industry, the insurance industry and other advisors.

The Securities Industry:
The securities industry has a lot of controls over what people can call themselves and what they can't call themselves. We will begin here. The National Association of Securities Dealers, NASD, is a self-regulating body of the securities industry. The NASD was created by the Federal Government to help control and monitor that industry. After all, someone needs to look out for the investors, don't they?

If a person has a license with the NASD, they fall under certain guidelines and rules that they "have to follow". If they don't, they could lose their license and be fined. Someone who does not have a securities license,  is not subject to the NASD's  rules. A simple example of this is in the area of church bonds. If my church wanted an to expand,  and wanted to sell bonds for that expansion, members of the church could sell these bonds to each other, themselves, friends and relatives. They don't need to have a securities license to do this. Let's assume that the national organization for that church backs the bonds, which is often the case. Let's further assume that this church has never had a default on any of their bonds. Let's also assume that this is a good investment. Since these are not registered bonds, and are an unregistered security, and the transaction is exempt, meaning the sales person does not need to be registered with the NASD, anyone can sell these bonds, except someone with a securities license. If a professional in the industry who knew more than anyone in the church about investments sold one of these bonds, they could lose their NASD license and face a big fine.

In the securities industry, there are two main regulating bodies for financial advisors. We will ignore the SEC for this discussion, because that body is over all securities transactions but unless there is a major violation, they don't often get involved in the control over the area we are discussing. The NASD and states are the two entities we will discuss here. The NASD covers the industry nationally. States can further pass laws to protect their residents, which they do. They also inspect and supervise licensed securities companies and sales people.

Once a person is sponsored by an NASD member firm, passes the necessary exams, and passes all the required background checks, they are licensed with the NASD for specific activities. There are a lot of different exams and licenses for all of the various securities products that are on the market today. They are all now called "registered representatives" because they are properly registered with the NASD to represent their firm is specific securities transactions.

Now that I have a license, what do I call myself? That is left up to the control of the securities firm you are licensed with. Some allow their reps to call themselves account executive. Others call themselves financial representatives, or other titles. They all mean the same thing. What these titles mean, in effect,  is that they have a license.   In order to call yourself a financial "advisor" many states require that you pass a NASD series 65 exam as well as the others you need for your licenses. Once you pass that exam, you can call yourself an advisor. Other states don't have such a law but that seems to be changing.

So what's really in a name? In many cases nothing. If a person is licensed with the NASD, one name doesn't mean anything more than another name or title. Some of the larger brokerage firms call their top reps Vice Presidents. In closer examination they are not elected Vice Presidents they are appointed Vice Presidents. They are, in essence, appointed by the firm to have a better title, with the hope that it will help them sell more. They are not on the board of directors, and they don't usually have any P & L responsibility.   They just are required to sell a lot of securities to keep the title.

A person with a securities license may also be a stockbroker. If you really want to understand stockbrokers, read Jim Salim's book "The Great Wall Street Swindle". I did and I think its great! In fact, I recommend it to anyone who have interest in this article.

Anyway, back to the topic at hand. My suggestion is to totally ignore the title of a financial advisor and look at what they can do for you. Certifications are a different story. Several years ago, I knew of a company that was selling diamonds as an investment. None of their representatives were registered with the NASD and didn't have to be. After 40 hours of in house training on how to sell diamonds as an investment, they became a "Certified Diamond Counselor". Sounds good, but what did it mean? NOTHING! 

To Be Continued...  (In the next part, we will look at Industry Professional Designations, the Insurance Industry, and other financial services industry advisors)

Kerry J. Fulton, RLP
LSR Staff  Author
LSR Staff Writer
All around nice guy

Divorce Requires Financial Planning
January 14, 2002

Business Succession Planning
December 26, 2001

Most small business owners spend most of their waking hours working with and planning for their businesses.  The business is their "baby". They work the business and pour all their blood sweat and tears into building that business. In return, the business provides for the needs of the owner and his/her family. When the business becomes successful, dreams of growing the business to even greater successes begin and many times these dreams come true.

But one important thing that many business owners never think about is, what would happen to the business if they became disabled or wanted to retire?  Most small business people have life insurance in the event of premature death. Many have insurance to cover fires or temporary business interruptions. But what will happen to the business when it is time to sell or retire?

Proper financial planning dictates that you should never have all your eggs in one basket. You should not plan solely on your business to always take care of you. You should invest some of your profits in outside investments. Many small business people don't do that. Not doing so is a big mistake. Don't fall into the trap of thinking that things are good and always will be good. Invest for various contingencies.

On top of this, while you are planning the growth of your business, plan on what will happen to it when you are ready to take life a little easier. Spend some of your planning time thinking about whom could possible buy your business and how they will pay for it. Remember, when you are no longer there to help with the day-to-day activities of the business and when someone else begins to manage your company, things can and often-times will change. Many of your customers buy from you because of you. If you are not there, will those customers continue to do business with your company?

Less than 1/3 of all small businesses survive two generations of ownership. If you don't have children who want to run your business, then you need to consider who might purchase your business when it is time for you to step down.   How will your business be valued? It probably won't sell for the amount of money you think it should. You may have to negotiate a price.  Check with your banker. Ask if your business could be financed to a new owner. If so, ask how much the bank would finance it for. The answers might surprise you.

Think about some of your competitors. What would you pay for their businesses? What would they pay for yours? Would they be willing to buy you out when the time comes?

Would you have to stay for a period of time following the sale of your business to assist in the transition? After that, if the new owners aren't as successful as you, or if they fail, how will that effect the payments on which you would have relied?

You should always plan your exit strategy long before the time comes to sell out or transfer ownership. Perhaps you can hire, train and sell the business to a key employee. If that is the case,  he or she may be able to obtain the financing necessary to pay for the business outright.  If not, will the earnings from the business be enough for that new owner to pay you the purchase price of the business if the success it achieves isn't as great as when you ran the business?

If you have enough outside investments for retirement, the money from the sale of the business will be extra income instead of essential income. That is the best position in which to be when the time comes to retire.

All businesses are different.  But all business owners should make this exit planning a major part of their financial planning. Remember, it is easier to plan for potential problems before those problems occur than it is after the problems exist.