Trust a Stock Broker?

Posted by on November 30, 2012

FinanceContributed by Jeff Davis, Business Program Chair, Minnesota School of Business

Whether you are business or finance student looking to get an edge in the world of finance or you are looking for your own financial adviser, you should understand the different licenses, degrees, certifications, and professional designations that someone working in finance might have.

Part 1 of this series looks at required licenses and the differences between them from a financial professional’s perspective and from a client’s perspective. We will cover advanced education, such as the MBA, and professional designations, such as Certified Financial Planner (CFP) in future posts.

You may think that working with other people’s money should require a license. However, the requirement to be licensed in finance is actually quite limited.

If you give advice about stocks, bonds or other securities, you must be licensed as an Investment Adviser Representative (IAR). Although requirements vary by state, in most states you will need to pass the Series 65 Exam to earn the license. This is a three-hour test covering financial regulations, ethics, types of security products, security valuation, and trading strategies.

If you are going to buy or sell securities for clients, you must be licensed as a Registered Representative, commonly called a stock broker. To act as a stock broker you must pass the Series 7 Exam, a six-hour test that covers stocks, bonds, options, markets, customer accounts, analysis, taxes, and regulations.Finance

If you obtain an entry-level position as a stock broker or investment adviser, you will typically spend your first few months on the job studying for and then taking the appropriate exams.

If you are looking for financial advice instead, there are important differences to note between an IAR and a stock broker. Investment Adviser Representatives have a fiduciary duty to hold your interests above their own in all circumstances. They typically charge a fee – a small percentage of your assets, or an hourly rate – and do not earn commissions by selling products. Stock brokers, on the other hand, do earn commissions by selling products. They are not fiduciaries, and can recommend any product as long as it is “suitable.” This means, for example, that given several investment products that are suitable for you, a stock broker could recommend the one that pays him or her the higher commission, rather than the one that is the best for you.

There is of course plenty to do in finance without giving advice about specific securities or selling investment products.  In those areas that do not require a license, advanced education and professional designations can help the financial professional obtain employment. Those looking for financial services can get an indication of the financial professional’s knowledge and areas of expertise by checking which designations they have.



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