Financial Advisors - The Primer, Part 3

Financial Advisors - Certification and Regulation

Here is the bad news. The financial planning industry is pretty unregulated. Almost anyone can hang out a sign and offer financial advice. If the person will be selling investments or insurance, then there are some regulations and requirements. We'll get to them in a minute. For now, focus all your mental energy on this one thought: ANYONE CAN CLAIM TO BE A FINANCIAL ADVISOR.


The only real regulation of financial planning and advice comes in the form of regulations which apply to trading securities. The basic level certification is either a Series 6 certification or a Series 7 certification. You will hear people refer to these certifications as "having a 7."

The practical difference between the two certifications is that a Series 7 allows trading individual stocks, options, bonds, and so on in addition to mutual funds. A Series 6 allows someone basically to trade only mutual funds. The Series 6 test, obviously, covers less and is "easier" to pass than the Series 7.

In addition to either a 6 or 7, a professional will also need to hold a state level or "blue sky" certification. The minimum requirement at this level is the Series 63. This exam is a uniform state level examination. In other words this fulfils the state level requirements for all fifty states. So, the absolute minimum certifications a professional can have in order to trade securities is a Series 6 (or 7) and a Series 63.

There are other examinations at the 60s level. One is the 65 which is "Investment Adviser" examination. The other is the Series 66 which is a combo certification that is the equivalent of having both the 63 and the 65. For practical purposes, the 66 = 63 & 65. Technically either the Series 65 or 66 is required to be an "advisor". However, this leads to a very big loophole. A professional who provides advice that is "solely incidental" to the trading of securities is not required to register as an investment advisor. Until 2007, this meant that from a functional standpoint there was no difference between an advisor and non-advisor. We'll cover the 2007 development later.

None of these exams are very difficult to pass. The average new broker will pass both their 6/7 and their 63/66 exams after taking a one week study course. So,these exams are not like a CPA exam or Bar Exam. They are much more like the Real Estate Licensing Exam. Also, there is no limit to the number of times the exam can be taken. You should consider these exams to be minimum requirements and nothing more. They are not an indication of skill or knowledge.

Finally, if your advisor sells insurance, a license will be required at the state level. The NASD does not regulate the insurance industry, nor does the SEC. Although they vary on a state level, these exams are even easier than the securities exams.

On to Part 4