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Should You Become a Financial Advisor?

Should You Become a

Financial Advisor?

By Donald Moine, Ph.D.

Copyright 2010 by Donald Moine.  All rights reserved.


In reading articles on Seeking Alpha over the past several years, I have been impressed by the quality of articles contributed by some individual investors.  I’ve also been impressed by the comments and article feedback contributed by other private investors.


For the past 28 years, I have served as a consultant and coach to professional financial advisors (FAs) and top insurance agents all over the United States and I’ve also worked with top financial advisors in Canada and Australia.  While I enjoy this work very much, I am sometimes struck by how little passion or inherent interest many of today’s financial advisors have in the market and in trading.


Also of concern is the relative under-performance of financial advisors compared to the market or a simple index fund. 


It is very possible that some of you who are serious students of the market and active investors might be able to deliver better performance than some of the financial advisors working today.


I’ve decided to contribute a few articles to Seeking Alpha to encourage those of you who are most interested (and hopefully also most talented) to consider pursuing a career as a financial advisor.   With the stock market having produced a negative return over the past ten years (“the lost decade”), your services are greatly needed. 


When you factor in that banks are now paying an interest rate that is below the likely level of inflation and that real estate prices have collapsed and show few signs of recovery, you can understand why tens of millions of Americans are frustrated because they are unable to reach their financial goals.  If you are a skilled investor, your services are greatly needed.


Some of the millions of financially frustrated people across America might be interested in becoming your clients.  If you can truly add value, you might be richly rewarded both financially and emotionally, by working as a financial advisor and helping some of your fellow Americans achieve their financial goals.


Becoming a Financial Advisor


The process of becoming licensed as a financial advisor is remarkably easy.  While it takes four years of undergraduate work and three years of law school to become a lawyer and about eight to ten years of higher education to become a physician, with as little as one week of formal coursework (sometimes less), you can take an exam to become a financial advisor.


Despite this relatively low barrier to entry into the financial advisory profession, the total annual compensation of financial advisors compares well to that of lawyers and medical doctors.  I’ve served as a coach and consultant to a number of financial advisors and insurance superstars who make $400,000 to more than $1 million a year. 


One of my clients received compensation of more than $10 million a few years ago.  Currently, another client, who is 30 years old, is earning more than $3 million a year.  Another financial advisor I did seminars with and wrote a book with used to make more than $3 million a year working only nine days a month.  He is now earning more than $5 million a year.


Of course, most financial advisors earn much less than that.  But let’s say you earned $100,000 to $200,000 per year (a reasonable, achievable income level for a financial advisor) doing work you loved—and you had an opportunity to genuinely help other people achieve their financial goals—would it be worth considering entering the financial advisory profession?


Types of Licenses


There are three different licenses you may wish to consider obtaining.  Even with only one license, you can become very successful.


One license is called the Series 7 Registered Representative (“Registered Rep”) and is the person who used to be referred to as a “stock broker.”  Registered Reps can be paid via commissions or with an “assets under management” (AUM) fee.  A typical AUM fee is 1% of assets under management, so if you sign up a new client who wants you to manage $1 million of assets, you’d be paid about $10,000 a year on that. 


Many Registered Reps are employed by big brokerage firms which will also pay you a base salary while they train you and prepare you for the licensing exam.  If you wish to prepare to take the licensing exam on your own, you can find exam prep courses on the Internet for this license and the others mentioned here.


The Series 65 Registered Investment Advisor (“RIA”) is a license that enables you to charge an asset under management (AUM) fee and start your own business.  While many Series 7 Registered Reps work for large brokerage firms, a large number of (RIAs) hang out their own shingle and start their own business. Oftentimes, several RIAs will work together in a partnership to collectively grow a much bigger firm.


If you work as a Series 7 representative at a large brokerage firm, the firm may take up to 50% (or even more) of your commissions to pay for the office, secretarial help and other services the firm provides.  If you work as a Registered Investment Advisor and own your own business, you can keep 100% of assets under management fees—but you’ll have to pay your own rent and overhead.  For this reason, some RIAs, just as many Series 7 representatives, chose to work for brokerage firms that will pay their overhead (even though they do have to give up some of their compensation to the brokerage firm).


I’ve found that most active investors and traders who become financial advisors elect to work as Registered Investment Advisors (RIAs) rather than as Series 7 reps.  There is a nationwide movement away from commissions and toward assets-under-management fees as the preferred method of compensation.  For various reasons, some members of the public and even some investment professionals see commission-based professionals as “product pushers”.  Most commission based financial advisors are not product pushers, but I want to make you aware of this perception that some people hold.


Of course, you can obtain both the Series 7 and the Series 65 licenses, but this will mean you will have regulatory scrutiny from additional regulators and perhaps also the scrutiny of additional company executives if you work for a brokerage firm.  There can be benefits to having both licenses but I know financial advisors who just have one license and who earn hundreds of thousands of dollars to well over $1 million every year in compensation.


Another license you may want to consider obtaining is an insurance license.  In many states, after completing a one week training course, you can take the insurance licensing exam. Don’t scoff at insurance—it is a much needed product and you can earn a handsome living today selling insurance and annuities.  My client who made $10 million a few years ago only has an insurance license.  Another client of mine who is both a RIA and is insurance licensed, received a $1 million commission from one sale in the insurance area.  While such sales are extremely rare, they are possible for people skilled at marketing insurance products.


Also, today there are many sophisticated insurance products that are linked to equities.  Insurance has evolved far beyond the whole life and term policies (although both of these still have their place). When you have both a securities license and an insurance license, you can offer your clients a full range of financial solutions.  There is little need for them to go elsewhere for financial advice.


Of course, the fact that it takes relatively little time to become licensed as a financial advisor does NOT mean you are qualified to be a financial advisor.  There is much to learn in this exciting and challenging field.  You should also possess outstanding ethics if you enter the field and be driven to provide financial advice that is always in the client’s best interest.


The Mathematics of Financial Success as an Advisor


What does it take to become financially successful as an advisor?  If you want to learn how much you can earn working for a large brokerage firm, you can do some research on the Internet to find out the pay-out ratios at different firms today.  These ratios are different from firm to firm, change over time and are beyond the scope of this article.


If you work as a Registered Investment Advisor, a typical asset management fee is 1% of assets under management.  As previously mentioned, if you attract a client who wants you to manage $1 million, you’ll earn about $10,000 per year from that client.  When you have $10 million in AUM, you will earn about $100,000 per year in AUM fees.  When you have $100 million in assets under management, you’ll earn about $1 million per year from AUM fees.


Many financial advisors also charge separate fees to write financial plans and for other services they provide, which can add to income received.  You may charge your larger clients a lower AUM fee and charge your smaller clients a higher AUM fee.   For example, if someone brings you $10 million to manage, you might only charge them ½ of 1% per year (which would still be $50,000 per year to you) and if someone only has $50,000 they would like you to manage, you might charge 2%.  The reason such discounts are commonly given for larger accounts is that it often does not take that much more time to manage a $10 million account than it does to manage a $50,000 account. 


What does it take to get $100 million under management and have an annual income of about $1 million a year?  America has several million people with a net worth of more than $1 million.  If you can attract 100 people to your financial planning practice who each have $1 million to invest, you will have $100 million in AUM and an approximate annual income of $1 million a year if you charge using the AUM model.


You could also reach that goal by having 200 individuals or families who each have $500,000 to invest.  Like most financial advisors, you will probably end up with a range of clients who have differing amounts of money to invest.  However, as you can see, you do not need to have hundreds of clients to earn an income of $1 million or more per year as a financial advisor (FA).


If you charge an AUM fee, the fee is automatically taken out of the portfolios you manage every quarter.  You never have to send your clients a bill.


When you start out as a financial advisor, you will, of course, earn much, much less than $1 million a year.  However, if you work for a brokerage firm or as an employee of someone else’s RIA firm, you are likely to be paid a base salary while you are given time to build up your practice. 


In addition to the financial rewards you might enjoy as a RIA, there can be immense emotional and psychological rewards from helping your clients reduce risk, diversify and rebalance their portfolios, plan for a successful retirement and achieve financial success. 


The Keys to Success as a Financial Advisor


There are many factors that contribute to becoming a successful financial advisor.  You must be knowledgeable, address your client’s true financial needs, honor his or her risk tolerance, work hard, have the highest ethical standards, care about your clients and deliver good service.  You might be surprised to learn that you don’t have to outperform the market to be a successful financial advisor.


It is not widely known by the public that many of the most financially successful financial advisors (those who earn more than $1 million a year) simply match the market’s performance or actually under-perform the market.  This is not their fault—as you probably know if you are an active investor, it is a great challenge to outperform the market.


In a future article, I will review detailed studies that compare the investment results of financial advisors to what a simple index fund earns over time.  If you can outperform the market, you will be a very rare financial advisor and there may be quite a demand for your services.


Financial advisors perform many valuable services besides investment management, such as writing financial plans, helping clients diversify and reduce risk and plan for retirement.  Thus, even if a financial advisor simply matches the performance of the market or even slightly underperforms it, he or she may offer many other valuable services that fully justify the compensation paid by clients.


From working as an “advisor to advisors” over the past 28 years and from helping many financial advisors build successful practices, I have found the most important factor to success as a financial advisor is marketing.


In future articles, I will share with you some of the most powerful marketing strategies that financial advisors are using to rapidly build their practices, including seminar marketing, writing articles and books, getting a radio show (which is now surprisingly low cost in many markets), getting a newspaper or magazine column, internet marketing, getting referrals and a variety of other powerful strategies.


It may not be fair but it is true that you could be one of the best investment managers in the world but if you don’t know how to market and get your value proposition out to a large number of people, you could starve as a financial advisor.  On the other hand, you could be just an average investment manager, but if you know how to market, you can make hundreds of thousands to millions of dollars a year or more as a FA.


Of course, if you are a skilled investor AND know how to market your services as a financial advisor, you can make lots of money for yourself and for your clients.  That’s the best of both worlds.  And with that goal in mind, I plan to contribute a few articles, as my busy schedule permits, to hopefully encourage a few of the skilled investors reading Seeking Alpha to enter the financial advisory profession and help Americans reach their financial goals.


If you are already in the profession, I hope that my articles provide you with some ideas and strategies for growing your practice even more rapidly.


I am also a very active investor and I have traded a wide variety of stocks, ETFs, options, futures, and options on futures over the years in addition to buying and selling apartment buildings, rental houses and commercial property. In the future, I may also contribute a few articles on investment psychology, the markets and behavioral finance.


Dr. Donald Moine, based in Palos Verdes, California, is a well-known Marketing and Investment Psychologist specializing in financial planning practice building, branding, seminar marketing and investment psychology.  Dr. Moine has worked with financial planners, investment managers, top insurance professionals, hedge fund managers, Wall Street firms and brokerage firms around the world.  Dr. Moine was hired by Morningstar to write their column on Practice Building and has written a total of more than 500 articles for various publications and websites in addition to authoring and co-authoring a number of books.


Due to his busy schedule, Dr. Moine cannot answer emails from readers.  However, he will read all comments posted here and will address some issues raised and answer questions of greatest interest in future articles.  Dr. Moine appreciates your feedback and wishes you success.  

Disclosure: No positions in any stock mentioned.