Top Entities Responsible for Regulating Financial Advisors

Hiring a financial advisor to help you manage your money and everything related to it is a wise decision. Undoubtedly, financial advisors can provide real value. The same was revealed by an independent study conducted by Vanguard to know the value addition of working with a financial advisor. The study reported that clients working with a financial advisor on average earned 3% per year more than those working without a professional advisor. The study did not take into consideration the performance of the investment fund and reported the changes in earnings solely based on the advice offered by the financial advisor. Even though 3% does not appear like a large number, over time, it can add up, making significant differences in your overall net worth.

However, there are many different types of financial advisors, each with a different title that makes it hard to pick the ideal professional for your needs. It is important that you hire a financial advisor that is most suited to meeting your financial requirements. Evaluating a financial advisor’s competency and required skills for the job can also be challenging. A simple way to solve this problem is by assessing their regulators and checking their licenses and authorizations. A competent financial advisor will hold the necessary qualifications and will be governed by the regulator in the domain they are offering their advice.

But, despite providing advice to millions of people on varied financial matters and retirement planning, there is no distinct or separate financial regulatory authority for these professionals. Any person could start calling themselves a financial advisor without having the necessary competencies or ethical standards. Though some aspects of the financial advisory domain like investment advice, trading securities, insurance products, etc., are regulated by governing authorities, the central component of financial planning does not have a distinct financial regulation. Instead, individuals who refer to themselves as financial advisors may be regulated by the service they offer. For instance, an accountant will be regulated by the Board of Accountancy and a financial planner who is also an investment advisor will be regulated by the Securities and Exchange Commission (SEC), etc.

Given the importance of sound financial advice for your present and future safety, it is important that you know the entities responsible for regulating financial advisors. This will help you make the right choice and be assured that the professional advice you receive is in your best interest.

Here are some of the important U.S. financial regulators that you must know:

1. Securities and Exchange Commission (SEC)

After the historic crash of the stock market in 1929 and the ensuing Great Depression, the Securities and Exchange Act of 1934 was passed, which created the U.S. Securities and Exchange Commission (SEC). SEC is the investor's advocate and works to protect investors and promote fairness in dealings across the securities markets. Moreover, the SEC also shares information about companies and investment professionals with the purpose to help investors like you make informed decisions and invest wisely.

The SEC pursues a three-part role:

• To protect investors
• Facilitate capital formation
• Maintain fair, orderly, and efficient markets



Primarily, the SEC monitors key participants in the financial services industry, including brokers, dealers, investment advisors, financial planners, securities exchangers including electronic markets like the NASDAQ, and more. The aim is to ensure that all entities participating in the market activities or offering financial services of any kind, including professional advice, truthfully disclose all relevant and important information to their investors to minimize fraud and financial crime such as insider trading, money laundering, etc. Typically, in this domain, the SEC:

• Interprets and enforces federal securities laws
• Issues new and amends any existing rules and regulations
• Oversees the inspection of securities firms, brokers, financial advisory firms, investment advisors, and rating agencies
• Governs private regulatory organizations involved in the securities, accounting, and auditing domain
• Coordinates U.S. securities regulations across different levels – federal, state, and foreign authorities



If a firm or a registered individual violates the law, the SEC may recommend a federal investigation into the case and can also direct the case to the Enforcement division. Each year, the SEC registers enforcement actions against several firms and individuals that violate securities laws. Moreover, the SEC also maintains a database that helps investors stay informed by accessing important information about the professional individual or the company they are dealing with. The objective is to stop and minimize fraudulent and manipulative practices in the market. All brokers, advisory firms, asset managers (including their professional representatives) must register with the SEC to conduct any business. Large investment advisors with over $100 million in AUM (assets under management) have to register with the SEC. Small advisors have to register with the state regulators.

How does the SEC work?

As mentioned, the prime objective of the SEC is to be a regulator for the securities market in the U.S. For this purpose, the SEC governs all organizations and professionals involved in the securities market. This comprises brokerage firms, financial advisory firms, asset managers (including their representatives) investment fund managers, securities exchanges, and more. The SEC has established strict rules and regulations and encourages all stakeholders to provide accurate and comprehensive market-related information to ensure fair dealings and protection against fraud. Moreover, investors have easy access to important data such as periodic financial reports, registration statements, financial misconduct, securities forms, and more.

Further, the SEC is empowered to initiate a civil action against financial corporations and individuals that violate securities laws. It also partners with federal and state law enforcement agencies to take legal action against advisors and entities who may have acted in violation of the financial regulations and securities laws.

Financial Industry Regulatory Authority, Inc (FINRA)

Another important U.S. financial regulator that you should know is FINRA. FINRA is an independent, self-regulatory organization established in 2007 after the SEC approved the merger of the New York Stock Exchange (NYSE) and the North Association of Securities Dealers (NASD). FINRA is a non-government organization that is responsible for writing and enforcing rules governing registered brokers and broker-dealer firms in the U.S. The main objective is to protect the investors and the general public against any type of fraud or financial malpractice.

FINRA is the largest independent U.S. financial regulator for securities with more than 35,000 brokerage firms, 625,000 registered securities representatives, and over 154,000 branch offices. FINRA is responsible for overseeing the trading of equities, futures and options, and corporate bonds. In addition to this, FINRA administers professional qualification exams – such as the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination - for advisors and securities professionals. It supervises the licensing of registered investment advisors, broker-dealers, including their representatives.

Financial advisors with the General Securities Representative license (Series 7) have basic knowledge of investments, markets, regulations, etc. These advisors are qualified to provide an opinion. Financial advisors with the Series 63 license (Uniform Securities Agent State license) have permission to conduct business across different states. Another vital accredit is the Series 65 license (Uniform Investment Advisor Law exam), which allows financial advisors to levy a fee for their services.

How does FINRA work?

FINRA, the SEC, and the North American Securities Administrators Association (NASAA) work in conjunction to supervise firms and individuals that deal in securities or provide professional securities training and testing. The three entities in the financial services regulation domain maintain a database on financial professionals and uphold continuing education standards. It also administers the exams mandatory for investment advisors and broker-dealer firm principals and representatives.

FINRA also creates and maintains the electronic system for state and federal registration of the firms and financial professionals. Investment advisors and their representatives register with the Investment Adviser Registration Depository (IARD) and broker-dealer firms through the Central Registration Depository (CRD).

Additionally, FINRA has the authority to take any disciplinary action against a registered individual or a firm that might have violated the financial regulations. To correct the violations, FINRA can levy fines, criminal penalties, order restitution, take civil action, and even expel and bar registered firms and individuals from offering their services or selling any financial products to investors.

2. North American Securities Administrators Association (NASAA)

The NASAA was founded in 1919 and is one of the oldest U.S. financial regulators. The NASAA is a voluntary organization of state and provincial securities regulators from the United States, Canada, and Mexico. The NASAA aims to protect investors from fraud. The NASAA works in conjunction with FINRA and the state regulators that are a part of the association to help investors identify and avoid fraud by educating them and giving them the required information. The NASAA also investigates violations of the state and provincial law, and files enforcement actions.

State regulators, that are a part of the NASAA, are responsible for licensing investment advisors and their representatives where the client assets are less than $100 million. They also register some state securities and are responsible for inspecting consumer complaints, and educating and advocating for the investors.

However, state regulatory agencies have to register with the NASAA, but individual investment advisors and investment advisor representatives are not obligated to register with the NASAA. Further, the Series 63, Uniform Securities Agent State Law Examination, which is administered by FINRA, is written by the NASAA.

3. State Securities Regulators

Each state in the U.S. has a distinct department of financial and professional regulation. The objective of the department is to regulate the sale of securities in their state. These departments are also responsible for enforcing the securities laws, such as the Blue Sky laws, in their respective states. Blue Sky laws differ from one state to another and often reflect the federal financial regulation.

Investment advisory firms and their representatives have to register with the state securities commission in the state in which they operate. However, this registration is mandatory only for those that have less than $100 million in client assets under management (AUM). Further, broker-dealers and their agents also have to register with the state regulators. The process for registration with the state securities regulators is the same as with the federal U.S financial regulators. However, in some cases, state regulators might have additional requirements for agents and advisors.

State law enforcement agencies take care of the legal issues and take action against investment advisors who act in violation of financial regulations and securities laws as determined by state securities regulators.

These are some of the prime U.S. financial regulators that govern the financial regulation domain in the U.S. As a wise investor, you must make a note of the accreditations of your financial advisor and also be sure they are registered and governed by the right regulator.

Why is it important to know the financial regulation of your financial advisor?

Your advisor can help you secure a comfortable financial future. You must ensure that the person who is in charge of your hard-earned money is qualified, equipped, skilled, and most of all, authorized to manage your money and related financial matters.

Lack of comprehensive financial planning and inadequate financial advice can seriously impact your financial security. Moreover, incompetent, unqualified, or biased advice could hamper major financial goals, such as creating a retirement corpus. Narrowly focused, product-biased financial advice, not aligned with your needs could cause significant financial repercussions.

When you engage with a financial advisor who holds the right registrations, you can be assured to receive skilled advice that aligns with your needs. Further, financial advisors who are registered with FINRA or the SEC, also follow fiduciary standards, where the professionals are mandated by law to act in your best interest and offer unbiased advice, ultimately ensuring your financial well-being. Moreover, by engaging with advisors that are abiding by the financial services regulation, you can be sure that the services or advice (tax, retirement, debt management, insurance, legal, estate, etc.) you will receive is all-encompassing, well-researched, and based on the experience.

To conclude

Financial advisors are not regulated by a separate and distinct organization. Hence, to ensure that the person you engage with is competent and ethical in the services they offer, check their professional registrations and regulators. Financial management regulations, such as the SEC, FINRA, etc., give you the chance to cross verify if the person you are considering hiring a financial advisor is worthy or not. You can check their databases and authenticate the person concerned, including their educational qualifications, certifications, professional designation, disciplinary records, and much more. You should also assess the validity and legality of licenses and verify the discipline history, conflicts of interest, etc. To check disciplinary records of 2005 or later, you can use the FINRA Disciplinary Actions Online database. Some state regulators also maintain their separate discipline database. Alternatively, you can find a qualified, competent, and authorized financial advisor with the help of the Financialadvisor.net's advisor match tool. This tool uses complex algorithms to match you with pre-screened financial advisors in your area. The experts are tested based on their experience, compensation arrangement (fee-based or fee-only), and licensing and disclosures related to the SEC/FINRA.

Your financial advisor is an important part of your monetary journey and can help you achieve your desired financial goals. They lay the foundations of your adequately funded future. Hence, choose your professional financial advisor with utmost caution and prudence.