A Registered Representative is registered with FINRA, has passed qualifying examinations, and is licensed by a state securities regulator.  The products they can trade for clients depend on the licenses they hold, but may include stocks, bonds, ETFs, options and mutual funds under the supervision of a broker-dealer.

To become licensed as a Registered Representative to act as an agent in the buying and selling of securities, a person must pass the Series 7 and Series 63 securities examinations, and be registered with a member of the Financial Industry Regulatory Authority (FINRA) or a self-regulatory organization (SRO). The purpose of the Series 7 license is to set a level of competency for a Registered Representative or stockbroker to work in the securities industry. The Series 7 license is known as the general securities representative (GS) license. It authorizes licensees to sell virtually any type of individual security. This includes common and preferred stocks; call and put options; bonds and other individual fixed income investments; as well as all forms of packaged products (except for those that also require a life insurance license to sell). The only major types of securities or investments that Series 7 licensees are not authorized to sell are commodities, futures, real estate, and life insurance. This is an important distinction to understand, since many advisors are masquerading as full service advisors when they are not even licensed to purchase a stock, bond, option or ETF.

Why is this important? Registered Representatives trade individual securities, which helps to develop a pulse for the market. When you are in the trenches, you develop market awareness. This is something that the packaged product salesman may not develop. A Registered Representative works with daily market indicators and other metrics to judge market conditions. As an investor, you should have as many options as possible to meet your financial goals. This includes the ability to invest in individual small cap, mid cap and large cap stocks or momentum stocks. The ability to provide protection in the options market can decrease your risk in volatile markets. Having the ability to invest in a variety of securities is in the best interest of the client.

The type of compensation that your advisor can earn is of paramount importance to you as an investor. A Registered Representative can earn a living on commission or fee-based assets. Having both as an income source puts the Registered Representative in a unique position; he is not dependent on one income source, and he has the freedom to give you an unbiased recommendation.  When an advisor restricts his compensation to one form, such as fee-based, it is not in the best interest of the client. For example, generally, a fee-based advisor will collect fees once per quarter, taken at the beginning of the quarter. Those fee collectors, who are dependent on the quarterly fee, put themselves in a conflict of interest position with their clients.  Let’s say, for instance, the market has become overvalued and there is fear in the market because of a possible economic slowdown. The fee collector is compelled to invest your monies in order to justify the quarterly management fee of the account. In the event the fee collector places your monies in cash or money market, he cannot justify the collection of a fee for non-managed money. This is a difficult position for the fee collector to be in when he is dependent on that quarterly check. Typically, your fee collector will tell you to invest for the long term when it may be of benefit to you to put some of your monies in cash.

How can you determine whether your advisor is working in your best interest or just interested in collecting fees? Just look back at the last seventeen years where we have witnessed two of the worst downturns in the history of the market. Were you instructed to hold on and invest for the long run despite declines of 50% to 60%?

Working with a commission-based Registered Representative can be a very reasonable and cost effective way to receive investment advice. For example, let’s say you purchased 300 shares of a $30 stock and pay a $125 commission. The stock would only have to move up about 42 cents in order to cover the cost of the investment ($125 divided by 300). This is a reasonable amount to pay to have a professional money manager partner with you while you navigate today’s volatile markets.

Some advisors are limited in what they can purchase for their clients. For example, some advisors hold the Series 6 license, which is known as the limited-investment securities license. It allows its holders to sell “packaged” investment products such as mutual funds, variable annuities and unit investment trusts. This license is also required for insurance agents who sell variable products of any kind, because securities constitute the underlying investments within those products. Many of these advisors are employed by insurance companies and are restricted from purchasing individual securities for their clients.

The Bottom Line
If you have trouble telling the difference between a CFA, CFP®, CIC, ChFC, or any of the other financial certifications, you’re not alone. How do you sift through this alphabet soup to find the best financial professional for you? Look for the Registered Representative.

The IHM Financial Registered Representative has the ability to purchase a variety of securities that are in the best interest of the client.