Becoming a Financial Advisor

Although most people may be unaware of how to become a financial advisor, many people have an interest in the field. Choosing to embark on a career in financial advising requires you to be educated in numerous areas. You will be working with topics such as funds, annuities, estate planning and taxes. Funds are complex matters which involve different management styles (active or passive), as well as specifications and makeup. Through your chosen advising style, you will foster a relationship with your clients and guide them through their fund decisions. A financial advisor course will teach you all you need to know and leave you with a certification to embark on a new and exciting career path.

When a fund is about to close its doors to new investors there is frequently an onslaught of new money that pours in. The belief is that the fund is almost magical. The reality is something different. A mutual fund advisory service recently looked at close to 40 funds that closed during a past 15-year period. An individual funds' performance was ranked for the three-year period before closing its doors and for the three-year period after new investors were barred. For every fund whose subsequent performance improved, three times as many funds experienced a decline in returns. Compared to the performance of their respective peer groups, the closed fund fell from the top quintile of returns to just below average.

Another problem that investors face when a fund closes its doors is increased tax inefficiency, which you will learn the specifics of in a financial advisor course. When a fund is using inflows of new cash, the need to redeem securities to pay for redemptions or to acquire other securities lessens the triggering of capital gains. One study shows that the average closed fund's tax efficiency fell 5% after its closing date. One mutual fund family has publicly stated that the negative tax consequences of closing outweigh the pluses.

If your client is intent on chasing a fund that is about to close, there is another course of action. As an alternative, find out what other funds the manager oversees. This is a skill that comes along with determining how to become a financial advisor who is effective and knowledgeable. More likely than not, if there are other offerings, portfolio composition will be similar. There are a number of actively managed funds that have consistently outperformed their index benchmarks. And there is evidence indicating that so-called "sophisticated money" directs assets to such managers.

The great majority of academic studies are strong advocates of passive management (indexing). Their argument is based on three points: (1) market efficiency, (2) the expense drag of hiring costly analysts, managers, researchers, and traders, and (3) the "hidden" costs of trading—brokerage commissions, impact costs, and bid-ask spreads.

A number of studies show that indexing tends to be more effective in some investment styles than in others. Funds that focus on large cap U.S. stocks invest in the most closely watched stocks in the world. Funds that venture outside the large cap arena have many more stocks to choose from—there are more than seven hundred U.S., mid cap stocks and more than four thousand small caps to sort through (versus about 250 domestic large cap issues). More importantly, those stocks receive far less attention from the financial community. Therefore, it is more likely that a manager could ferret out an underappreciated gem in the mid or small cap area than in the large cap realm.


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Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about how to become a financial advisor, financial advisor course, visit http://www.icfs.com