Many financial advisors getting started in their careers have historically faced the same conundrum: In order to get started with a broker-dealer, you needed to pass your Series 6 or Series 7 exam. However, you couldn’t actually start on your Series exam until you got hired by a broker-dealer, so they could sponsor you in the first place! Which created issues for both prospective financial advisors, and the broker-dealers hiring them. Acknowledging the problems this creates, earlier this year FINRA received approval from the SEC to begin offering the SIE (Securities Industry Essentials) exam starting next year, which will finally allow prospective financial advisors to get started on their Series exams without being sponsored!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the new SIE exam, including how it works, what it covers (and doesn't cover), and why it ultimately isn't actually a good path to becoming a financial advisor in the future.
Under FINRA Regulatory Notice 17-30, the SIE (Securities Industry Essentials) Exam will actually first become available next October of 2018, allowing prospective brokers to be able to sit for the SIE exam without first being sponsored by a broker-dealer. Instead, the individual will be able to register themselves directly with FINRA, and then register to take the SIE exam at a local testing center from organizations like Prometric and Pearson. The SIE exam will cover, as the “Securities Industry Essentials” name implies, the basics of the financial services industry, including knowledge of basic products, and the rules and regulatory structure of the financial services industry itself.
Notably, however, the SIE exam is not actually a replacement for the Series 6 or Series 7 exams. Those who have passed the SIE will still need to take abbreviated Series 6 and Series 7 exams, to "top off" the initial SIE exam, after getting hired by a broker-dealer and being sponsored for the final Series exam. But the SIE exam will provide the initial pathway to the Series 6 or Series 7 exams... allowing prospective brokers to get started without first getting sponsored. Additionally, though, the SIE exam doesn't actually prepare anyone to be/join a Registered Investment Adviser (RIA), because the SIE exam prepares for broker-dealer jobs, not for RIA jobs that require the Series 65 exam instead.
And that’s ultimately why I’m actually concerned about the introduction of the SIE exam. Particularly for college students and young entrants to the profession, given that college students studying financial planning are likely going to be pushed to take the SIE exam before they graduate to get started as a financial advisor. Only to discover once they search for financial planning jobs, that increasingly the jobs require them to have a Series 65 exam and work under an RIA or a hybrid RIA... which means their SIE exam will be useless!
The bottom line is to recognize that while the SIE exam may be a great expedited pathway to getting a job at a broker-dealer to sell financial services products, it’s still ultimately a path to getting a Series 6 or Series 7 or similar license, which are licenses for salespeople. The path to getting paid for financial advice, under the current regulatory environment, is all about passing the Series 65 and becoming or joining an RIA (or at least a hybrid RIA), which the SIE exam doesn’t cover at all!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
For this week's Office Hours, I want to talk about a recent change that came through at FINRA, finalized earlier this year, which is the introduction of something called the Securities Industry Essentials exam, or the SIE exam, for short.
For those who aren't familiar, the idea of the SIE exam is to resolve that infamous problem that a lot of today's financial advisors faced early in our own careers, which is in order to get started with the broker-dealer, you need to pass your Series 6 or your Series 7 exam, but you can't start your Series exams until you get hired by a broker-dealer so they can sponsor you in the first place, which frankly was a challenge both for those who wanted to become financial advisors and actually for broker-dealers themselves.
From the individual side, you couldn't really get started on your career without the necessary regulatory entrance exam, but you couldn't start on the exam until you went to find a broker-dealer to work for first so you could be sponsored. And then heaven forbid, you discover that you couldn't pass the Series 7 exam and all that time and job searching was wasted.
And arguably, the problem was actually even worse for the broker-dealers themselves because they would go through all the trouble of evaluating and finding, and hiring, and vetting potential financial advisors and then at best, the BD would have to pay them a stipend while waiting for them to study and take their exams, and at worst, the broker-dealer would bear all the costs of hiring and vetting, and sponsoring, and registering someone for the exams and then they'd go to take their Series 7 and fail, and retake and fail again, and then the broker-dealer just wasted a whole bunch of time and dollars for nothing.
And so earlier this year, I think it was a really big deal when FINRA got final approval from the SEC to start offering the SIE exam starting next year.
FINRA Regulatory Notice 17-30 And The SIE Exam Requirements [Time - 2:01]
Under FINRA Regulatory Notice 17-30, the SIE exam will actually first become available next October of 2018. The basic gist as I just mentioned is that those who want to work at a broker-dealer will be able to sit for the SIE exam without first being sponsored by a broker-dealer. Instead, the individual will be able to register themselves directly with FINRA and then register themselves to take the SIE exam at a local testing center from organizations like Prometric and Pearson.
Now, the SIE exam will cover, as the Securities Industry Essentials name implies, the basics of the securities industry, the financial service industry, including knowledge of basic products, all the rules and regulatory structure of the financial service industry itself. It'll be a shorter exam, 75 multiple-choice questions, and candidates will have 1 hour and 45 minutes to complete the exam.
Now, the SIE exam isn't actually meant to be a total replacement for all of today's regulatory entrance exams like the Series 6 or the Series 7. Instead the idea is that someone will take the SIE exam first and then apply for a job with a broker-dealer, and then get sponsored to take the actual Series 6 or Series 7 exam, which at that point will become a shortened exam, because the SIE exam already covered the basics of the securities industry so the subsequent Series exams just have to cover what's relevant for that specific job function. So mechanics and rules of mutual funds for the Series 6, stocks, bonds, options and other securities for the Series 7.
And accordingly, the Series exams themselves will generally get cut by roughly half. The new Series 6 will only be 50 questions instead of 100 today. Series 7 will be down to 125 questions from today's 250. Now, the total length won't be all that different because, again, you'll have to take both the SIE exam and a shortened subsequent top-off exam for the Series 6 or the Series 7.
In other words, the point here isn't really to make it easier per se, to get ephemeral regulatory exams done, the real point is just to make it easier to get started with the Securities Industry Essentials exam without being sponsored first. And then those who pass this SIE exam and want to go further can apply for a job at a broker-dealer, get sponsored, go take their top-off Series 6 or Series 7 exams, or actually a number of other Series exams as well. The SIE exam is actually meant to be the pathway to a lot of different registered broker-dealer jobs, including not just those that require Series 6 or Series 7, but also Series 22 for direct participation programs, Series 57 for securities traders, Series 79 for investment banking, Series 82 for private securities offerings, and the Series 99 for broker-dealer operations professionals.
The good news of all this, though, is that because the SIE exam will be the common ground for all of those Series exams, for those who are actually going to take multiple Series exams over time, maybe as their career progresses and their jobs change, you actually will save some time because you won't have to take what's basically the duplicative part of each exam that tests general securities industry knowledge on each of those Series exams, instead you'll cover all of that once in the new SIE exam and then just take the top-off exams in any and all the different areas you need as you progress through your broker-dealer jobs.
The SIE Exam Doesn’t Prepare For The Series 65 RIA Exam [Time - 5:23]
Relative to today's path for becoming a financial advisor or a broker-dealer, I think the SIE exam is a positive step forward. I do know there are people out there who've become dissuaded from entering the financial service industry because it was too hard to go through that juggling act of finding a firm to hire you just to see if you'd be able to then get registered and pass the requisite Series exams.
And it's especially been problematic for students looking to enter the industry where often they want to put a good foot forward and get started before they even finish school, except they can't because they can't get sponsored for an exam until they get hired and they can't get hired until they finish school. And the SIE exam resolves that blocking point, because now, students will be able to get registered for and go sit for the SIE exam before they even graduate if they want so they can hit the ground running immediately after graduation, get hired by a broker-dealer, quickly take the much shorter top-off exam, and then get going on their career.
And I think that'll help broker-dealer firms as well maybe be a little bit more willing to hire young people knowing that they've already passed the SIE exam. Because at least it helps a little to reduce the risk for the firm of vetting and hiring a candidate only to find out they can't pass the exams. And obviously, there's still some risk that a candidate passes an SIE exam but then can't pass the Series 7. But realistically, it's probably not a high risk. If you can pass one, you should be able to do the studying it takes to pass the other.
But there's a really important caveat to the SIE exam, which is that it's built to give people an easier path to the requisite regulatory exams you have to take to get a job at a broker-dealer in the securities industry. But it's just for broker-dealer jobs, not for jobs at a registered investment advisor.
Because if you want to work at an RIA and become what technically is an investment advisor representative or an IAR of the RIA, what you need is a Series 65 exam. And the Series 65 exam is completely separate from the Series 6 and 7 exams that are paired with the SIE. In fact, even after the new rules are in effect, you won't need the SIE exam to take the Series 65, nor will taking the SIE exam even help with the Series 65 exam. Those who take the SIE exam will still have to do the entire Series 65 exactly as it is today, and the SIE exam will basically be irrelevant at that point. Because it's testing different knowledge, and the reality is that you don't need to be sponsored by a broker-dealer to take the Series 65 anyway. It's not an exam for working at a broker-dealer. This is an exam for working at an RIA.
Why The SIE Exam Is Not A Good Path To Become A Financial Advisor [Time - 7:55]
And that's ultimately why I'm actually a little bit concerned about the introduction of the SIE exam because FINRA's goal is to make it easier to have a pathway into the financial service industry by making it easier for students to get started with the SIE exam. It does have a cost, but it'll be a nominal cost, and then just continue their path into the brokerage industry with the top-off exam after they join a broker-dealer and get sponsored. Except the problem is that legally, having your Series 6 or Series 7 exam and working at a broker-dealer doesn't make you a financial advisor. It doesn't actually. It makes you a salesperson for the broker-dealer. Literally, those Series exams make you a registered representative of the broker-dealer. You represent the broker-dealer and their brokerage products and services.
In fact, the Investment Advisers Act of 1940 explicitly states that if you ever give investment advice that's more than "solely incidental" to the sale of brokerage services, you have to go ahead and take the Series 65 and register as an investment advisor anyways, which means in the long run, everyone who actually wants to actually get paid for financial advice is going to end up working under an RIA and taking the Series 65.
And that's why we've seen so much growth in the RIA model over the past decade as advisors are switching to actually getting paid for advice. Also, that's why there's an explosion in the hybrid model where more and more brokers are also taking their Series 65 and working under an RIA at the same time they're under the broker-dealer. Because, again, you need the RIA registration to offer any kind of fee-for-service financial planning advice or to get paid any kind of ongoing advisory fee.
And so my concern going forward after the SIE exam takes effect in October of 2018 is that college students studying financial planning are going to be pushed to take the SIE exam before they graduate to get started as a financial advisor, only to discover once they search for financial planning jobs, that increasingly the jobs require them to have the Series 65 exam and work under an RIA a or hybrid RIA, and that their SIE exam will basically be useless. Especially since these days, the best financial planning jobs are virtually always at advisory firms that have some kind of recurring revenue advisory fees, and those firms are virtually all RIAs or at least hybrid RIAs that are focusing more and more on the RIA side of the business.
And in point of fact, future financial advisors are increasingly getting jobs as paraplanners anyways, which don't actually require a license at all, because the exams and the licenses, whether it's Series 6 or Series 7 or Series 65 don't actually matter until you're talking to and soliciting clients, which frankly, you shouldn't be doing when you're getting started. You should be learning what you need to learn to actually be technically competent at giving advice. Client-facing time, where you have to be licensed, should come later.
Which means college students who take the SIE exam to become a financial advisor are going down the wrong path because what they should be doing is trying to find a paraplanner job and then later perhaps studying for the Series 65, not the SIE exam. Because, again, the SIE exam ultimately prepares you for work at a broker-dealer to become a financial product salesperson. The Series 65 prepares you to actually get paid for financial advice.
Now, it's messy in today's environment. I have a lot of sympathy for everybody who's coming to the financial service industry today trying to navigate this because we use that label "financial advisor" so broadly to cover those who are actually paid for financial advice and also for brokers who are legally financial product salespeople.
But for those who really want to become advisors, who are paid for their advice, the SIE exam isn't the path. And I worry that students won't discover that until after they've potentially wasted some time and resources to take an SIE exam that they may not need for the financial advisor jobs of the future, especially as broker-dealers themselves are increasingly reinventing themselves as giant roll-up RIAs now, especially with the Department of Labor's fiduciary rule looming.
But the bottom line, though, is just to recognize that while the SIE exam may be a great expedited pathway to getting a job at a broker-dealer to sell financial services products, it's still ultimately a path to getting a Series 6 or a Series 7 or similar license, which are licenses for salespeople. The path to getting paid for financial advice, at least in our current regulatory environment as it's existed since 1940, is all about passing the Series 65 and becoming or joining an RIA, or at least a hybrid RIA, which the SIE exam isn't built to cover.
So I hope that's helpful as some food for thought and perspective on the new SIE exam. This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays. Thanks for joining us, everyone, and have a great day.
So what do you think? Is the SIE exam an improvement over the status quo? Will it just be a distraction for students who ultimately want to end up in an RIA? Please share your thoughts in the comments below!
Really interesting topic. Probably a good idea to incorporate the SR 65 as well as an ethics class as well.
Christopher Winn says
This is actually good news for the industry as a whole. A few years back, FINRA made it a requirement that any registered person through a FINRA firm must request a Series 65 or Series 66 exam through a Form U4 filing by the firm [B-D]. However, a non-registered person has been able to register for the Series 65 directly by filing a Form U10 [which has been replaced with an online form at https://www.finra.org/industry/enroll-series-exam%5D. Using this process, one technically does not need to be sponsored. If one does not have a firm, they can complete the form, just indicating the state in which they reside. This could be better communicated by FINRA.
Capt. Obvious... says
Ummm – Its about the money??? Instead of hiring them for 6 months to study and then having to fire them, BD’s save because they get to weed out those applicants who can’t pass an exam – with the applicants even doing paying their own way. FINRA, the study course providers and the testing centers all get more testers whom they can charge for the privilege of taking the exam. Or – its all for the better of the industry…. you decide.
Politely, I disagree with the statement that their SIE exam will be “useless”. There is so much information to learn to become a good advisor and some of it is securities related. It seems to me that no harm will come from aspiring advisors learning more about securities through the SIE exam study, plus it demonstrates to prospective employers (including RIA’s) that the applicant is self-directed and motivated.
Michael Kitces says
Fair point about the signaling implications.
But if you’re looking to hire an associate financial planner, would you rather see a student who showed the self-directed motivation to take the SIE exam, or the self-directed motivation to take the Series 65 and/or be working towards the CFP exam?
Certainly, any self-investment in education is good – I’m a strong advocate for it – but in practice, choosing to take the time to pursue the SIE exam is taking the time to NOT pursue something even more relevant for the actual path to becoming the financial advisor of the future?
Steven Smith says
Of course, the “solely incidental” provision has been barely incidental in practice. Even despite the decision in FPA vs. SEC. Which is what has created the legal pretzel known as the DOL Fiduciary Rule. Couldn’t the DOL have simply said if a registered representative is providing a recommendation on a rollover IRA the rep has to register as an IAR with an RIA and abide by the fiduciary provisions of both the ’40 Act and ERISA?
Michael Kitces says
Unfortunately it’s beyond DoL’s jurisdiction to force the enforcement of SEC rules under the ’40 Act.
Although I truly believe that if the SEC was properly exercising enforcement of this provision of the ’40 Act as written, the DoL fiduciary rule never would have happened.
It’s the SEC’s ongoing lax enforcement that is triggering others to fill the void, from the DoL’s fiduciary rule, to the one that Nevada recently passed.
Tunc Tanin says
In my opinion, it is a slight improvement over the current silly complicated system. It will also help folks who can not find a FINRA firm to sponsor them and still want to try out as financial advisors. Their choice before was to go get appointed with a life insurance company, get a life license and call yourself a full financial advisor.
I am also a proponent of asking RIA’s/CFP’s to consider being a mentor after they have been in the business for 10 years. Right now, it is voluntary and most of the time it turns into a recruiting tool, not mentoring. May be it should be more forced after you have used the CFP designation for a certain time or you have been a RIA. As important as knowledge/education is, also access to quality mentoring and experience is critical. Adding more exams does not achieve that.
TimTurner, CExP, EA says
Nice article Michael. I always enjoy them. If i could add some clarity, the IA Act of 1940 does not specify the taking of the Series 65 exam. Even the SEC, over all these years, has been silent as to any specificity regarding qualifications for application to register as an investment adviser. It was the States along with their membership association, NASAA, that created any sort of qualifications for individuals to provided “investment advice” through the creation of the Series 65/Series 66 exams as well as identifying certain certification/designation programs.
It is the State(s) where the RIA wants to work in that will review qualifications to grant registration…not necessarily the SEC. Most States have generally adopted eight (8) ways an individual can demonstrate qualifications to become registered, passing the Series 65 is just one of them. Most dual-registered broker dealer/investment adviser choose the Series 7 & Series 66 exam combination…although there are some that still require the Series 65 also…which is just examination overload and redundant.
If an individual wants to only be associated with an RIA, then I think, possibly, the only quickest way is probably the Series 65 exam. Obtaining the CFA, CFP, ChFC, CIC, or the MSFS certifications/designations take longer and only CPA’s can obtain the PFS designation.
Notwithstanding FINRA’s decisions on timing/administering certain qualification tests for broker dealers (remember they regulate ONLY qualifying exams for BD’s not RIAs), it is incumbent on those of us that have been this business to help guide those that want to enter/succeed us in this business to help them make decisions on how to qualify…whether it be by examination, certification/designation or a combination.
Michael Kitces says
Thanks for your comments here, and the clarification of state- vs SEC-imposed exam requirements! 🙂
I’ll be certain to explain these more distinctly in the future, between the ’40 Act’s “registration” requirements, and state/NASAA exam requirements! 🙂
Ken Finnen says
I don’t see how this is any different for newcomers. If they were going the broker route they would be taking the 7 and getting registered and if they were to start as advisor then they would go the 65 route anyway. Since FINRA doesn’t regulate IAs this wasn’t even a consideration in the thought process. I understand your warning that the the SIE is not the way to go for IA but neither is the Series 7 route as it stands now.
This was strictly a money grab by FINRA and shouldn’t even be in the conversation regarding advisors