Financial Institutions Overview

CFP professionals work within a complex ecosystem of financial institutions, each serving distinct functions in the economy. Understanding how these institutions operate, their regulatory frameworks, and their compensation structures is essential for providing comprehensive financial planning advice.

Banks: The Foundation of Financial Services

Commercial banks accept deposits from individuals and businesses, then lend a portion of these deposits to borrowers. This core function defines banks as depository institutions and subjects them to specific regulations.

Types of Banking Institutions:

Key Characteristics of Banks:

• FDIC Insurance: Deposits are insured up to $250,000 per depositor, per institution, per ownership category
• Reserve Requirements: Banks must maintain reserves based on their deposit liabilities
• Capital Requirements: Regulatory capital standards ensure bank solvency
• Lending Authority: Banks can make consumer loans, mortgages, commercial loans, and other credit products

Investment Banks differ from commercial banks by focusing on capital markets activities. They underwrite securities offerings, advise on mergers and acquisitions, provide trading and market-making services, and offer research.

Broker-Dealers: Facilitating Securities Transactions

Broker-dealers are firms that buy and sell securities for their own account (acting as a dealer) or on behalf of customers (acting as a broker). These firms must register with the SEC and become members of FINRA.

Services Broker-Dealers Provide:

• Execution of securities transactions
• Investment recommendations (subject to suitability/Reg BI standards)
• Custody of client assets
• Margin lending
• Research and market analysis
• Underwriting of securities offerings

Broker-dealers operate under the Securities Exchange Act of 1934 and are subject to FINRA rules, SEC regulations including Regulation Best Interest (Reg BI), net capital requirements, and customer protection rules.

Registered Investment Advisers (RIAs)

Registered Investment Advisers (RIAs) are firms or individuals who provide investment advice for compensation and must register with either the SEC or state securities regulators based on assets under management (AUM).

Registration Thresholds (Dodd-Frank Act):

RIAs are fiduciaries under the Investment Advisers Act of 1940, meaning they must act in the client's best interests at all times, provide full disclosure of material conflicts, seek best execution for client transactions, and have a reasonable basis for recommendations.

RIA Compensation Models:

Important Distinction: "Fee-only" means the adviser receives compensation solely from clients. "Fee-based" means the adviser may also receive commissions, creating potential conflicts of interest.

Insurance Companies

Insurance companies provide risk management products that protect individuals and businesses against potential financial losses. They collect premiums from policyholders and pay claims when covered events occur.

Key Characteristics:

• State Regulation: Unlike securities firms, insurance companies are regulated primarily at the state level by state insurance commissioners
• Guaranty Associations: State guaranty funds provide limited protection if an insurer becomes insolvent (typically $300,000 for life insurance, varies by state)
• Separate Accounts: Variable products (variable annuities, variable life) are held in separate accounts regulated as securities

Insurance agents typically earn commissions on product sales, which can create conflicts of interest. First-year commissions on life insurance and annuities can be substantial (50%-100%+ of first-year premium).

Trust Companies

Trust companies specialize in providing fiduciary services, with a primary focus on estate planning, trust administration, and wealth transfer strategies.

Trust companies are authorized to exercise fiduciary (trust) powers, may be standalone entities or divisions of banks, and are subject to banking regulators. They often serve high-net-worth clients and families.

Fintech Companies

Fintech companies leverage technology to deliver financial services, including digital payment platforms, robo-advisers, online lending platforms, cryptocurrency exchanges, and personal financial management apps. Fintech firms must comply with existing regulations based on the services they provide—a robo-adviser, for example, must register as an RIA.

Choosing the Right Institution

CFP professionals help clients navigate this landscape by understanding client needs, compensation structures, regulatory protections, costs, and qualifications of different institutions and advisers.