Financial Advisor Credentials Are Misleading
In general, legitimate credentials prove that an advisor is furthering his or her education; with the rules and regulations of finance changing nearly every day, current information and knowledge is crucial.
But having credentials doesn't make someone worthy of being your advisor, a conclusion I draw from personal experience.
I did not study for the test and did not expect to pass, nor did I want to; I would have lost all respect for both the test and the group if I could ace the exam without formal training. None of the journalists passed.
What I learned was not how tough the test was, but rather that the mark of CFP -- a standard I have tremendous respect for -- does not make someone a great financial planner. It proves technical proficiency, the ability to analyze a portfolio and make appropriate suggestions, but it gives no insight into the advisor's "relationship skills."
An advisor could pass the CFP exam largely by boning up on some financial formulas and rules, but could be lacking the basic human skills necessary to build a comfortable relationship with you. Since a successful relationship with an advisor depends on developing a working partnership, credentials alone can't make someone a good advisor.
Don't get me wrong. Technical expertise is critical, especially when it comes to the legal, insurance, and tax arenas in which a mistake could have severe costs.
But I do not know of a single financial planner -- and I have asked hundreds of them in the years since I took the test -- who ever had a client come in and ask for the calculation of the Sharpe Index of Performance on a mutual fund. In fact, only one or two of the planners I've queried could actually calculate the Sharpe Index without the formula in front of them. (The Sharpe is sufficiently esoteric that most planners can't adequately explain it and I'm not even going to attempt it here.)
Yet the Sharpe Index was on the CFP exam that I took.
Meanwhile, subjective decision making about how someone can cut spending to improve savings or reduce debt was not anywhere on the CFP exam. And the same planners who have never been asked by clients to calculate a Sharpe Index have dozens of clients who need help changing their spending habits.
Until I saw what the test measured, I never understood how the CFP Board of Standards had bestowed its precious mark on some of the very best and very worst planners I know; the answer is that the exam is an incomplete gauge of an advisor's skills. I like or dislike the CFP designees I know because of their demeanor, ability to communicate complex information, and the investment approaches they espouse, not because they are technically proficient at the esoteric points of personal finance.
That's why credentials are a starting point and not the Good Housekeeping Seal of Approval.
What All Those Letters Stand ForWith over 100 credentials and designations, ranging from the ordinary to the ridiculous, and more being created every day, it's impossible to cover every credential here. Clearly, the most respected designations are those that require the most knowledge and preparation, that espouse the highest ethical standards, and that are given by top-flight educational institutions or industry organizations. Not all of the most-common designations actually meet that standard.
Here, in alphabetical order, is a list of the 20 marks and designations you are most likely to run into during your search for financial advisors:
- AEP: The Accredited Estate Planner designation requires the recipient to have five years of estate planning experience. The person must be an attorney or financial planner with appropriate credentials in that field. Given by the National Association of Estate Planners & Councils, the credential requires just two graduate level courses, but then needs 30 hours of coursework every two years to stay in good standing.
- ATA or ATP: An "Accredited Tax Advisor" or "Accredited Tax Preparer" has completed the College for Financial Planning's Accredited Tax Preparer Program and passed an exam administered by the Accreditation Council for Accountancy on Taxation.
- CAA: A Certified Annuity Advisor must be a lawyer, insurance agent, or financial planner, who then completes classwork (either self-study or in a classroom) developed by Advisor Certification Services.
- CAS: The Certified Annuity Specialist designation competes with the CAA. It requires a bachelor's degree or one year of experience in financial services and completion of a self-study course and passing an examination administered by the Institute of Business & Finance.
- CDP or CDFA: One growing sub-specialty among financial advisors is dealing with divorce cases. A Certified Divorce Planner is an experienced advisor who has completed coursework from The Institute for Certified Divorce Planners, while a Certified Divorce Financial Analyst is an experienced advisor who chose instead to study with the Institute for Divorce Financial Analysts.
- CFA: Chartered Financial Analysts pass a rigorous, three-level test on investment analysis, economics, portfolio theory, accounting, corporate finance, and more, administered by the CFA Institute (formerly the Association for Investment Management and Research). CFAs also must demonstrate expertise in a specialized area of investments.
- CFP: Certified Financial Planners must meet experience and education requirements and pass a 10-hour exam given by the Certified Financial Planner Board of Standards. To remain in good standing, they must take at least 30 hours of continuing education classes every two years.
- CFS: Certified Fund Specialists need only have a bachelor's degree or one year of experience in financial services to take the self-study course and pass an examination administered by the Institute of Business & Finance.
- ChFC: Chartered Financial Consultants are typically insurance agents with several years of experience, who have passed courses in financial planning from The American College. It is a credential for an insurance agent who wants to branch into other types of financial planning; many agents get this in conjunction with the CLU credential, since some of the academic requirements are the same.
- CIMA: The Investment Management Consultants Association (IMCA) -- a trade group for advisors who specialize in high net-worth clients and institutional investors -- gives the Certified Investment Management Analyst credential to experienced consultants who complete a five-month study program at the University of Pennsylvania, the University of Chicago, or the University of California-Berkeley. Candidates cannot have any history of criminal or regulatory violations, civil judicial actions, or warranted customer complaints. IMCA has also started awarding the Certified Private Wealth Advisor (CPWA) credential for expertise in "the life cycle of wealth."
- CLTC: The "Certified in Long-Term Care" program is run by the CLTC Board of Standards and is one of the few standards that look at the vexing issue of long-term care insurance. That said, the credential has no prerequisites or required experience; it is given for the completion of a correspondence course or a 2-day in-person class, plus an exam.
- CLU: Chartered Life Underwriter is generally considered the highest professional designation for life insurance agents, who must meet extensive experience and education requirements, with the courses coming from The American College.
- CMFC: Chartered Mutual Fund Consultants have completed a 72-hour self-study course on mutual funds. The program is administered by the College for Financial Planning and overseen by the Investment Company Institute, which is the trade association for the mutual fund industry.
- CPA: Certified Public Accountants are tax specialists who must have a college degree, pass a strict national exam, and keep current on changes in tax law.
- CRPC, CRC, CRFA, or CRP: These are four separate-but-similar designations for advisors who want a credential that shows their ability to assist retirees and pre-retirees. Chartered Retirement Planning Counselor, given by the College for Financial Planning, seems to be most popular, but not significantly different from a Certified Retirement Counselor (bestowed by the International Foundation for Retirement Education), a Certified Retirement Financial Advisor (given by the Society of Certified Retirement Financial Advisors), or a Certified Retirement Planner (from Retirement Planners LLC). There is also a PRPS -- Personal Retirement Planning Specialist -- credential, given mostly to insurance professionals looking to broaden their expertise, especially as it comes to selling annuity/lifetime income products.
- CSA or CSC or CSFP: Certified Senior Advisors have taken classes on working with senior citizens that go beyond the finances to help them understand the health, insurance, and other issues that could come into play. The same applies to the Certified Senior Consultant and Chartered Senior Financial Planner credentials.
- CWM: Chartered Wealth Managers have at least three years' experience and typically have an advanced degree. They complete coursework with the American Academy of Financial Management. A similar, competing credential is the CWC, or Certified Wealth Consultant, run by The Heritage Institute.
- EA: Enrolled Agents are tax preparers who either worked for the IRS for at least five years or passed a test on federal tax law.
- JD: The Juris Doctor is a law degree, not an actual financial-planning credential. That said, there are plenty of lawyers who wind up in financial planning and services, whether that is through estate planning, tax law, or getting an additional financial-planning credential. When that happens, you can expect that the JD mark will be prominent among their credentials.
- PFS: Personal Financial Specialists are CPAs who have met education and experience requirements and passed a comprehensive exam on financial planning. Because this credential is always linked to the CPA -- designees typically list it as CPA/PFS -- the person who has it is typically qualified to help a client with both investment and tax issues. That said, many PFS advisors no longer do tax work and focus more on tax-efficient financial planning.
- RIA: Not really a credential at all; when someone tells you he's a "registered investment advisor," it simply means that he has registered with the U.S. Securities & Exchange Commission and has paid a registration fee.
By Chuck Jaffe