The 3 advisor licenses that matter

In the last 10 years or so, there has been an explosion of new financial designations.In fact, the Financial Industry Regulatory Authority (FINRA), reports at least 95 financial advisor designations. The Wall Street Journal has documented another 115 that FINRA doesn’t monitor. Many of the newer credentials can be obtained by paying a fee and passing an exam and others don’t even require a test. Should you pay any attention to what is listed on that business card?

Yes, you should, but it’s important to know what to look for. Think of it this way – would you want to be operated on by a doctor who didn’t have an MD after his name? Or would you hire an attorney who hadn’t passed the bar exam? Unfortunately, while doctors and lawyers must be licensed to be in practice, the financial industry has no such requirement. The good news is that there are only three designations that really matter:

CFP® – CERTIFIED FINANCIAL PLANNER™ The CERTIFIED FINANCIAL PLANNER™ designation is perhaps the most widely recognized credential in the financial industry. CFP®s are monitored by the CFP® Board of Standards in Washington, DC and must be a college graduate, complete a series of courses covering the six areas of planning plus ethics, and have three years of experience. Candidates must pass a rigorous 10-hour exam, requiring hundreds of hours of study, and pass a background check before receiving permission to use the mark. CFP®s must complete annual continuing education, including ethics, and renew their licenses every two years. While many CERTIFIED FINANCIAL PLANNERs™ manage investments, they emphasize the importance of having a plan that encompasses all aspects of clients’ finances before investing.

ChFC® – Chartered Financial Consultant® The ChFC® credential was introduced by The American College, an insurance-focused nonprofit institution, in 1982 as an alternative to the CFP® mark. Chartered Financial Consultants take the same core curriculum as Certified Financial Planners™ plus electives. The big difference from the course to become a CFP® is that Chartered Financial Consultants® do not need a college degree or have to pass a comprehensive exam. Those who wish to avoid lengthy board testing or lack a college degree often go this route, especially if they work in the insurance industry. The ChFC® is especially popular among insurance professionals.

CPA/PFS – Certified Public Accountant/Personal Financial Specialist CPAs in good standing can obtain the companion designation, PFS, by taking 75 hours of personal financial education, obtaining experience in financial planning, passing a related exam, and paying a fee. (CPAs who are CFP®s are exempt from the exam requirement.) In the past, the requirements to become a PFS were not nearly so rigorous but the American Institute of Certified Public Accountants (AICPA) has rightly given the PFS license more weight by strengthening the prerequisites. Personal Financial Specialists are subject to continuing education requirements which may overlap those necessary to maintain CPA status. (See “How can I find a GREAT tax pro?“)

The more significant financial designation require at least three of the following:

  1. College-style education,
  2. Comprehensive exams designed to fail those who don’t know and understand the material,
  3. Ongoing continuing education requirements (including ethics), and
  4. A national licensing board to maintain standards and enforce discipline, such as sanctions.

In my opinion, lack of the above leaves most other licenses toothless. Other designations are credible, but are not normally used by financial planners. For example, Chartered Financial Analysts (CFAs) are highly respected but are typically found in the field of institutional money management (i.e. banking and mutual fund administration) rather than planning. A CLU (Chartered Life Underwriter) would be a very helpful designation for a fee-only financial planner to have because that would demonstrate a higher understanding of the insurance industry than one without it. But a CLU on its own would suggest a sole focus on insurance, which is only one area of expertise for a CFP®.

In 2007, FINRA found that 46% of older investors were more likely to use an advisor with some type of designation. Since many credentials are similar to the above, it’s important to make sure that the designation you are counting on has been earned, not purchased. Go to FINRA’s Broker Check to begin your research.  You’ll find information on an advisor’s licenses, background, client complaints, and more. Of course, just having a license won’t guarantee the results you’re looking for. You can read how to interview for a good financial planner here.

What does a real financial planner do?

Beware of the “F” word scam

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