If there is one thing that is not in short supply in the financial planning profession it’s initials. Professional designations in the financial planning business include CFPs, CFAs, ChFCs, RIAs, RRs, and CSAs to list only a few. To make things even more confusing, many people carry multiple designations.
While no professional designation guarantees wisdom and honesty, some mean more than others and many are all but meaningless. Here are a few of the most common designations and what it takes to earn them:
1. Certified Financial Planner (CFP®)
This is granted by the Certified Financial Planner Board of Standards. Earning the designation requires:
- Completing a one to two year study course
- Passing a ten hour exam
- Working three years in financial planning
- Passing a background check
- Completing thirty hours of continuing education every two years
Some CFPs sell financial products and earn commissions. Other CFPs charge fees, not commissions. They have no motivation to sell products that carry commissions and tend to focus on selling low cost mutual funds or exchange traded funds known as ETFs. Look for “fee only” CFPs who are members of the National Association of Personal Financial Advisors (“NAPFA”). Many CFPs work for Registered Investment Advisory (“RIA”) firms.
2. Certified Public Accountant (CPA)
CPAs are specialists in tax and accounting. The CPA designation does not equate to knowing how to invest. However, CPAs who are also Personal Financial Specialists (“PFS”) have specific training in financial planning.
3. Certified Senior Advisor (CSA)
This is a meaningless designation granted by the Society of Certified Senior Advisors. To receive this designation, an applicant pays a fee and takes an easy multiple choice test. The CSA Society itself concedes that the “CSA designation does not imply expertise in financial, health, or social matters.” Other terms designed to give seniors a false sense of expertise include “Senior Specialist,” “Senior Advisor,” or “Retirement Advisor.”
4. Chartered Financial Analyst (CFA®)
This is granted by the Association for Investment Management and Research. CFAs specialize in securities analysis and money management. To earn a CFA, the applicant must complete a rather demanding independent study of topics including accounting, portfolio management, economic analysis, and quantitative techniques. Four years of acceptable work experience is required, and the applicant must pass three difficult exams, each of which requires about 250 hours of study time. Roughly half of those who take the tests do not pass.
5. Chartered Financial Consultant (ChFC)
This designation for advanced financial planning is granted by The American College of Bryn Mawr, Pennsylvania. It requires the applicant to complete an eight course curriculum (which is similar to that required for CFPs) and to work at least three years in the financial services business.
6. Chartered Life Underwriter (CLU)
CLUs have expertise in life insurance. The issuing organization is The American College. To get a CLU, the applicant must complete eight core courses and three elective courses and pass exams in each. In addition, three years of full-time business experience is required.
7. Registered Investment Advisor (RIA)
RIAs act as investment managers and are registered with the SEC or state securities departments.. Many will only accept clients with a substantial minimum to invest such as $500,000 or more. They offer investment advice, manage investments, and are subject to the federal Investment Advisors Act of 1940, which imposes fiduciary duties in their dealings with clients. RIAs frequently employ CFPs and CFAs. Individuals who work for RIAs and give planning or investment advice are called “Investment Advisor Representatives.”
8. Registered Representative (RR)
These are stockbrokers employed by brokerage firms. Their licenses are obtained by sitting for exams administered by FINRA. They are compensated primarily by commissions. Many firms push stockbrokers to sell products like variable annuities, private placements, and “load” mutual funds which carry high commissions. Even when a firm offers fee-based managed accounts (wrap fees) in which the broker and his firm charge a percentage of a client’s assets in the account as a fee, some products (i.e., IPOs or variable annuities) are not covered by the wrap fee. Also, the fact that the RR is paid based on the total value of the wrap account (including debit balances) may lead some RRs to encourage clients to use margin borrowing to withdraw money from the wrap account. This is good for the broker (because the account value does not decline) but bad for the client who pays the broker margin interest and the wrap fee.
Although FINRA does not approve or endorse any specific titles, it offers a useful tool on its website called “Understanding Professional Designations” which presents a summary description of various designations, the sponsoring organizations, and the requirements for each. As FINRA points out, terms like Financial Analyst, Financial Advisor, Financial Planner, Investment Consultant, and Wealth Manger are generic terms that do not, in and of themselves, require or demonstrate any specific training, experience, or qualification.
Before you commit to doing business with any financial advisor, do your homework. People or firms that give investment advice for compensation generally must be registered with the SEC and/or the state where they maintain their principal place of business. If you are going to deal with an RR, look at FINRA’s BrokerCheck website where you can find employment information, registration data, and some records concerning consumer or regulatory complaints. For RIA firms, look at the SEC’s Investment Advisor Public Disclosure website.