Thursday, January 21, 2010

Financial Designations are Not Really as Simple As ABC!

There are way too many designations that financial advisers use and none of them are statutory.

A few months ago during a discussion of financial credentials it was pointed out that the public is somewhat confused by what all the acronyms mean. That was music to my ears because I cannot think of one other industry that has created so many initials to place after someone’s name on their business card. For other professions, it was simply Marcus Welby, MD, and everyone understood that he was a doctor. If Perry Mason had a business card it would have simply said Attorney at Law or perhaps Perry Mason J.D.

I was challenged to put together a list that might be educational but does not reflect strongly my own opinion that there are way too many organizations selling initials.

In the world of investment advice and financial planning there are certain registrations that are, by law, required to be held. No designations are required.

The first is Registered Investment Advisor, which means that the person has registered with their state or with the SEC as an investment adviser. The body with which they register is determined by the amount of assets that they are managing. Currently if you have less than $25 million you register with the states. If you have more you register with the Securities and Exchanges Commission. Registered Investment Advisors are governed by the Investment Advisers Act of 1940 and it provides for the disclosure and the fiduciary relationship that everyone is all abuzz about. The person or firm provides investment advice for a fee. A Registered Investment Advisor cannot use the abbreviations RIA on their cards or letterhead.

Along a similar path comes the Registered Representative or Stockbroker. They are authorized to sell securities for a commission and must have either a limited Series 6, which allows for the sale of mutual funds, or the more encompassing Series 7, which allows for the sale of funds and general securities. They are granted and regulated through FINRA. Registered Representatives are not allowed to refer to themselves as financial planners.

Those registrations are at the top of the food chain and allow for the provision of advice for a fee, management of securities for a fee or the sale of securities for a commission.

The next set of initials that the public seems to be enamored with is the CPA or Certified Public Account. This is a licensed profession regulated by each state. While many people think a CPA is an expert in taxation, the truth is that the CPA license is required in order to attest to the accuracy of financial statements. No small or insignificant task considering the ENRONs, World Coms and Madoffs that we have seen this past decade.

Many CPAs also have added the initials PFS after their CPA designation. Personal Financial Specialist means they have completed additional studies dealing with personal finance as opposed to corporate issues. However, the addition of those three letters does not afford them any legal right to call themselves financial planners.

Next we have the CFP® designation which is the Certified Financial Planner™ mark owned and franchised by the Certified Financial Planner Board of Standards. They do require that current applicants have completed an educational track of five approved courses, have a college degree, pass a comprehensive examination and submit to both a background check and adhere to a code of ethics. However, the holder of a CFP does not have any legal right to call themselves a financial planner.

In fact depending who they work for a CFP may use the designation but may not be allowed to refer to themselves as a financial planner. That one statement speaks volumes about the sad state of the financial industry.

Along the lines of the CFP mark is the Chartered Financial Consultant® designation, which is awarded by the American College in Bryn Mawr, PA. The college is nearly 100 years old and has curriculum for numerous designations. The requirements of the ChFC are completion of an educational track and passing of a comprehensive examination. Holders of the ChFC must also undertake continuing education requirements biennially.

Read more about the CFP mark and ChFC here.

The CFA Institute issues a designation called the Chartered Financial Analyst or CFA. The requirements to obtain that involve passing three difficult exams, each exam given annually. The holders receive an excellent knowledge of the investment arena and many of the products used. While the CFA is a wonderful designation I truly question its usefulness to the consumer who is seeking financial planning advice and not portfolio management. The CFA curriculum devotes very little time to personal finance.

You will find that there are numerous other designations out there all created to fill a niche. The vast majority are ones that require little study and are often granted over a weekend. I question their value and in fact I have had one or two of them in the past and allowed them to lapse. It seems that as a subject becomes “hot” a designation is created and the real beneficiaries are the creating organizations.

I have provided the registrations required to deal in securities, either for a fee or commission as well as the three most common designations that people associate with financial planning. None of them are required by law to provide financial planning advice.

The public needs to be wary of the designation craze and seek the individuals that are legally empowered to provide either advice or sale.


Anonymous said...

What an interesting post. It seems that being a CFP does not give you license and that simply being a Registered Investment Advisor does. Do you know if any states recognize a license such as the CFP in order to give financial planning?

Morris Armstrong ChFC, EA said...

I am not aware that any state recognizes the CFP designation as a icense for financial planning. Many states do grant an exemption to holders of the CFP, ChFC,CFA among others from having to retake the series 66exam which is a requirement of the RIA renewal process.