What’s in a name?
What an adviser’s credentials mean for you
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) — Say you’re nearing retirement age, and you want to improve your portfolio to make sure it lasts a lifetime and helps meet your personal goal of putting the grandkids through college someday.
You also need to help your grown daughter as she goes through a divorce, and you have a desperate need for estate planning — as well as ongoing tax counsel — plus a needs evaluation on long-term care insurance, and you’ve heard about annuity products that could help you lock in an income stream for you and your spouse for the rest of your lives.
Theoretically, that means you are looking for a financial adviser who is a CFP, CCPS, CDP, EA, CIC, CEP, or CAS. Or perhaps you’d settle for a CPA/PFS who also holds the AEP, BCA, CDFA, CAA, CASL credentials, although there’s definitely a chance you won’t get enough advice on the grandchildren’s college savings that way.
Confused? You should be.
There are more than 100 professional designations and credentials for financial advisers, and that doesn’t count some of the flimsy, half-hearted, or just plain silly things that some advisers latch on to as a way to impress you. Every few months, there seems to be another new designation, as if consumers or the financial-services industry need them.
Advisers use financial licenses and designations to market themselves to you. Oh, they’ll say that they got the credential in order to be more qualified to handle a specific financial task or job — and there may be some truth to that — but they know that the more credentials they have, the more they can impress potential customers, and the more services they can offer their clients.
If credentials are truly important to you, and you have the needs laid out in the hypothetical above, you’d hire a Certified Financial Planner (CFP) who is also a Certified College Planning Specialist (CCPS), a Certified Divorce Planner (CDP), an Enrolled Agent (EA, for your tax needs), a Chartered Investment Counselor (CIC), a Certified Estate Planner (CEP), and a Certified Annuity Specialist (CAS).
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Or, if you went the other way, you’d have a Certified Public Accountant/Personal Financial Specialist (CPA/PFS), with a whole raft of other credentials to cover the rest of your needs.
Yet the truth is that an ordinary financial planner with a customer base that is mostly people of your age and assets and concerns could probably do the job, without having a single advanced credential. You may feel more comfortable with someone who has additional training to meet your needs, but you can also overvalue that additional training and pick an adviser more on his or her credentials than his or her true worth as a counselor.
Don’t sell experience short and give too much credit to letters after the adviser’s name. Some titles and designations have valuable significance; but others are misleading, or worse. As a consumer, you should know that titles and credentials can misrepresent an adviser’s ability to give you appropriate, knowledgeable advice.
Credential confusion can leave consumers vulnerable to unsuitable recommendations and costly investments; state and federal regulators have reported a huge increase in deceptive practice cases, particularly involving senior citizens, who swallow the alphabet soup as if it’s truly meaningful. They believe that advisers with a credential that makes them some type of expert on the finances of senior citizens makes for the perfect helper; however, it may also open the door to rogues and scoundrels. As a result, some states have implemented new regulations that limit the use or mention of credentials by certain types of advisers.
Even if you know what a CFP is, you probably don’t know what an adviser does to earn the designation. And CFP is a common credential, unlike most of the 100-plus designations that most consumers have never heard of.
In general, legitimate credentials prove that an adviser is furthering his or her education; with the rules and regulations of finance changing nearly every day, current information and knowledge is crucial.
Simply having credentials doesn’t make someone worthy of being your adviser.
Instead, think of credentials as a starting point and not the Good Housekeeping Seal of Approval.
All of these letters are supposed to be “professional designations,” which is a misnomer because–with the exception of lawyers–none of the members of your financial team truly is a “professional.”
Most dictionaries define “profession” as a vocation or occupation that requires advanced training either in sciences or the liberal arts. You do not need an advanced degree to practice as a financial planner, insurance agent, real estate agent, stockbroker, tax preparer, or accountant. Standards vary for each role, with state or federal law dictating whether practitioners must even be registered or licensed. Even then, “registration” is more about putting your name on file than it is about having achieved a minimum standard of education and academic excellence.
In other words, you can be a “financial planner” without having the “Certified Financial Planner,” “Personal Financial Specialist,” or any credential. That doesn’t demean the designations; there’s no denying that an adviser who goes through training and education to get them is set up to be a better, more skilled, more competent adviser.
Moreover, there are a number of cases where the governing bodies that designate the criteria for a particular standard are warring with competing organizations touting a different standard. For example, an adviser looking to become more knowledgeable on the use of mutual funds could pursue the Chartered Mutual Fund Counselor (CMFC) designation, or the Certified Fund Specialist (CFS) standard. Or she could decide that the continuing education she gets on mutual funds just from being a Certified Financial Planner is sufficient. Truth be told, if you took three advisers, and each took one of the paths described here, you’d have a hard time telling the difference.
That’s precisely why your decision will come down to more personal factors and be less about credentials.
It’s important to make sure that an adviser’s designations are meaningful to you and your needs, because you will almost certainly be paying up for the expertise and credibility these marks bestow on an adviser.
It’s impressive when you find a financial planner who has done the work to earn the “Chartered Financial Analyst” designation; the CFA is one of the most demanding and respected marks in the business, and it is held primarily by stock analysts and institutional money managers. A financial planner who gets one will tell you that it makes him better at selecting stocks and mutual funds.
That may all be true, but if you just want a basic mutual fund portfolio, the CFA means that the planner is way overqualified for the job. There’s nothing wrong for that, unless you are paying the freight for all of this expertise that you aren’t using and don’t expect to need. In that case, someone with less invested in getting credentials can provide qualified assistance at a lower cost.
Professional marks are nice, but there is no substitute for the experience of someone who has a client base just like you, where instead of trying to be all things to all clients, she specializes in the needs of a small group of like-minded, financially homogenous people.
Four questions to ask
When an adviser makes his or her credentials part of the presentation — a presumed reason why you would want to hire him or her — ask these four questions:
What did you have to do to earn this mark, and why did you consider it important to achieve this distinction?
Some credentials require experience, knowledge, continuing education, and the ability to pass a test, while others are online open-book study. Some advisers use their membership in a trade group, like the Financial Planning Association, as if it was a meaningful credential. Maintaining certain designations requires adhering to an ethics policy; other times, all that’s necessary to remain in good standing is to pay dues. And some marks seem to be little more than a show.
Find out why the adviser went to the effort of getting the credential. You may learn a lot about the adviser’s experience and clientele that way; if he pursued an annuity designation or estate-planning credential because clients were aging and asking about those specialties, you’ll get a better idea of whether you fit in with the adviser’s “typical client.”
Are there continuing education requirements? If so, what must you do to meet them?
Ask about the courses your prospective adviser must take to stay current, and ask how that education might help him work with you. Continuing education courses run the gamut from nuts-and-bolts practice-management classes to specific ideas for helping clients get more from their money.
You want an adviser who is building expertise as it relates to you (rather than learning how to get more profits from each client, which some organizations consider suitable continuing education).
Can you give me the contacts for the sanctioning body?
No adviser should be afraid of your contacting the group that issues the credentials to make sure everything is on the up-and-up. While you can get the contact details on your own, play dumb here because you want to see if the adviser will make it easy for you.
Most consumers don’t do their homework and make appropriate background checks, which has allowed crooks who pretend to have credentials to stay in business. In addition, most sanctioning groups will kick out members who run afoul of bylaws or codes of ethics, so someone who has a credential up on his office wall may not necessarily be entitled to continue using it.
An adviser who really works with the sanctioning group will have the phone number or Web address handy and should have no fear of your checking out the credential.
Does the designation mean anything unique in the service?
With tax preparers, for example, an enrolled agent can represent you in an audit; the return-preparer at the corner fast-food tax joint can’t.
An accountant who also has a law degree, meanwhile, may be adept at trust and estate planning work. The same could be said for a financial planner with a law degree. Plenty of advisers use credentials to cross over from one specialty to the next, which is good if your financial needs spill from one area to the next.
Assume that the letters after an adviser’s name mean something in terms of the price you will pay, as in “the more credentials, the bigger the bill.” That’s not always true, but that kind of thinking will help you find someone who is “properly qualified” to work with you, rather than being over- or underqualified.
Don’t pay for expertise you don’t need. You may decide you don’t need a certified public accountant to do an ordinary tax return, for example. At the same time, you might prefer hiring a lawyer who has taken specialized classes in elder law.
By making the adviser spell out the benefits you get from his expertise, you go a long way toward defining what to expect from the relationship.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from “Getting Started in Finding a Financial Advisor” by Chuck Jaffe. Copyright (c) 2010 by Chuck Jaffe.
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.