Learn Your ABCs Before Hiring a Financial Advisor
Make sure you know what all those credentials mean before seeking help with your finances.
Question: In shopping around for a financial advisor, I often see acronyms such as CFA or CFP after their names. What do these stand for and how do I know which are most important?
Answer: Seeking the help of a financial advisor can, at times, feel like wading through a bowl of alphabet soup. The list of acronyms that advisors typically attach to their names on websites and business cards may mean little to those unfamiliar with them. But if you're going to turn to a financial professional for help, you'll need to decode this series of letters to find an advisor that's a good match for your needs.
Before focusing on what specific acronyms mean, however, you'll need to keep in mind a few basics. First, be aware that generic titles such as financial advisor, financial planner, and financial consultant are essentially meaningless. Anyone can call themselves by these names and charge you money in exchange for advice. In fact, one reason so many acronyms exist in the world of financial planning is to provide consistency and--just as importantly--credibility to the titles used by financial professionals. Qualified financial advisors typically will have earned accreditation from a reputable organization in the financial industry, and many have earned more than one.
Be aware that not all designations are created equal. Some require heavy coursework, professional experience, ethics training, and rigorous testing, while others are less demanding. Many designations are highly specialized, and an advisor trained in one area may not be a good choice for another. Finally, don't assume that an advisor with many designations after his or her name is necessarily better than one with just one. The most important thing is to find an advisor who meets your needs, not one who collects credentials.
Following are some of the most common designations among financial advisors:
Certified Financial Planner (CFP):Financial planning expert accredited by the Certified Financial Planner Board of Standards.
Requirements: In order to use the CFP designation, planners must log at least three years of full-time financial planning experience, complete a CFP Board-certified educational program, and pass a two-day, 10-hour exam.
Helpful if: You are looking for a trained professional to provide comprehensive guidance on all of your personal financial matters. Certified financial planners often work closely with other experts, such as estate-planning attorneys and accountants, serving as the "quarterback" among all of these professionals.
Certified Public Accountant (CPA): Tax expert licensed by a state Board of Accountancy.
Requirements: To use the CPA designation planners must pass the Uniform CPA Exam and meet requirements set by the state Board of Accountancy.
Helpful if: You want your taxes prepared by an accredited expert, or you need tax planning advice.
Chartered Financial Analyst (CFA): Financial expert accredited by the CFA Institute.
Requirements: In order to use the CFA designation, advisors must have at least four years' work experience involving investment decision-making and take courses on subjects such as economics, financial reporting and analysis, ethical standards, equity and fixed-income investments, and portfolio management. They also must pass a series of three six-hour exams to be certified, with at least 250 hours of study for each exam.
Helpful if: You are looking for a trained financial professional to analyze a specific investment or manage a portfolio but not necessarily to formulate a comprehensive personal financial plan.
Chartered Financial Consultant (ChFC): Financial planning expert accredited by The American College of Financial Services.
Requirements:In order to use the ChFC designation, advisors must have at least three years of full-time business experience and pass nine courses in topics such as financial planning, income taxes, investments, and estate planning with a proctored exam for each course.
Helpful if: As with a CFP, you are looking for a trained professional to help manage all your personal finances.
Chartered Life Underwriter (CLU):Insurance expert accredited by The American College of Financial Services.
Requirements:In order to use the CLU designation, advisors must have at least three years of full-time business experience in the five years prior to accreditation and pass eight courses in topics such as insurance planning, life insurance law, and estate planning with a proctored exam for each course.
Helpful if: You need help specifically in the area of life insurance planning.
Registered Investment Advisor (RIA): Financial professional or firm registered with the SEC (if assets under management exceed $100 million) or state securities agency (if assets under management are less). Employees of an RIA firm may be designated as Investment Advisor Representatives, or IARs. RIAs and IARs have a fiduciary responsibility to serve in the client's best interests (broker/dealers are held to a lower standard). There is some controversy over financial advisors' use of the RIA designation. According to this SEC document "advisers should not use the term 'RIA' after a person's name because using initials after a name usually indicates a degree or a licensed professional position for which there are certain qualifications; however, there are no federal qualifications for becoming an SEC-registered adviser."
Requirements: Those using the RIA designation and registering with the SEC must file a Form ADV that documents their activities and must provide periodic updates. At the state level, IAR applicants are typically required to pass the Series 65 exam or hold a designation such as CFP or CFA.
Helpful if: You are looking for an advisor who is under legal obligation to act in your best interest.
For information on other financial industry designations, a good place to start is the website of the Financial Industry Regulatory Authority (FINRA), which provides a lengthy list that includes requirements for each designation.
Do Your Due Diligence
In addition to finding a financial advisor with the right credentials, be sure to ask how he or she is paid. Advisors may charge you a percentage of assets held in the account, a retainer fee, an hourly rate for services, a flat fee, or a combination of approaches. Also, do a background check if possible, ask for referrals, and make sure to ask lots of questions to avoid any unpleasant surprises later on. Finally, ask people you know what they've liked or disliked about working with an advisor. Morningstar readers shared their own experiences in this recent article, and Morningstar columnist Mark Miller provides some tips on hiring a financial advisor here.
Have a personal finance question you'd like answered? Send it to TheShortAnswer@morningstar.com.