Choosing a Financial Planner…Part II: What about the alphabet soup?
When I decided to get into the financial planning industry in the late 90s, I had one designation as my final goal: Certified Financial Planner™ professional. When I first heard that term, I was taking a Personal Finance class at Pierce College and getting my general education out of the way. I was going to school full time and working as a project manager at a multimedia software training company full-time, but I knew that wasn’t the career for me. I was trying to figure out what to do for the rest of my life and I took one semester to explore some alternatives by taking classes in programming, early childhood development and personal finance.
Although I enjoyed all of those classes, I found my passion with personal finance. I realized I could have a career where I worked directly with people to define their goals and create a plan to meet them, then got to dive into the numbers through spreadsheets and analytics which I love, too. Perfect blending of both worlds!
The CFP® is the top designation for financial planning and is the most rigorous to achieve. It requires education through a board-certified program offering a certificate or degree, three years of experience in the field, an agreement to abide by the code of ethics, and successful passing of the 10-hour exam. Then there are 30 continuing education hours required to complete bi-annually.
For those providing comprehensive financial planning, this is really the designation to have. Other designations focus on different specialties within the industry and I’ve outlined some of the others that you may see:
CFA – Charted Financial Analyst – This is the top designation for those that manage money. You’ll often see this designation held by mutual fund managers and by those at firms that specialize in money management. Very rigorous series of exams required to complete.
CIMA – Certified Investment Management Analyst – This designation is not as rigorous as the CFA and is meant for those providing investment advice but assisting individuals in setting their asset allocation and screening money managers or mutual fund managers for those individuals.
CLU – Charted Life Underwriter – For those offering insurance services, this is the designation you may see. This designation requires that a series of classes be completed offered by The American College.
Other designations that are not as rigorous to obtain, but indicate an interest or specialty in different areas:
CDFA – Certified Divorce Financial Analyst – Planners that can assist in the divorce process from a financial perspective to plan and educate for an equitable splitting of the assets.
CCPS – Certified College Planning Specialist – Planners that specialize in planning for college utilizing grants, scholarships, loans, investment options and tax strategies.
There is a smorgasbord of additional financial-related designations (over 80 that I last saw) that you may come across. Be careful about being influenced by the “alphabet soup” after some people’s names. Ask about the requirements for obtaining the designations and the continuing education requirements as well. Honestly, I’ve seen that some designations don’t require that much work to achieve (other than perhaps a large check to the institution administering the designation), and then there isn’t any continuing ed requirement to stay on top of the changes in that area.
Choosing a Financial Planner…Part I
Did you know that anyone can call themselves a “financial planner”? Unlike other professions, such as medicine, law or accounting, where regulatory boards control who may practice, there is no such oversight for financial planners. So, if there is no regulation, how do you know that you are working with a financial planner that is right for you?
Let’s start with a definition of what is a financial planner. A financial planner is someone who takes a “big picture” view of where you are today, helps you define the goals you want to reach in the future, and then works with you to develop a roadmap to get there. A comprehensive financial plan will normally cover budgeting, debt reduction, personal insurance (life, disability, health, long-term care), property and casualty insurance, taxes, retirement planning, investments, estate planning, real estate (primary residence and investment properties), and college funding (for children and grandchildren). Sometimes a financial planner will be asked to focus on a single financial issue, however, it should be done in the context of your overall situation.
Before hiring a planner or if you’re working with an advisor now, ask yourself what you are looking to get out of the relationship? Is it a comprehensive plan or ongoing comprehensive advice covering your entire situation, or are you looking to address one area of your financial life, such as investments, insurance, or estate planning?
The other area to consider when choosing a financial planner is how you will be charged for the planning advice. There are a few ways that a financial planner or a firm can be paid:
1) commissions for the sale of products, such as insurance or investments, to implement your financial plan,
2) fee-based, which traditionally has meant a combination of commissions and fees paid direct by the client, though some individuals and industry definitions are now using this interchangeably with fee-only, and
3) fee-only, which can mean an annual percentage of assets under management or financial planning based on hourly advice, including projects and retainers.
When working with a planner you should ask about all the various charges that both the individual planner and the firm will receive for the business that you do with them. Some firms, generally the larger ones, may receive ongoing fees paid direct by you for managing your investment accounts and also receive additional revenue based on the securities purchased in your account. Not all of the revenue the firm receives is disclosed on your statements, so it’s up to you to ask.
Our next article will focus on the primary certifications held by financial planners and provide a questionnaire to use when selecting an advisor.
What is a “fiduciary” and why do you care?
You may have been hearing or reading more and more about financial advisors being held to a “fiduciary” standard and you probably wondered why that mattered. Up until now, stockbrokers and other advisors at firms receiving commissions (e.g., wirehouses, insurance companies, banks, broker dealers) were held to a “suitability” standard, which meant that they simply needed to recommend investments that were suitable to each client’s situation from a risk and time horizon perspective. In other words, if an investor said that they were risk-averse, then the advisor couldn’t invest in high risk investments (aggressive stocks, high yield bonds) in their account.
To contrast that, Registered Investment Advisors and Certified Financial Planner professionals are held to a “fiduciary” standard meaning that when they advise their clients, they must put their clients’ best interests first. The difference is that if there were two comparable investments with the same objective, one with a high commission being paid to the firm (and the financial advisor) versus another low-cost, no commission fund, a financial advisor held to a “suitability” standard could legally recommend the fund with the higher commission because it was suitable for the client, even if it was not in the client’s best interest due to the high commission! A proposed law would require that all financial advisors be held to the same fiduciary standard. What is interesting is that an article in the Wall Street Journal (WSJ) on July 19th (http://online.wsj.com/article/SB124536973514629609.html) reported that these changes to put the client’s best interest first could “upend” Wall Street! I think most people working with a financial advisor already assumed their needs were being put first, even if that was not the case. Fascinating how this change to better the investor’s experience could cause such turmoil!
Another article more recently in the WSJ on August 29, 2009 stated “Wall Street finally has agreed to put its brokers under the tougher fiduciary standard for their dealings with customers. Now a fight looms over how tough that standard will be.” I vote to make it as tough as possible. Investors deserve to know that their interests are always put first.
