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Selecting a Financial Advisor: Designations and Education That Matter (Interviewed Video) Thumbnail

Selecting a Financial Advisor: Designations and Education That Matter (Interviewed Video)


In our previous blog/video we discussed the regulation (or lack thereof) of people who call themselves financial planners. That issue is intimately related to the lack of any formal requirement that financial planners have a designation or some other evidence that they have the education one would think is necessary to advise consumers competently.

We like to think that there are three critical “E’s” related to providing clients with competent advice, Ethics, Education and Experience. While ethics is something that those who have acquired designations such as the CFP® of CFA are required to study, a commitment in writing that an advisor works 100% as a fiduciary, communicates an intent to behave ethically.  While a breach in trust is still possible, this written document is a contract binding the advisor legally which is why only advisors who are truly committed to a fiduciary standard will risk the legal exposure.    

The other two “E’s,” education and experience are things that can be measured by examining an advisor’s background. Those that have taken the time to acquire “letters” after their name may be both properly educated and have a decent amount of experience depending on which letters, we are talking about here. So, let us consider some designations that are most important.

There are four designations that are most important, the CFP® (described in detail in our first blog on this topic and only briefly covered again here), the CFA, the ChFC and the CLU (most useful for those who sell or advise on insurance).

The CFP® is the standard designation now for those who want to specialize in financial planning. With its broad-based education in the basics of financial planning, insurance, retirement planning, estate planning, tax planning and investments, it is a bare minimum for someone who professes to be a financial planner. It also has a requirement that candidates write a financial plan and have 2000 hours of experience.

Advisors and financial planners that prefer to have a much deeper background in portfolio management generally seek to acquire the Chartered Financial Advisor (CFA) designation. The CFA is a post-graduate level degree and was first awarded in 1963. The designation is awarded by the CFA Institute and they have rigorous requirements, applicants must take and pass three exams over three years and have 4000 hours of experience completed in a minimum of 36 months. It is estimated that only 5-8% of all applicants complete the three exams and qualify. The exams have an average passing rate of 40-60%, and they are offered once a year (twice a year for Level I). The actual material is not what makes the designation so difficult to acquire, it is the amount of material that must be known for each level. The material includes, statistics, economics, balance sheet analysis, securities analysis, portfolio construction, alternative investments, etc., and 10-15% of each exam includes questions on ethics. Once you pass the three exams you still need letters of reference from two other CFA’s and you must have those hours of relevant experience. Those who hold this designation have a deep knowledge of investments and portfolio management. Surprisingly among fee-only financial advisors only 6-9% hold the CFA designation even though the overwhelming bulk of their revenue comes from managing client portfolios. The CFA program is very broad and might be more aptly described as the equivalent of a master's degree in finance with accompanying minors in accounting, economics, statistical analysis, and portfolio management.

The ChFC (Chartered Financial Consultant) designation is solely awarded by the American College, this designation has been offered since 1982, with a requirement that applicants complete 9 courses for a total of 27 credits. The designation is an advance financial planning designation with somewhat more coursework than that required by the CFP®. The designation is not as widely known but it does indicate that the advisor has acquired relevant knowledge and experience.

The CLU (Chartered Life Underwriter) has been awarded by the American College since the 1920’s and is therefore one of the oldest if not the oldest designation awarded within the financial services profession, it is typically acquired by individuals who are insurance agents since it provides a broad educational background in insurance. Those who acquire the designation need only take three more courses to also become ChFC’s. Many do go on to acquire both and they have taken more coursework that that required by the CFP®. There is no requirement that either a CLU or ChFC take a single comprehensive exam as is required to become a CFP®.

Advisors who have these designations CFP®, or the ChFC can rightly call themselves financial planners since they have completed sufficient coursework to be qualified. Those that also complete the CFA have also demonstrated that they have the deep educational background to manage portfolios.

Planners that truly want to have the highest levels of knowledge go on to get a master’s degree in the profession, those degrees originally began to be offered in the late 1980’s and early 1990’s. These programs focus on much more advanced methods and concepts in estate planning, taxation retirement planning and investments. They also may require the candidate to prepare a very detailed financial plan as a capstone course. Since the CFP® and ChFC designations reflect coursework that is the equivalent of an undergraduate college degree having a masters makes an advisor even more proficient and enables them to become focused experts in a core component of planning for example retirement planning or estate planning. At least one master’s program uses the learning objectives from the CFA designation as part of their course offerings in investments and portfolio management.

At least one college (Texas Tech) also offers a PhD in personal financial planning. A Ph.D. in Personal Financial Planning is focused on original research and theory forming the foundation of financial planning, including investments, economics, retirement planning, estate planning, financial counseling, risk management and tax planning.  The coursework associated with the Ph.D. includes advanced statistical and research methodology, data analysis and critical thinking used to assimilate empirically based evidence into personal financial planning best practices.

 Over the last few years many other designations have been offered by various associations and a couple of colleges. Those designations are typically very light on educational requirements, in some cases merely requiring the certificants to take 6 hours of education. Those designations also tend to be very focused on one small area of financial planning or finance and they typically do not have the depth and much higher requirements of the four we discussed in detail. Many designations that were offered in the past are no longer offered because they are no longer relevant, they were too focused or the demand for them declined, one example is Chartered Mutual Fund Counselor.

A complete list of designations can be found here: https://www.finra.org/investors/professional-designations.

A financial planner should be a CFP® as a bare minimum, but we suggest that professionals with the CFA, designation, and or master’s or PhD in Financial Planning have demonstrated the greatest commitment to educational excellence in this profession. So, If you want to know that the advisor you are considering hiring is most committed to their profession, check to see if they have an advanced degree.