Understand The ‘Alphabet Soup’ Before You Hire A Financial Advisor

There are three very important aspects to anyone’s well-being- physical health, fiscal (financial) health and spiritual/mental health. With regard to fiscal health, important and complex though it is, it is surprising that even with so many regulatory agencies around, there are no minimum standards applied to anyone calling himself or herself a ‘financial advisor’. These days there are any number of people who call themselves financial advisors or financial consultants. I am referring to the retail financial services industry. In this article I will try to elucidate some of the designations that are displayed at the end of a name on business cards. This is important for any consumer to know before hiring a financial advisor. Currently, there is no specific organization or regulatory body that defines these various designations. There is a hodge-podge of designations floating around. There are many who do not have any designations at all but a license to sell securities or insurance, who hang out a shingle as ‘Financial Consultant” or “Financial Advisor”. Add to this mix, some CPAs and attorneys also dispensing financial advice, being de facto financial advisors and receiving commissions either directly from the sale of products or indirectly through referral arrangements with other sales representatives (sometimes without disclosing such compensation to consumers).

Let’s examine these various designations. The most common and perhaps most often quoted is the CFP designation. It is awarded by the Certified Financial Planner Board of Standards, Inc to applicants who have passed a fairly comprehensive and rigorous 10-hour exam covering courses that normally take two years of study in general financial planning, risk management, pension plans, investment management, tax-planning and estate planning. The CFP designees should have also had 3 years of full time experience in the financial industry and an undergraduate degree before being allowed to display the designation. The designees are required to fulfill continuing education requirements that include ethics credits every two years. The CFP Board defines the standards of conduct and specifies the ‘planning standards’ to any planning engagement. It also deals with certification, continuing education, disciplinary issues. The Financial Planning Association is the voice for the country’s Certified Financial Planners in the public domain as well as Congress.

Then we have the CLU and ChFC. The CLU which stands for Chartered Life Underwriter. it is an insurance oriented designation obtained after a rigorous exam related to insurance subjects. This has been awarded by the American College, Bryn Mawr, PA (originally affiliated with the American Society of CLU and ChFC). In 1990, the courses were expanded to include a more comprehensive coursework with other areas of financial planning, which led to ChFC or Chartered Financial Consultant designation. In the insurance area you may also see a designation called LUTCF, which means the person has undertaken the training of Life Underwriter Training Council and deals with the specifics of insurance underwriting.

There are so many other letter symbols and designations that one may come across. The most prestigious designation in the money-management field is the CFA or Chartered Financial Analyst awarded by the CFA Institute (originally the Association for Investment Management Research). As I said before, the CFA carries a lot of weight in the money management area and is a highly desired designation for mutual fund managers, investment analysts, trust managers, managers of endowment funds, etc in the institutional management area. We have also CFS (Certified Fund Specialist), RFC (Registered Financial Consultant), CIMA (Certified Investment Management Analyst) and the AIF (Accredited Investment Fiduciary). There may be other designations that I have not listed.

With all these designations, how would one hire and retain a financial advisor? An article in the Wall Street Journal sometime ago gave the following guidelines, some of which are subjective and even post-facto for hiring a financial advisor:

1. What are the advisor’s credentials and qualifications? Where is the advisor coming from? What is the advisor’s focus- Is it a money management, annuities, insurance or is it a comprehensive wealth management focus?
2. Does the advisor disclose how he or she will be compensated? Is it through commissions for sale of financial products, through fees as a percentage of managed assets or for drawing a plan or document? Is there any fee for financial advice?
3. Will the advisor provide a financial strategy or plan specific to you covering different areas (retirement income, estate, trusts, distributions, ira conversions, etc) that takes your goals, objectives and concerns into consideration? Will the advisor monitor and maintain the plan in the future at additional cost?
4. Will the advisor put your interests first? Does the advisor have any conflict of interest? Is the advisor pushing the sale of his company-affiliated or promoted products?
5. Will you see “value” on a continuing basis in the future?

Understanding the alphabet soup and the guidelines above may assist you in hiring and retaining a ‘trusted’ personal advisor to help you manage one extremely important aspect of your life – your fiscal health!

Jay Kabad, CFP®, is President of Jaykay Wealth Advisors, Inc, a Houston-based wealth management firm. He received his Graduate degree from IIT Madras and an MBA from University of Pittsburgh, PA in 1980 and has been in business for 27 years. He is a Financial Advisor with LPL Financial and can be contacted at 713-780-4575. Securities and investment advisory services are offered through LPL Financial, Member FINRA/SIPC. The opinions voiced in this material are for general information only