If you go see a doctor, you know that you are working with someone with experience. To become a doctor you need to go through years of education and even more years of training before you can start practicing on patients. I’m not saying that all doctors are great at their job, but you at least know that the barrier of entry is high. This is unfortunately not the case with financial advisors. In Michigan, a person could be selling used cars (or drugs) and with a one-month class and training you could sell an annuity that locks up a person’s life savings for over 10 years. This is the reason that understanding those letters behind your financial advisor’s name is so important. If you understand those letters, you will know if you are working with a true professional.
I will show the certification, the acronym for the certification, and how long it typically takes to obtain the certification. These times can vary greatly depending on the person.
Certified Financial Planner (CFPⓇ) – 1-3 years: The CFPⓇ is the gold standard for financial advisors. I’m sure there are plenty of good financial advisors that don’t have the CFPⓇ designation but why take the chance. If the person is a CFPⓇ he or she will:
- Have a bachelor’s degree
- Have completed at least a year’s worth and usually a couple years or more worth of education to pass the exam
- Have passed a brutal 8 hour exam (it was 2 days when I got mine)
- Have at least 2 years of financial planning experience
- Be knowledgeable in creating a financial plan, investing, insurance, estate planning, and retirement income planning
If you are looking for a financial advisor, you really should demand that the advisor is a CFPⓇ.
Chartered Financial Analyst (CFA) – 3+ years: If the CFPⓇ is the gold standard for financial planners, then the CFA is the equivalent for investment managers. The CFPⓇ has a section dedicated to basic investment management, but the CFA takes it to much more detailed level. The CFA is 3 levels, and each level typically takes about 7 months of studying to pass (around 1000 hours of studying total). The pass rate for each level is less than 50% and less than 20% of the people who initially start the CFA actually pass all 3 levels. Typically you see the CFA more often in the hedge fund/mutual fund world but if your financial planner is also managing your investments, he/she should also be a CFA.
Chartered Public Accountant (CPA) and Personal Financial Specialist (PFS) 1-3 years: The PFS is for CPAs who are looking to do financial planning as well. CPAs are typically just accountants and don’t do a lot of financial planning. If you are looking for someone with a strong tax background, a CPA with a PFS designation may be the right financial advisor for you.
Chartered Financial Consultant (ChFC) – 1-3 months: The ChFC is also known as the CFPⓇ Light. It covers much of the same areas as the CFPⓇ but it is less comprehensive and takes much less time to complete. It isn’t a bad designation, but would you rather work with an advisor that is a CFPⓇ or a CFPⓇ light.
Chartered Retirement Planning Counselor (CRPC) – 1-3 months: The CRPC is just about the same as the ChFC. Really the main difference is that the two designations are offered from 2 different colleges. The CRPC may also have a little more of a focus on retirement planning.
Series 6, 7, 63, 66, etc. 1-3 months: 10 to 15 years ago the only “certification” that a financial advisor needed was the series 7 and 63 license. Prior to fee-only advisors, financial advisors were really just brokers, selling you different financial products. If a person has a Series 7 and 63 license he can officially sell a product. The problem is that acquiring the “series” license don’t include any financial planning training. You will learn about different investment products, but nothing about retirement planning. If anything, you should be weary of working with someone with only a series license because you know you are working with a salesperson, and not necessarily a financial planner.
Michigan Insurance License 1-2 months: The good thing about working with a licensed insurance agent, is that they can help you purchase insurance. The bad thing about working with an insurance agent, typically the solution to every financial plan is insurance. Find an advisor that has a series 6 and a life insurance license and be prepared to be pitched a variable annuity. Again, being an insurance salesperson doesn’t mean that you have any financial planning expertise.
This is certainly not an inclusive list of all financial planning designations. In my opinion the designation that is most important for financial planning is the CFPⓇ. If you are considering working with a financial planner, that planner should be a CFPⓇ. I won’t guarantee all Certified Financial Planners are great at their job or that a non-CFPⓇ is bad at financial planner. In an industry that has basically no barrier of entry, your best bet is working with someone that you know has been in the industry and has put in the time to become better at their craft.