By Jill Schlesinger
Tribune Media Services
What’s better: a CFP or a CPA-PFS? What’s the difference between a fee-based financial adviser and a fee-only one? Being a consumer of financial services these days can be maddening. One reader asked, “Can you give me a rundown about what these designations mean so I can select the right type of adviser to help me with my retirement planning?”
Absolutely. Let’s start with the basics: There is a difference between a license and a designation. Conducting certain sales activities in the securities and insurance industries can require both state and federal licensing. Additionally, those who are Registered Investment Advisers (RIAs) are licensed to provide advice and must put their clients’ interests first (“the fiduciary standard”). Those licenses require passing standardized tests and some continuing education. However, many professionals engaged in providing financial advice also rely on outside designations, which are often more rigorous than the licensing exams, in order to differentiate themselves from those who sell product versus those who sell advice.
The financial professional designations include:
CFP(r) certification: The Certified Financial Planner Board of Standards (CFP Board) requires candidates to meet what it calls “the four Es”: Education (through one of several approved methods, must demonstrate the ability to create, deliver and monitor a comprehensive financial plan, covering investment, insurance, estate, retirement, education and ethics), Examination (a 10-hour exam given over a day and a half; most recent exam pass rate was 59.1 percent), Experience (three years of full-time, relevant personal financial planning experience required) and Ethics (disclosure of any criminal, civil, governmental, or self-regulatory agency proceeding or inquiry). CFPs must adhere to the fiduciary standard.
CPA Personal Financial Specialist (PFS): The American Institute of CPAs(r) offers a separate financial planning designation. In addition to already being a licensed CPA, a CPA/PFS candidate must earn a minimum of 80 hours of personal financial planning education and have two years of full-time business or teaching experience (or 3,000 hours equivalent) in personal financial planning, all within the five year period preceding the date of the PFS application. They must also pass an approved Personal Financial Planner exam.
Chartered Life Underwriter(r) (CLU(r))/Chartered Financial Consultant(r) (ChFC(r)): Available for insurance agents who want to demonstrate a deeper knowledge base. The CLU is more insurance-focused, while the ChFC is broader. Both require designees to take eight college-level courses on all aspects of financial planning from The American College in Bryn Mawr, Penn., and then complete continuing education. Neither requires a comprehensive exam.
Membership in the National Association of Personal Financial Advisors (NAPFA): Becoming a member of NAPFA maintains a high bar for entry: Professionals must be RIAs and must also have either the CFP or CPA-PFS designation. Additionally, NAPFA advisers are fee-only, which means that they do not accept commissions or any additional fees from outside sources for the recommendations they make. Fee-only advisers can charge based on an hourly or flat rate, or based on a percentage of your portfolio value, often called “Assets Under Management” (AUM). Either method is fine with NAPFA; however, if the adviser collects a commission from an insurance company or a fee from a mutual fund company as part of the financial plan, then that adviser is precluded from membership.
In addition to being fee-only, NAPFA advisers must be fiduciaries and must provide information on their background, experience, education and credentials, and are required to submit a financial plan to a peer review. After acceptance into NAPFA, members must fulfill continuing education requirements.
The requirements make NAPFA members among the tiniest percentage of registered investment advisers, with only 2,500 total current members. I asked John Ritter, NAPFA board member and public policy chair about setting the bar too high, making it too exclusive a club. He responded that NAPFA advisers want “to be the ones carrying the torch, in front of the industry.”
Certainly, you can get good advice from someone without these designations, but knowing what they mean can help you ask the right questions about the services and fee structures they provide, so you can make an educated choice.
Jill Schlesinger, CFP, is the Editor-at-Large for www.CBSMoneyWatch.com. She covers the economy, markets, investing or anything else with a dollar sign on her podcast and blog, Jill on Money, as well as on television and radio. She welcomes comments and questions at askjill@moneywatch.com.
This was printed in the April 21, 2013 – May 4, 2013 Edition
