Chapter 1: Doing Your Homework
Many people are uncomfortable managing their own investments. They may be overwhelmed by the myriad of unfamiliar terms and investment vehicles, and they may lack the confidence to select their own investments.
Selecting a financial advisor can be equally difficult. There are many different choices—from the large publicly held Wall Street brokerage firms (also known as “wire-houses”) with well-known brand names and offices on every corner, to the small independent boutiques comprised of financial planners and/or investment managers. As the industry has expanded in the last 30 years, financial advisors have adopted many job titles, and they can earn many different credentials. Distinguishing among all the choices of firms and financial advisors can be bewildering—like sorting through all the makes, models, and options on a new vehicle. At least with vehicles, it’s easy to obtain an apples-to-apples comparison. Not so with financial advice.
Many begin their search for an advisor by consulting with a friend or relative about a referral. That’s certainly one way to go, but what is right for your friends or relatives may not be right for you. Some people may believe that their financial advisor is doing a great job strictly based upon how much their account grew last year or last quarter. They may not have compared the risk-based returns (after all fees and expenses) to the proper benchmark index—which is a common way to evaluate investment performance. This does not mean that one should disregard absolute return—whether or not the investment made money, regardless of index performance.
Investment managers typically identify a particular index to use as a benchmark against which to compare their performance. For stocks, the S&P 500 is probably the best-known index. It represents the 500 companies with the largest market value that are traded in U.S. stock markets, so it is considered a good approximation of the stock market.
Even if your friend or relative makes the right comparison to a benchmark, he or she might still misunderstand the investment performance. For example, their financial advisor might be exposing them to greater risk than necessary, or greater expense than necessary through the choice of investment vehicles. During the dot-com bubble, many people were impressed with their
financial advisors who put them heavily into technology stocks. It turned out that the short-term boost came crashing down.
Each investor should do his own homework and his own due diligence when selecting a financial advisor. A referral is a good start, but it is just a start. Also, it is a mistake to believe that bigger is better. It is a mistake to believe that a financial advisor working for a large company knows more, has access to better research, or is held to a higher standard of care than an independent advisor at a smaller firm. In fact, as will be discussed in later chapters, the exact opposite is often the case.
Advisors’ credentials are featured on their business cards, but what do they mean?
Understanding Professional Designations
There are many different job titles used by financial professionals: financial advisor, financial consultant, financial planner, investment consultant, investment manager, wealth advisor, wealth manager, and the list goes on and on. Amazingly, there are no educational requirements and no licensing requirements to use any of these titles. There are also more than 100 professional designations. All of them sound impressive. Some of these designations require years of study and a comprehensive examination, but others require little more than a weekend seminar.
Here are three designations requiring extensive study of many topics:
Chartered Financial Analyst (CFA) charter-holders are experts in analysis of financial statements. Often, they provide advice to other financial professionals, rather than work directly with retail clients. CFAs are required to complete three years of study and take a final exam before advancing to the next year of material.
Certified Public Accountant/Personal Financial Specialists (CPA/PFS)
are commonly known as accountants. The PFS designation represents additional training and education in financial planning. The Financial Industry Regulatory Authority (FINRA) provides a comprehensive list of professional designations along with complete descriptions of the necessary requirements to attain and maintain each designation at www.finra.org. Just type “professional designations” in the search box.
The Certified Financial Planner (CFP®) designation requires extensive course work and examinations, including a comprehensive final exam covering the following topics: financial planning, investments, insurance, taxes, retirement and estate planning. CFP® certificants must also have several years of work experience and must adhere to a code of ethics.
FINANCIAL PROFESSIONAL DESIGNATIONS
AAI— Accredited Advisor in Insurance
AAMS—Accredited Asset Management Specialist
ADPA— Accredited Domestic Partnership Advisor
AEP—Accredited Estate Planner
AFC— Accredited Financial Counselor
AFSI— Associate, Financial Services Institute
AIF—Accredited Investment Fiduciary
AIFA—Accredited Investment Fiduciary Analyst
AINS— Associate in Insurance Services
ALMI—Associate, Life Management Institute
API— Associate in Personal Insurance
APMA— Accredited Portfolio Management Advisor
APP—Asset Protection Planner
APR— Accredited Pension Representative
ARPC— Accredited Retirement Plan Consultant
AWMA—Accredited Wealth Management Advisor
BCA— Board Certified in Annuities
BCAA— Board Certified in Asset Allocation
BCE—Board Certified in Estate Planning
BCM—Board Certified in Mutual Funds
BCS— Board Certified in Securities
C(k)P— Certified 401(k) Professional
C3DWP— Certified 3 Dimensional Wealth Practitioner
CAA— Certified Annuity Advisor
CAC— Certified Annuity Consultant
CAIA— Chartered Alternative Investment Analyst
CAM—Chartered Asset Manager
CAMS— Certified Anti-Money Laundering Specialist
CAPP— Certified Asset Protection Planner
CAS— Certified Annuity Specialist
CASL— Chartered Advisor for Senior Living
CCPS— Certified College Planning Specialist
CDFA— Certified Divorce Financial Analyst
CEA— Certified Estate Advisor
CEBS— Certified Employee Benefit Specialist
CEIAS— Certified Index Annuity Specialist
CEP— Certified Estate Planner
CEPA—Certified Exit Planning Advisor
CEPF— Certified Educator in Personal Finance
CEPP— Chartered Estate Planning Practitioner
CES— Certified Estates and Trust Specialist
CFA— Chartered Financial Analyst
CFEd— Certified Financial Educator
CFG — Certified Financial Gerontologist
CFP®— Certified Financial Planner
CFPN— Christian Financial Professional Network Certified Member
CFS— Certified Fund Specialist
ChFC®— Chartered Financial Consultant
ChFE— Chartered Financial Engineer
ChFEBC— Chartered Federal Employee Benefits Consultant
CIC— Chartered Investment Counselor
CIMA— Certified Investment Management Analyst
CIMC— Certified Investment Management Consultant
CIS— Certified Income Specialist
CLTC— Certified Long-Term Care
CLU— Chartered Life Underwriter
CMA— Chartered Market Analyst
CMAA—Certified Merger and Acquisition Advisor
CMFC— Chartered Mutual Fund Counselor
CPC— Certified Planner Consultant
CPCU— Chartered Property Casualty Underwriter
CPFC— Certified Personal Finance Counselor
CPIA— Certified Professional Insurance Agent
CPIW/M— Certified Professional Insurance Woman/Man
CPM—Chartered Portfolio Manager
CPWA— Certified Private Wealth Advisor
CRA— Certified Retirement Administrator
CRC— Certified Retirement Counselor
CRFA— Certified Retirement Financial Advisor
CRP—Certified Retirement Financial Planner
CRPC— Chartered Retirement Planning Counselor
CRPS— Chartered Retirement Plan Specialist
CRSP— Certified Retirement Services Professional
CSA—Certified Senior Advisor
CSC— Certified Senior Consultant
CSEP— Certified Specialist in Estate Planning
CSFP— Chartered Senior Financial Specialist
CSRP—Certified Specialist in Retirement Planning
CTEP—Chartered Trust and Estate Planner
CTFA—Certified Trust and Financial Advisor
CTP— Certified Treasury Professional
CTS— Certified Tax Specialist
CWC— Certified Wealth Consultant
CWM—Chartered Wealth Manager
CWMC—Certified Workplace Money Coach
CWPP— Certified Wealth Preservation Planner
CWS—Certified Wealth Strategist
DAE— Diversified Advanced Education
DIA—Disability Income Associate
EHBA—Employee Healthcare Benefits Associate
FAD—Financial Analyst Designate
FALU— Fellow of the Academy of Life Underwriting
FFSI— Fellow, Financial Services Institute
FLMI—Fellow, Life Management Institute
FRM—Financial Risk Manager
FSS—Financial Services Specialist
MCEP— Master Certified Estate Planner
MFP—Master Financial Professional
PFS— Personal Financial Specialist
PPC—Professional Plan Consultant
PRP—Plansponsor Retirement Professional
PRPS—Professional Retirement Planning Specialist
QFP— Qualified Financial Planner
QPFC— Qualified Plan Financial Consultant
RF— Registered Fiduciary
RFA—Registered Fiduciary Financial Associate
RFC— Registered Fiduciary Financial Consultant
RFP—Registered Financial Planner
RFS— Registered Financial Specialist
RIS—Registered Income Specialist
RPA—Registered Plans Associate
WMS—Wealth Management Specialist
The following is a description of the necessary requirements for the Certified Financial Planner designation—financial planning’s most respected certification.
Also consider CPA Financial Planners—CPAs that also offer comprehensive financial planning. Many are licensed as investment advisor representatives of a Fee-Only (RIA) firm and fiduciary.
The CPA designation is one of the world’s most trusted. CPA Financial Planners provide traditional CPA services, but with the added benefit of providing comprehensive financial planning—a natural extension of the CPA’s scope of services. Your CPA already knows every aspect of your financial life. This, combined with the profession’s attention to detail and work ethic, make the CPA Financial Planner well worth your consideration—especially one registered with a Fee-Only RIA and fiduciary and one that does not sell products or receive commissions. The next chapter identifies the least you should expect from a financial advisor.
A description of each designation may be found at www.finra.org (obtained with permission from FINRA).
” It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you will do things differently.”
~ Warren Buffet, CEO Berkshire Hathaway
Have a question? Contact Ed Mahaffy.
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