Deciphering the Alphabet Soup of Advisor Designations

If you’re searching for a financial advisor, you’ve likely noticed that many have three or four-letter acronyms after their name. These financial advisor designations, which are awarded by various industry trade organizations, indicate that these advisors have gone through extensive training in various areas of investing and financial planning, passed a comprehensive test of their knowledge, and agree to adhere to the organization’s professional and ethical standards. Having said that, not all designations are created equal.

Here is a high-level summary of the most common advisor designations: CFP, CFA, ChFC, CFS, CMT, CPA, and RIA.

CFP – Certified Financial Planner

Financial advisors don’t need licenses to call themselves financial planners or to offer financial planning services. If you’re looking for one whose experience and qualifications have been formally recognized, look for an advisor who has been certified as a certified financial planner by the Certified Financial Planner Board of Standards (CFP Board).

These financial planners earn their certifications by being experienced financial professionals who have passed a rigorous financial planning examination and agree to uphold the highest standards of integrity, accountability, and client service.

According to the CFP Board, around 80,000 financial professionals are CFP professionals. It is important to note that the passing rate for the CFP exam is only about 60%!

CFA – Chartered Financial Analyst

The chartered financial analyst designation is granted by the CFA Institute, a global association of investment professionals. To become a CFA, candidates must take 300 hours of training over a four year period and pass three levels of exams that demonstrate their in-depth understanding of advanced investment, analysis, and real-world portfolio management skills.

More than 150,000 investment professionals in 63 countries hold the CFA designation. Most of them work in asset management companies or investment advisory firms managing portfolios for wealthy individuals and institutional investors such as pension funds and endowments.

ChFC – Chartered Financial Consultant

The Chartered Financial Consultant (ChFC) designation is similar in many ways to the CFP designation, although fewer professionals have earned it. It’s granted by the American College of Financial Services to professionals who have completed a required regimen of financial education and possess at three years of relevant experience. Applicants must take seven required courses and two elective courses and pass comprehensive exams for each subject.  These courses cover topics such as retirement planning, estate planning, insurance, investing and tax planning. The ChFC was developed as a competing alternative to the CFPs in the 1980s.

The most notable difference is that, unlike CFPs, ChFC candidates do not have to pass a comprehensive final exam. ChFCs also don’t have to have a bachelor’s degree or meet a minimum experience requirement.

CFS – Certified Fund Specialist

Relatively few financial advisors go out of their way to earn the Certified Fund Specialist (CFS) certification. It’s granted by the Institute of Business and Finance (IBF) to professionals who have gone through a six-module self-study program covering various aspects of mutual funds, ETFs, real estate investment trusts (REITs) and close-ended funds, and passed three online exams as well as a case study.

Since experienced financial advisors generally have a deep knowledge of these products, most don’t take the time to earn the CFS certification. It’s more commonly pursued by accountants and bankers who also want to serve as financial advisors for their clients. Since the program can be completed in as little as 15 weeks, the CFS certification is not one that we would hold in the same regard as the CFP or CFA.

CMT – Chartered Market Technician

The Chartered Market Technician (CMT) designation is granted by the CMT Association to investment professionals who have demonstrated proficiency in technical analysis. This investment approach bases buy and sell decisions based on historical trading activities, such as price movements.

Those who go through the CMT training process learn about pricing patterns and trends, short selling, and research skills such as correlation analysis, t-tests and regression analysis.

There are more than 4,500 CMTs in over 85 countries. Those who earn the designation tend to work in broker-dealers, asset management companies and hedge funds, where the planning, timing, and execution of trading-related decisions have the most impact. Since most financial advisors aren’t involved in executing trades on their own, the CMT designation isn’t one that most consider being vital for their role.

CPA – Certified Public Accountant

The Certified Public Accountant (CPA) license is given by the American Institute of Certified Public Accountants. To earn this license, an individual, generally, someone already working as a public accountant, must take 150 hours of training and pass the Uniform CPA Examination®. They must also meet certain professional requirements in compliance with their state’s Board of Accountancy. After they become a CPA, the individual must take continuing education courses to keep up with industry developments.

While many CPAs serve as accountants or tax advisors for individuals and businesses, many also work within companies as auditors, comptrollers, chief financial officers, and business advisors. Many also work with independent accounting firms that audit companies’ financial activities.

When you find a financial advisor who is also a CPA, chances are that they started their career as an accountant and then earned their investment license and/or CFP or ChFC certification to be able to offer a broader range of financial services to their clients. The advantage of hiring these types of individuals is that they may serve as a one-stop resource for integrated financial and tax planning advice and services.

RIA – Registered Investment Advisor

Registered Investment Advisor (RIA) is a popular (and incorrect) name for financial advisors whose real title is “investment advisor representative.” These individuals offer investment advice and manage client portfolios, mutual funds and other pools of investable assets.

Unlike all of the other certifications and designations listed above, which are granted by trade associations, investment advisors are licensed and regulated either by the states where they do business or by the SEC and often both.

Investment advisors who work for individuals and families are legally required to act in their clients’ best interests, otherwise known as the fiduciary standard. This means that their advice and recommendations must reflect their clients’ financial goals and risk tolerance. They cannot expose their clients’ investments to unnecessary risks. And they must try to keep investment expenses reasonable.

Investment advisors are paid directly by clients, most often as an annual percentage of the assets they manage. They cannot be paid commissions for selling investments to clients since this would impede their ability to act solely on their clients’ behalf.

Not all financial advisors are investment advisors. Many are brokers, who are not held to the fiduciary standard and do get paid commissions for selling investment products to clients.

Finally, Some Clarity…

Both investment advisors and brokers may hold any of the designations listed above. The CFP designation continues to be the most popular and most widely recognized. But designations alone shouldn’t determine the advisor you choose. It’s important to understand the differences between the advisors’ service models, as well as their investment and financial planning process before you make this important decision.

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