All industries have obscure jargon, terminologies, and professional designations. The financial industry is no different. As a consumer of the services provided by the financial industry, it's very useful to have a full grasp of what all of those letters and abbreviations mean. Not all financial professionals are equally competent, and it's wise to ensure you are getting the best expertise from the best people.
Unlike a doctor or a lawyer, any person can legally call themselves a financial planner, investment analyst, financial coach, or financial advisor. There are Securities and Exchange Commission (SEC) laws on what those people can do or say, but a person can generally just declare themselves a financial expert without knowing anything about finance. Look for these designations from any financial professional offering you their services:
Certified Financial Planner (CFP)®
Those with the CFP® designation have demonstrated competency in all areas of financial planning. The candidates complete studies in more than 100 topics, including stocks, bonds, taxes, insurance, retirement planning, and estate planning. The program is administered by the Certified Financial Planner Board of Standards Inc.
Because of the nature of their work, people place a good deal of trust in these individuals. The CFP board posts information on the financial planning process and current licensees, which lets clients of CFPs verify if their financial planners' designations are in good standing. The last thing anyone needs is to choose a CFP whose certification has been revoked.
While anybody may call themself a financial advisor, only 29% of advisors are CFP professionals.[1]
Chartered Financial Analyst (CFA)®
This designation is offered by the CFA Institute (formerly the Association for Investment Management and Research [AIMR]). To obtain the CFA charter, candidates must complete three difficult exams and gain at least three years of qualifying work experience, among other requirements. In passing these exams, candidates demonstrate their competence, integrity, and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and securities analysis.
CFA charter holders tend to be analysts who work in the field of institutional money management and stock analysis, not financial planning. These professionals provide research and ratings on various forms of investments.
Certified Public Accountant (CPA)
A certified public accountant (CPA) is a designation provided to licensed accounting professionals. The Board of Accountancy provides the CPA license for each state.
Those holding the CPA designation have passed examinations in accounting and tax preparation, but their title does not indicate training in other areas of finance, something many people incorrectly assume.
While certifications are not everything, you should give extra credit to investment professionals who have them. Most of these certifications require candidates to put in many hours of study and meet high ethical and professional standards.
For instance, to get the CFA designation, candidates must put in approximately 250 hours of reading per exam, and there are three exams to pass. The tests are so intensive that approximately 64% of those who take just the level 1 exam will fail.[2] Those who make it through all three levels to become charter holders are also bound by a code of ethics and rules of professional conduct.
The CFP (certified financial planner) is also a quite respected designation. One of the oldest in the profession, it requires years of experience, successful completion of standardized exams in several areas, a demonstration of ethics, a college degree, and ongoing education in the field.
Bottom line: like all professions, there are good ones, bad ones, and just plain mediocre ones. Know these designations to make sure you get the best financial advice possible.
Notes:
[1] Certified Financial Planner Board of Standards, Inc
[2] https://www.bloomberg.com/news/articles/2022-04-12/cfa-level-i-pass-rate-rises-to-36-with-covid-disruptions-over#:~:text=In%20February%2C%2036%25%20of%20candidates,%25%2C%20according%20to%20the%20association.
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