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Making Dollars and Sense of Financial Planner Designations

Karen Haywood Queen / March 10th, 2014

Whether you're looking for advice about saving for your child's education, managing an inheritance, or setting up a financial plan, a financial planner can help. But all planners and their credentials are not the same. An impressive list of letters and an engaging smile is not enough to help you reach your goals.

"There's a reason they call themselves 'financial planners' or 'financial advisers,' " says Barbara Roper, director of investor protection for the Consumer Federation of America, Washington D.C. "It puts the clients off guard and they sell more product. It's extremely difficult for investors to distinguish among them."

One reason for consumer confusion: numerous designations. "The last time we looked, there were more than 100 professional designations," says Geoffrey Brown, CEO of the National Association of Personal Financial Advisors (NAPFA), Arlington Heights, Ill., the nation's leading professional organization for fee-only financial advisers.

Some designations require college level training, rigorous exams, and continuing education. Others sound impressive, but may not require more than a weekend seminar to achieve the designation, Roper says.

"They are counting on the fact that most investors will not take the time to research them by looking at educational requirements and ethics requirements," Roper says.

There's no substitute for doing your own research. This article should help you understand the ethical requirements for a fiduciary compared with a salesperson, the gold standard designations, and different compensation practices for salespeople.

A fiduciary looks out for you

Often investors feel they're getting a higher standard of ethical care than the law requires of their particular planner. Three-fourths of investors incorrectly believe that financial advisers are fiduciaries and two-thirds wrongly believe stockbrokers are fiduciaries, according to a 2010 survey of investors by InfoGroup, Papillion, Neb. That ignorance can be costly.

The common scenario is not a horror story about the little old lady swindled out of her life savings, Roper says. "The typical problem is the person who pays way more than [he or she] should for mediocre investments that don't perfectly align with [his or her] investment objectives," she says. "Most people will never know when they are the victim of that kind of bad financial advice. When they hit retirement, they will have tens of thousands of dollars less than they should have because their planner recommended products that benefited the planner instead of the clients."

A fiduciary must make decisions based on what's financially best for you. "The fiduciary will unconditionally put the client's best interests ahead of the adviser's interests—regardless of all other factors," says Mark Cussen, a certified financial planner (CFP) and accredited financial counselor in Leavenworth, Kan. "A fiduciary also has to disclose any possible conflict of interest."

For example, if someone with a small pension of $100,000 wanted to invest it all in penny stocks, "As a fiduciary, I could not do that because it wouldn't be in her best interest," Cussen says.

There are cases when an additional niche designation could be helpful.

By contrast, a broker salesperson must adhere only to a suitability standard, Roper says. That means the broker can't commit fraud and can't recommend anything without regard to your financial situation, she says. "But the recommendation doesn't have to be designed with your best interests in mind," she stresses.

A broker could advise you that a large stock mutual fund is an appropriate investment for you but then recommend the large stock fund that pays the best commission to the broker as opposed to the one with the best combination of features for you, Roper says.

"No model is 100% free of conflicts," Roper says. "But (using a fiduciary) means that there is no one else in the relationship—no third party compensation. My planner has no reason to recommend investments other than my best interests."

The U.S. Securities and Exchange Commission, Washington, D.C, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is authorized to adopt a fiduciary standard for brokers, but insurance brokers are resisting such a move, Roper says.

Find a fiduciary

Although nothing guarantees a planner's honesty and expertise, ask questions to help determine if the adviser you'll be working with has your best interests at heart. Ask if he or she is a CFP, a member of the Financial Planning Association, or a registered investment adviser. The CFP Board requires that CFPs providing "financial planning or material elements of financial planning...owe the client the duty of care of a fiduciary as defined by the board."

Further, the CFP Board of Standards requires that, in any client relationship, a CFP place the client's interests ahead of his own interests. The Financial Planning Association requires that its members adhere to a fiduciary standard, Roper says. The Investment Advisers Act of 1940 requires a fiduciary standard of care of all registered investment advisers, Brown says.

The gold standard for planners

The CFP is one of the most respected designations, Roper and Brown say. "While no designation is a guarantee of unquestioned expertise and integrity, the CFP designation has been recognized as the standard that best measures expertise in the broad range of issues covered by personal financial advisers," Roper says.

To become a CFP, the planner must take 15 undergraduate credit hours and pass a comprehensive exam that involves analyzing three complicated case studies, Cussen says. A CFP's knowledge helps him or her see how each aspect of the client's finances fit into the broad picture, and not necessarily to be able to advise a client on precisely how to accomplish every step, he says.

"That qualifies us to quarterback a team of financial advisers," Cussen says. "I can look at someone's financial situation and tell when the client needs to go to an estate planner, when to see a CPA (certified public accountant), when to see someone about asset management."

No designation is a guarantee of unquestioned expertise and integrity.

Other designations respected for their education, expertise, and ethics include CPA with a personal finance specialist designation, chartered financial consultant, chartered financial analyst, and perhaps chartered life (insurance) underwriter, Roper and Cussen say.

There are cases when an additional niche designation could be helpful, Brown says. For example, a doctor might look for a planner with expertise in working with physicians while a divorcing couple might seek a certified divorce financial adviser.

How you pay your planner

There are several kinds of fee-only compensation. Planners might be paid an hourly fee, for example, if the client has an issue to resolve but isn't looking for total portfolio management, Roper says. A client might pay a flat retainer of $5,000 a year for asset management and access to the planner, Brown says. Or, you might compensate a planner based on a percentage of assets under management. "That directly aligns the client's money with the adviser's interest," Cussen says. "If he doubles the client's money, the adviser's income is doubled. And, of course, the opposite also applies."

Contrast that with the broker who is paid a commission, whose advice is 'free' to the client. "If you operate by commission, you get paid whether the investment does well or not," Cussen says.

Sometimes, you might pay a planner via a hybrid model. Cussen notes that a fee-only planner might be required to spend a great deal of time researching the best variable annuity contract for a high net-worth client in return for a nominal hourly fee. Meanwhile, the insurance broker who completes the sale might get a $50,000 commission—probably 10 times to 50 times what the fee-only planner might receive. In those cases, it might make sense for the planner to also have an insurance broker license to be able to sell the policy after disclosing his commission to the client, he says.

The key to consider: Where does the planner's loyalty lie?

"Whenever that commission piece comes into play, you always have to question the motivation of the adviser," Brown says. "There will always be the question: Where does the adviser's loyalty lie? With me the client, or with the entity that the adviser is selling?"

Neither the publisher nor the author of this article is a registered investment adviser. Readers should seek independent professional advice before making investment decisions.

Red flags of bad planners

  • The planner has an answer before you sit down.
  • One product solves all your needs.
  • The planner says the advice is free.
Source: Barbara Roper, Consumer Federation of America

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