Archives for September 2021

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Financial Advisor Licenses and Designations

A reader writes in, asking:

“I’m looking into using a financial advisor for the first time as I near retirement. I know I’m supposed to look for a ‘fee only fiduciary’ but am lost as to the titles…RIA, CFP, CFA, etc. I am not sure the pros and cons of each. Perhaps you could elaborate in an article?”

The first thing that confuses (and surprises) many people is that the term financial advisor doesn’t have any legal meaning at all. Basically anybody can refer to themselves as a financial advisor. A person who refers to himself or herself as a financial advisor might, from a regulatory perspective, actually be any of a few different things: an investment adviser representative, an insurance agent, a registered representative, or none of the above.

Registered Investment Adviser (RIA)

A registered investment adviser (RIA) is an entity (either a person or a business) that provides investment advice for a fee. A investment adviser representative (IAR) is a person who works for an RIA and provides advice on behalf of the RIA. For example, Wealth Logic, LLC is a registered investment adviser, and Allan Roth is an investment adviser representative who provides advice on behalf of the firm. Similarly, Jon Luskin, LLC is an RIA, while Jon Luskin (i.e., the actual person) is an IAR who provides advice on behalf of the firm.

Registered investment advisers (and representatives thereof) have a fiduciary duty to their clients. That is, they’re required by law to put the client’s interests ahead of their own. Unfortunately, the reality is that there are some RIAs who do not actually live up to a fiduciary standard. So a certain level of self-education is still necessary, in order for you to be able to understand what the advisor is recommending and why.

Another noteworthy point here is that you don’t actually have to be an RIA (or representative of one) in order to provide investment advice. For example, if you’re a cardiologist and your sibling comes to you asking for investment advice, you’re perfectly allowed to provide that advice.

The general rule is that anybody who is in the business of providing investment advice in exchange for compensation must be an RIA (or IAR). But there are exceptions even to that.

Registered Representative

A registered representative (also known as a broker or stockbroker) is somebody who sells securities on behalf of a broker-dealer (i.e., a brokerage firm). Registered representatives are generally paid a commission. They do not (usually) have to be RIAs because the advice is considered to be solely incidental to the business as a broker (i.e., the business of selling securities).

Registered representatives are held only to a “suitability” standard. That is, they are not required to put the client’s interests first. The only thing that is required is that they must have reason to think that the product they are selling is “suitable” for the client. And if history is a guide, all sorts of garbage can be considered suitable.

When you see, “securities offered by….” on a website or other piece of marketing material, you know that you’re dealing with a registered representative.

Certified Financial Planner (CFP)

The certified financial planner (CFP) designation is not actually a license. The entity that provides this designation (Certified Financial Planner Board of Standards, Inc, generally just referred to as the “CFP Board”) is a private entity rather than a governmental entity.

From a legal standpoint, all this designation means is that the person is allowed to use the registered trademark “CFP professional” to describe himself/herself and use the registered trademark “CFP” letters after their name.

So from a legal standpoint, this designation is not important at all. That is, there’s no service that you might want for which it’s legally necessary for the service provider to be a CFP. However, it is relevant information from a credibility standpoint, because it means that the person a) has passed an exam that covers quite a bit of financial planning material and b) has a meaningful amount of experience providing one or more financial planning services.

Certified Public Accountant (CPA)

The certified public accountant (CPA) designation is a license (at the state level). But, roughly speaking, the only things that CPAs are allowed to do which other people are not allowed to do are:

  1. Provide auditing (or similar) services, and
  2. Use the “CPA” letters.

So, as with the CFP designation, if you’re looking for personal financial services, it’s unlikely that you need somebody who is a CPA. But, as with the CFP designation, the CPA designation can be quite relevant, as it means that the person has a certain level of expertise with tax and other financial topics.

The personal financial specialist (PFS) credential is an additional designation (through the AICPA) that CPAs can get, which is akin to the CFP credential in that it means that the person has passed a test about personal financial planning and has a certain amount of experience with financial planning. But as with the CFP designation, it’s not a license from a governmental entity. It just means you’re allowed to use certain letters after your name.

Chartered Financial Analyst (CFA)

The chartered financial analyst (CFA) designation is akin to the CFP designation in that it is not a license to practice, but rather a designation from a private entity. So again it’s a situation where there’s no service for which you would need somebody who is a CFA, but it is a useful indication of a person’s experience and expertise.

Whereas the CFP area of focus is overall personal financial planning, the CFA curriculum and exams focus much more specifically and deeply on the investment side of things.

What Type of Professional is Right for You?

An important point to understand is that somebody can work in more than one of the above roles. For example, it’s common to see people who are both IARs and registered representatives. That is, they provide advice for a fee, and they also sell products for a commission. And that person might have one or more of the CPA/CFP/CFA designations — or none of them.

Are you looking for overall financial planning? Then you probably want to work with somebody who is an RIA (or representative thereof). The CFP designation (or the CPA/PFS designation) would be great to see. But it isn’t entirely necessary. For example, you might find a CFA who has also developed the necessary expertise in taxation, retirement planning, etc.

Are you looking specifically for somebody to do a certain type of tax planning for you? Then a CPA would likely be a good fit. But a CFP could be a great choice as well, if they happen to specialize in that particular area.

And of course in some related areas — estate planning, for instance — the best professional to work with is probably an attorney.

And finally, just because somebody has the right designation(s) doesn’t mean they’re a good fit for what you need. Compensation matters as well. For instance, if you’re looking for a one-time engagement, you will want to find a professional who usually works in such a manner, rather than a professional who prefers to work with clients who have ongoing needs and who are happy to pay an ongoing annual fee.

Investing Blog Roundup: Interviewing the Vanguard Total Stock Fund Manager

For the Bogleheads on Investing podcast, Rick Ferri recently interviewed Gerry O’Reilly (manager of the Vanguard Total Stock Market Index Fund and ETF) and Rich Powers (Head of ETF and Index Product Management at Vanguard). It was quite a discussion, covering a range of nitty gritty details about how the fund is run.

Recommended Reading

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Social Security Planning Approaches: Insurance Approach vs. Maximizing Expected Outcome

When it comes to Social Security planning, people often take one of two approaches:

  • The insurance approach: Social Security is meant to be longevity insurance, so in order to get the most protection from it, I will delay until age 70.
  • The maximizing approach: I want to get the most total dollars (or present value of dollars) from Social Security over my lifetime, so I will file at whatever age results in the highest expected sum. (Note: this second approach is what calculators such as Open Social Security are doing — recommending the filing age(s) that maximize the expected present value of dollars collected.)

In short, most people should be accounting for both perspectives in their planning.

Taking only the maximizing approach fails to account for the fact that a reduction in risk is valuable. Waiting to file for Social Security generally reduces longevity risk, because it makes you less likely to deplete your savings in a live-a-long-time scenario, and it means that you would be left with a greater monthly income in the undesirable event that you do deplete your portfolio.

Conversely, taking only the insurance approach makes no sense either. Yes, Social Security does function as longevity insurance. And when you delay Social Security you are, essentially, buying more of that insurance. But just because a type of insurance is available doesn’t mean that you need it or that it’s a good deal. (I’m sure you can come up with several examples of this concept on your own.)

For some people, the risk reduction that comes from delaying Social Security isn’t really important, because they’ve already reached a point where their level of savings relative to their desired level of spending is such that there’s very little chance of running out of money, regardless of what decisions are made with regard to Social Security.

Similarly, for some couples (most especially, married couples in which one person is in very poor health or the higher earner is much older than the lower earner), having the spouse with the lower earnings history delay filing doesn’t necessarily even reduce risk. It makes the “we both live a long time” scenario better. But it makes the “one of us lives a long time” scenario worse. And for such couples, it’s that second scenario that’s far more likely.

“Delay until 70” happens to be a respectable rule of thumb for an unmarried person, because:

  1. It does happen to be a pretty good deal (not astonishingly good, but good) for most unmarried people, and
  2. If you choose to delay, then you die at an early age, it’s not as if you’ll be upset about having waited to file for your benefits.

But once we look at married couples, it’s more complicated because:

  1. It’s often not a good deal (for the lower earner to delay). In some cases (again, if one person is in very poor health or if the higher earner is much older than the lower earner), it can be quite a bad deal.
  2. And if you’re the lower earner and you choose to delay, then one spouse dies soon thereafter, the surviving spouse will still be alive and will be in a worse position as a result of you not having filed for benefits early.

Point being, Social Security planning should be treated much like any other personal financial planning topic in that:

  • It’s helpful to actually do an analysis that looks at your personal facts and circumstances, and
  • When performing that analysis, the evaluation of any particular strategy should account for both the effect that that particular strategy would have on the risk(s) to which you are exposed and the effect that that strategy would have on the expected (i.e., probable) outcome.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: Morningstar Fund Fee Study

Morningstar recently released their annual fund fee study. Mutual fund investors continue to pay lower and lower fees per year, and it’s largely due to the fact that we’re choosing less expensive funds:

“Investors deserve most of the credit for putting the squeeze on fees. […] In nine of the last 10 years, the cheapest 20% of funds across all Morningstar Categories have, as a group, accounted for 100% of the net inflows into all funds. Meanwhile, money has poured out of the remaining 80% in all but one year over the past decade.”

Recommended Reading

*Related reading:

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My Social Security calculator: Open Social Security