Archives for September 2021

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.