Since prehistoric times, men have adorned themselves in paint, animal skins, and feathers to impress, intimidate, and influence their fellow humans. While people no longer wear such accoutrements, many, particularly those employed within the financial industry, continue to enhance their status by appending alphabetic symbols to their names, the psychic totems of a modern world. Of course, the value of such acronym symbols depends upon the recognition and understanding of their meaning by the viewer.
Just as ancient shamans guided our ancestors through the mysteries of the natural world, modern financial advisors seek to guide prospective investors through the complex and often dangerous world of modern personal finance. Some provide well-meaning, informed information, while others lead the sheep to the slaughter, so to speak. Understanding these common acronyms will help you identify competent investment advisors and distinguish true professionals from those who would merely have you believe they are.
Common Financial Credentials & Designations
Unfortunately, the size of the market, the lack of liability of advisors for the results of their advice, the difficulty of confirming past performance, and insufficient regulatory supervision continue to attract unscrupulous people who often hide behind the facade of a “professional” credential. Many, but not all, advisors have professional designations attesting to their qualifications. However, the lack or presence of a title is not by itself sufficient reason to discard or select an advisor.
If possible, you should review the resume or biography of each prospective advisor – either via printed collateral material they provide or on a personal or company website – and review their expertise in light of your needs.
The following designations and explanations will help you understand what each acronym or title means, but should not be considered as evidence that the advisor is either competent or suited to your needs.
1. IAR (Investment Advisor Representative)
While this legal designation may be the easiest to acquire, requiring the successful passage of the Series 65 exam and the payment of a fee to the Securities and Exchange Commission (SEC), most recipients are former stockbrokers, insurance agents, or commercial bankers with extensive experience and other securities licenses, such as the Series 7. They are subject to the regulations of the SEC.
2. RIA (Registered Investment Advisor)
Technically, this designation refers to the firm with which an investment advisor representative is associated – though it may be used to refer to an individual who is technically an IAR.
3. IA (Investment Advisor) and FIA (Financial Investment Advisor)
These are slang acronyms that have no official meaning or standing with any accreditation body, but may be used by someone who is licensed as an IAR.
4. CFP (Certified Financial Planner)
CFP, a designation conferred by the Certified Financial Planner Board of Standards, Inc., has become increasingly popular in recent years, particularly by those who provide fee-only advisory services to individuals or sell financial products which are frequently coordinated with other components of personal finance. Certification is rigorous; it involves a lengthy education requirement and follows the successful passage of multiple exams completed over a two-day period dealing with personal finance subjects, including investments, insurance, and estate planning. Candidates are required to possess a bachelor’s degree and three years of relevant experience, and must adhere to a code of ethics.
5. CFS (Certified Fund Specialist) or CFMC (Chartered Mutual Fund Counselor)
Professionals who earn the CFS title have completed a portion of the CFP program and focus on assisting clients with setting up investment portfolios for retirement and estate planning. However, a bachelor’s degree is not required. A CFS is sometimes referred to as a Chartered Mutual Fund Counselor (CMFC).
6. CTFA (Certified Trust and Financial Advisor)
The American Bankers Association confers CTFA certifications to trust and wealth management professionals who offer fee-based services. To qualify for CTFA certification, individuals must meet specific levels of experience (depending on their level of education), pass a comprehensive exam, and agree to abide by a code of ethics.
7. CLU (Chartered Life Underwriter)
The CLU is a designation for life insurance agents bestowed by the American College. It requires three years of business experience (two if the candidate holds an undergraduate degree), passage of specialized tests across a range of life insurance topics, and adherence to an industry code of ethics.
8. REBC (Registered Employee Benefits Consultant) and RHU (Registered Health Underwriter)
These designations are also bestowed by the American College to insurance agents. Candidates must have three years of business experience (two if they hold an undergraduate degree), pass a series of exams, and adhere to an industry code of ethics.
9. ChFC (Chartered Financial Consultant)
The ChFC is a financial planning designation primarily for the insurance industry, and is also awarded by the American College. Not nearly as difficult to attain as the CFP, it does address a range of financial planning topics and requires the passage of multiple exams. Candidates must possess three years of business experience (two if they hold an undergraduate degree) and abide by a code of ethics.
10. CPA (Certified Public Accountant)
The CPA designation is granted by individual state boards of the American Institute of Certified Public Accountants, and is considered to have the most rigorous requirements of any professional designation, which vary by state. CPAs assume personal liability for their work as accountants, auditors, and tax advisors.
11. PFS (Personal Financial Specialist)
A graduate of the American Institute of CPAs Personal Financial Planning program allows CPAs to demonstrate their knowledge and expertise in personal financial planning. Only certified public accountants can receive the PFS designation. However, the personal liability they assume as accountants does not extend to the recommendations they make regarding investments.
12. PFA (Personal Financial Advisor)
This is a new designation created by the National Association of Personal Financial Advisors, a competitor of the Certified Financial Board of Standards, Inc. which issues the CFP designation. The PFA is for fee-only planners who have at least five years experience and have passed a series of exams to qualify for the title.
13. RR (Registered Representative)
This is the basic legal title given by the SEC to those who have passed the Series 7 licensing exam and are regulated by the Financial Industry Regulatory Authority (FINRA). Anyone who sells securities must carry the Series 7 license.
14. CFA (Chartered Financial Analyst)
Considered the most exclusive and most difficult title to achieve, the CFA designation requires multiple monitored exams, working as an investment professional for a minimum of four years, and committing to a code of ethics and standards of professional conduct. This title is bestowed by the CFA Institute, founded in 1959. However, it is unlikely that an individual investor would deal with a CFA. CFAs are generally research analysts employed by investment banks, mutual fund companies, and securities firms. They typically specialize in a particular industry and the companies operating within that industry.
15. CIC (Chartered Investment Counselor)
In 1975, the Investment Advisor Association (IAA) working with the Institute of Chartered Financial Analysts created the title of chartered investment counselor. This recognizes the special qualifications of persons employed by IAA member firms whose primary duties are to manage investment portfolios or provide counseling to such managers. Candidates for the CIC designation must hold the CFA designation, have a minimum of five years experience in performing investment counseling and portfolio management responsibilities, be employed by an IAA member firm, provide work and character references, endorse the IAA’s standards of practice, and provide professional, ethical information.
Most credible advisors will have one or more of these designations, depending upon their experience and the specific components of personal finance with which they work. However, there are new designations and accrediting organizations that pop up from time to time, some with no other intent than to defraud the advisor seeking the designation, and some with the intent to confuse and even deceive potential clients – especially those 55 years of age and older.
Picking Your Advisor
The vast majority of financial advisors are trustworthy, ethical, and understand their fiduciary duties to their clients. Despite such examples as Bernie Madoff and Anthony Fields, hundreds of millions of dollars of investment transactions occur every day in the United States to the satisfaction of both buyers and sellers.
The risk of a financial advisor is not that he or she will intentionally steal your money, but will lose it through misunderstanding your investment needs, carelessness, or simple ineptness. For these reasons, it’s important to do your own due diligence to determine which advisor can best address your goals.
1. Understand Your Own Financial Needs
You are unlikely to be successful if you do not have a goal in mind with which to measure your progress. Are you interested in advice to plan your estate, invest your savings, or protect your property against risk? Most people have a variety of financial needs, not all of which can be addressed at the same time, and some that may even be opposing.
Before you select an advisor to help you, first identify and prioritize your goals. By clearly expressing your needs, including the amount of your investments, the expected return on the investments, the amount of risk you are willing to assume, and the time frame with which you are working, you can better see whether the prospective advisor is the right person to help you. Your advisor’s commitment to your success should be as solid as your willingness to trust his or her advice.
2. Check Credentials
It is amazing how often the average person is willing to simply accept a paper document or personal statement as proof of accomplishment. While most advisors are honest, it’s always best to be safe. If your prospective advisor has an industry designation, verify this with the issuing authority. Confirm the training that he or she received and, while you’re investigating, ask about any complaints which the authority may have received about the advisor.
3. Interview Your Candidates
Working with an advisor is akin to taking lion training lessons from someone standing outside the cage: The risks are all yours. If the advice is bad, the lion eats you, and the advisor finds another client.
While a personal meeting doesn’t guarantee an accurate assessment, it can allow you to form a more thorough impression than what the Internet and a phone conversation can provide. A person using an online dating service would not marry his or her matched partner without a face-to-face meeting. Nor should you turn over your financial future to a virtual stranger without testing your online perceptions with a face-to-face encounter.
When choosing a financial advisor, remember that acronyms, designations, and titles are just a collection of letters and words. While their presence can guide your research, they will not replace it.
If you are interested in using a financial advisor, the best place to begin your search is with your employer’s human resources department. Many companies offer employees a wealth of insurance and investment options ranging from health insurance to mutual funds in 401k plans, and they retain professional advisors to help their employees make the most suitable choices. In many cases, the companies will subsidize the cost of the advisors if there is a fee. Friends and business colleagues can also be good sources for referrals, many of whom have previously sought financial counseling, estate planning, or investment advice.
Your choice of an advisor should be made upon the solid, verifiable recommendations of past and current clients and your sense that he or she understands you, your needs, and your limits.
What has been your experience with financial advisors and titles?