Navigating the Maze of Financial Advice Credentials

There is no shortage of financial credentials, and the fact is that most investors have no clue about what they mean.  Credentials are important – they are a way to differentiate or “signal” special expertise and quality.  Credentials such as MD, LLD, PhD, and even MA’s or MBA’s are widely recognized and understood.  An MD can spend up to 8 additional years in college/training to become credentialed as a medical doctor.  Attorneys spend an additional 3 years in law school and have to pass a bar exam.  PhD’s spend typically a minimum of 4 additional years in college to earn their credential.  Even a Master’s degree, in business or otherwise, typically entails an additional 1 to 2 years of additional college training.  All of these credentials are then usually further differentiated as a result of the specific university from which they were obtained, ie. a University of Chicago MBA is more highly regarded than a University of Arkansas MBA.

In the financial realm, CFA and CFP are very well understood by institutional investors and somewhat so by retail investors.  Both credentials have educational and experience requirements, and testing requirements.  While both the CFP and CFA credentials require passing a comprehensive exam and prerequisite educational requirements, the CFA exam requirements take 2 ½ years and involve three full day exams.  Based on a survey of people who held both the CFP and CFA designations, the CFA designation was unequivocally the most difficult to obtain.  The educational and testing requirements pretty much fall off the cliff after that.  Several tiers below lie the ChFC and CLU.  These designations are held by advisers who are primarily selling product… insurance and annuities.  The ChFC has the same educational pre-requisites as the CFP, but has no exam requirement.  The CLU is a credential to sell insurance, not provide investment or portfolio advice.  (See link below for more information about difference among CFP, ChFC, and CLU.)

So, what is the difference between a CFP and a CFA?  Well, I have actually published two peer-reviewed journal articles that compare CFPs and CFA’s.  First, the CFP designation is more of a generalist… think of your primary care physician.  They know a little bit about a lot, and refer you to a specialist when the issue exceeds their expertise.  The CFA designation is more like a specialist.  They are trained rigorously in investments and portfolio management.  Second, CFPs tend to overestimate their investment expertise.  In our research, we asked survey respondents to answer how well they thought the CFP exam trained them to do investments and portfolio management.  When we compared those who held both the CFP and CFA designations to those who held only the CFP designation, those who held only the CFP thought the CFP exam trained them well, while those who held both the CFA and CFP felt that the CFP exam did not prepare them for investments and portfolio management.  Our results were part of a greater behavioral finance literature that indicates people overestimate their abilities and don’t know what they don’t know.  From a practical and business standpoint, the CFP is likely to be more knowledgeable about insurance and related issues than a CFA.

We have now have moved from the universally recognized credentials to the better known financial credentials.  Here is where things get interesting and SCARY!  Even the term “financial adviser” is unlimited.  Anyone can represent himself as a “financial adviser.”  As the Consumer Financial Protection Bureau (CFPB) has pointed out, there are over 50 (FIFTY!!) “senior” designations for financial advisers.  These are “advisers” who are using the word “senior” or “retirement” in their designation to imply that they have some kind of special expertise to advise seniors or those nearing retirement.  Yet none of these “designations” comes remotely close to the requirements of a CFP, much less a CFA.

So what should you do?  Well, if you have a medical issue then you should go to a doctor.  If you have a legal issue, you should go to an attorney.  If you have an investment issue, you should go to the highest credential in investments.  More simply ask, is this person selling a product, or selling expertise?

Ref:  From Investopedia:  “Due to the number of courses that overlap both the ChFC® and CFP®, the ChFC® and CLU marks are often taken by individuals seeking in-depth knowledge of both financial planning and insurance, but who wish to avoid a lengthy board exam.”

CFP, CLU Or ChFC - Which Is Best? | Investopedia