Commentary 10/22/2010

Submitted by cfany on Fri, 10/22/2010 - 12:16

“Is Your Advisor Pumping Up His Credentials?” This very informative article appeared in the Wall Street Journal’s (“Journal”) Weekend Investor column on Saturday, October 16th. -- Certainly well-established professional certifications are a way to identify qualified financial advisors and investment managers. As the Journal points out, designations such as the certified public accountant (CPA), chartered financial analysts (CFA) and certified financial planner (CFP) require rigorous study, continuing education and strict codes of ethics. Some credentials also require other meaningful credentials. For example, the personal financial specialist designation (PFS) requires that one be a CPA with significant experience in the financial planning arena. To earn the designation the CPA must also prepare and pass a comprehensive day-long examination and adhere to a code of ethics and continuing education requirements.

The problem is the proliferation of credentials that require little study and may mislead the public. The Journal notes that regulators are increasingly concerned about financial advisors who are using a smorgasbord of designations to win the trust of older, wealthier investors in order to sell them inappropriate investments. The Financial Industry Regulatory Authority (“FINRA”), lists 95 different professional designations. The Journal has found at least 115 others that are not followed by FINRA.

While some credentials are more rigorous than others, some designations are easily earned in a few days often by paying a fee and passing a brief multiple-choice test. The Journal mentions the certified retirement financial adviser (CRFA), a designation that sounds impressive. However, it requires only that the applicant pass one exam consisting of 100 multiple-choice questions. This designation may have some value, but it is certainly not as meaningful as the well-established credentials mentioned above.

What should one do when selecting a financial adviser? You have to be skeptical and ask questions about the potential advisor’s credentials, education and experience. You can check out registered advisors on the SEC or FINRA web sites. You can also check with your state insurance department and the relevant state regulatory agency (in New York the attorney general’s office).

Not all credentials are created equal. Caveat emptor!