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Sound Advice: April 17, 2024

HOW TO SELECT A FINANCIAL ADVISER

Financial advisers usually come under the following headings: stockbrokers, Registered Investment Advisers, and individuals with the following designations: CFP®, CFA, CLU, ChFC.  Most other lettered designations are misleading.  Some, in fact, are available online for only a small fee and a 10-question test.

The most common financial adviser is a stockbroker.  Years ago, a stockbroker was known as a customer’s man.  That was in the good old days when trading commissions were fixed and the cost of individual trades was $100 to $200 or more.  These days, commissions are rarely over $10 and often free, regardless of the size of the order.

The key hurdle for prospective stockbrokers is the Series 7 exam.  It’s a 3 hour and 45 minute test that is little more than a check on one’s memory.  The material covered includes such areas as industry regulations, basic economics, security types, and simple investment concepts.  It does not in any way confirm an individual’s ability to evaluate securities or put together well-conceived portfolios.  Without years of experience combined with extensive focused study, a stockbroker is only a salesman.

Stockbrokers are required to offer securities that are suitable for investors. When there is a choice between similar securities where one offers a greater benefit to the stockbroker, you can guess which one will get the stronger sales pitch.  Often, there’s an incentive to the stockbroker, whether or not it’s in the best interest of the investor.

Far better to offer what is in the best interest of the investor.  That is the essence of the fiduciary standard, which is what is required of Registered Investment Advisers. 

In contrast, stockbrokers follow the suitability standard, which does not put the investor’s interest first.  It just means that the securities offered should be reasonably suitable for the investor, even though they may not be the best choice.

A few stockbrokers rise above the crowd, but most are little more than glorified salespeople hawking whatever their firms are recommending.

There are financial advisers with either CLU or ChFC designations. CLU is a Chartered Life Underwriter, basically an insurance salesperson who will suggest insurance products to solve financial problems even if they are not the best ways to do so.  ChFC is a Chartered Financial Consultant, a designation for which no comprehensive board exam is required.  Someone with a ChFC designation is not a mainstream financial adviser.

Far more prestigious is a CFA, Chartered Financial Analyst.  CFAs are primarily analysts working with large money management companies.

Among financial advisers for individuals, the highest designation is Certified Financial Planner or CFP®.  CFP® training is far more rigorous and focused specifically on critical issues such as investments, insurance, income taxes, education planning, retirement planning, and estate planning.  The CFP® exam consists of 170 questions to be answered over two three-hour sessions.  The pass rate is generally between 50% and 60%.  As a group, CFP®s are the most qualified financial advisers for individuals.

CFP® certification demands a deep knowledge and commitment to personal financial planning.  More and more consumers seeking financial planning help are looking for planners of exceptional quality who adhere to the highest standard.  Nearly 9 in 10 consumers say they would feel more confident working with an adviser who is certified in financial planning.

A CFP® is uniquely qualified to help individuals pull all their finances together, solve financial problems, and make a plan to achieve their financial goals.  Individuals certified by the CFP® Board have taken the extra step to demonstrate their professionalism by voluntarily submitting to the rigorous CFP® certification, a process that includes education, examination, experience, and ethical requirements.  These standards are called the “the four Es” and they are four important reasons why those with the CFP® designation are the most appropriate providers of personal financial advice.

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877 

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