Why the ''Alphabet Soup'' of Financial Advisors' Credentials Has Boiled OverSubmitted by HearthStone | Private Wealth Management on August 18th, 2015
APRIL 13, 2015
Why the "Alphabet Soup" of
Financial Advisors' Credentials Has Boiled Over
Do you know someone with professional credentials after their name? If so, they’ve probably worked hard to earn them. Such hard-earned credentials help to legitimize a professional and differentiate them among their peers. So what’s the problem?
The problem is the widespread confusion resulting from the sheer number of credentials within the financial industry—and the broad variations in requirements in order to use them. This article sheds light on these issues. It also offers suggestions for how consumers can protect themselves and how the financial industry can clean up its act.
Credentials should be easy to recognize, understand and evaluate —such as CPA, JD and MD—earned by accountants, attorneys and doctors. That clarity is lacking when it comes to financial advisor credentials.
The proliferation of financial advisor credentials has been nothing short of amazing. According to The Wall Street Journal, the number of financial advisor credentials rose from 48 in 2005 to 95 in 2010. Today there are more than 200.1
The proliferation of credentials has created a quagmire of confusion. What’s the difference between “accredited,” “chartered” and “certified”? Do you know what “CFA” means? Is that any different than “CDFA” or “CFCA”? It’s no wonder that people of all walks of life are mystified by the “alphabet soup” used by financial advisors.
Even more confounding is the wide range of credentialing requirements. Prerequisites, testing standards and annual re-certification hurdles are hardly equal. Some credentials, like the Certified Financial Planner (CFP®), have rigorous requirements. Others require little more (or no more) than writing a “membership” check every year.
Given this credentialing landscape, it’s no wonder that some people abuse the system. Instances of advisors using bogus credentials, exaggerating their credentials, and claiming to have credentials they haven’t earned have been reported by the Financial Industry Regulatory Authority (FINRA).2
Can unscrupulous financial planners affect you? Sure they can. These people are smooth. They can fool unwitting consumers. And they can fool savvy professionals.
How can you protect yourself? Check out the credential and the credential holder. Sounds simple, but it’s not always easy.
When checking out a specific credential holder, verify if the person is entitled to use the credential and has a clean record of conduct. It’s easy to do that online for some credentials. It might be more challenging for others. It’s best to start at the issuing entity’s website.
What can be done to mitigate or eliminate the confusion? I suggest that the only effective solution is to severely limit the use of credentials in marketing and advertising within the financial industry.
I think it should boil down to two: CFA (Chartered Financial Analyst) for those working in the industry, and CFP® (Certified Financial Planner) for those communicating with the public. This will be more transparent for everyone—both consumers and professionals.
By eliminating most of the problems created by the current, confusing system, legitimate financial advisors will reap significant benefits. Credentials will be more clearly recognized and understood. And it will become more daunting and less attractive for abusers to take advantage of unsuspecting consumers or unprepared professionals.
The financial industry and its consumers have much to gain by eliminating the mystery and letting transparency reign. Let’s leave the alphabet soup to the grocery stores.
1 “Is Your Advisor Pumping Up His Credentials,” by Jason Zweig and Mary Pilon, WSJ, October 16, 2010. Available here: http://online.wsj.com/article/SB10001424052748703927504575540582361440848.html
2 FINRA, 2007 Senior Fraud Risk Survey; available at http://www.finra.org/web/groups/sai/@sai/documents/sai_original_content/p036702.pdf