Financial Planning - Advisors

Choosing a financial planner in today's environment can be daunting: CFP, CPA, ChFC, CLU? What do these titles mean and which ones are better than others? What organizations confer and regulate these titles? The reality is that financial advisors aren't all created equal. Professional money managers can hold a slew of various titles and credentials that must be understood before engaging their services.

As Americans live longer and have a need to save ever-greater amounts of money to fund retirement, financial planners are very much in demand. Before committing to the services of a financial advisor or planner, make sure your goals are aligned with the advice the advisor is giving you. Ask questions about his or her education, background, and whether any disciplinary action has ever been taken. Be sure you understand how fees are assessed and are comfortable with the way the advisor will earn those fees. Always make sure the advisor has experience with people in a similar financial situation to yours.

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Understanding Fiduciary Responsibility

It's often difficult to determine what credentials a financial professional holds if he or she uses a title such as "Financial Planner", "Financial Advisor", or even "Financial Coach". These generic titles generally mean the same thing: The person specializes in helping a client to understand how financial decisions affect other areas of his or her life, and in creating a plan that works to achieve financial goals. But using one of these titles does not guarantee that the person using it has any special training or education in financial planning. Therefore, you must always make sure the person you choose is qualified to help you. He or she does not necessarily need to hold one of the following titles, but you should be able to do a background check and speak with references to be sure he or she is qualified.

One topic that should always be discussed with a potential financial advisor is fiduciary responsibility. An advisor with fiduciary responsibility must legally act in the best interest of the client and practice full disclosure. This is particularly important when it comes to recommending financial products like stocks, bonds, and mutual funds. If an advisor recommends a product to a client and also profits from that sale, he or she must disclose that information if bound by fiduciary responsibility.

Not every professional designation has fiduciary responsibility, and that's fine in several situations. For example, neither a stockbroker nor an insurance agent has fiduciary responsibility. But if a broker or agent profits from recommendations that are suitable for your financial situation and level of risk tolerance, he or she is still acting professionally.

Certified Financial Planner (CFP)

A Certified Financial Planner has demonstrated competency in all areas of finance that are related to financial planning. The CFP has completed courses of study on over 100 topics that include equities, bonds, taxes, insurance products, and retirement and estate planning. The Certified Financial Planner Board of Standards oversees and administers the program. A CFP must also have several years of qualified work experience and must agree to adhere to the code of ethics, professional responsibility and financial planning standards as established by the Certified Financial Planner Board of Standards.

A CFP has a fiduciary responsibility to his or her clients. That means a CFP must put the client's interest and well being ahead of his or her own. A CFP has a duty to avoid conflicts of interest that may interfere with fiduciary responsibility. He or she must also maintain confidentiality and has the duty of disclosure that requires advising a client of all information that may affect the client's interests. A CFP who does not maintain this high degree of professionalism may be subject to a lawsuit if a client suspects a breach of fiduciary responsibility. While training and qualified work experience are much more rigorous for Certified Financial Planners, it is the fiduciary responsibility that sets this designation apart from all others.

CFPs are also held to a very strict code of conduct apart from their profession. Individuals who have a felony conviction for theft, embezzlement, murder, rape, or other violent crime will not be certified. Those who have convictions for tax fraud, a revocation of a financial license, or two or more personal or business bankruptcies will also not be certified.

Certified Public Accountant (CPA)

A Certified Public Accountant has passed exams on accounting and tax form preparation. He or she may or may not have additional training in other areas of finance or financial planning. More often than not, a CPA will seek the advice of another financial professional in order to advise a client on other financial matters.

CPAs are licensed by the state. In general, they hold a bachelor's degree in some area of accounting or finance and they've passed the Uniform CPA Exam. In addition, a CPA must pass an ethics course. CPAs also have a fiduciary responsibility to their clients and can face disciplinary actions by the licensing board.

Personal Financial Specialist (PFS)

A Personal Financial Specialist is a CPA with additional training in financial planning. The American Institute of Certified Public Accounts awards the PFS designation to those who have completed rigorous coursework in financial planning.

Working with a PFS is a good choice for those who need expert tax advice along with advice regarding estate planning, retirement planning, investments, and life, health, and casualty insurance. Because all of these areas have tax consequences, a PFS is often uniquely qualified to outline a total financial plan.

Chartered Life Underwriter (CLU)

The Chartered Life Underwriter designation is awarded by the American College. Those who hold this designation are by and large insurance agents. They may have additional education, training, and certification that allows them to sell annuity products. The curriculum includes a 10-course program that covers the basics of life and health insurance, pensions, laws surrounding insurance, taxes, investments, group plans, and financial and estate planning. 20 hours of exams are also required.

One of the courses offered by the American College is on Planning for Business Owners and Professionals. Business owner clients often have very different issues than salaried investors, and often need the advice of a CLU. A CLU typically has a bachelor's degree and may or may not have additional insurance, annuity, or financial planning certifications. A CLU does not have a fiduciary responsibility to his or her clients.

Chartered Financial Consultant (ChFC)

A Chartered Financial Consultant has demonstrated a vast and thorough knowledge in all areas of financial planning. The program is overseen by the American College. To become a ChFC, a person must successfully complete exams in the areas of financial planning, taxes, insurance and investments, and estate planning. Candidates for the ChFC designation must have at least a bachelor's degree and a minimum of three years experience in the financial industry.

The job of the ChFC is to gather and analyze financial information. He or she must then identify and establish specific goals in order for clients to meet their financial objectives. The ChFC is required to take at least 30 hours of continuing education every two years in order to provide clients with the most up-to-date legal and tax information.

Chartered Financial Analyst (CFA)

The designation of Chartered Financial Analyst is provided by the CFA Institute. To be awarded the charter, an individual must successfully complete a series of three very difficult exams and have at least three years of work experience that counts toward qualification. Candidates must demonstrate that they have the competence, integrity and knowledge of accounting practices, ethical and professional standards as required, an understanding of economics, portfolio management and equity analysis.

CFAs tend to work for or with institutional investors like hedge funds and mutual funds. They are technical analysts, not financial planners.

Registered Investment Advisor (RIA)

A Registered Investment Advisor usually works with clients who have a high net worth. In some cases, the RIA designation is assigned to an individual advisor and in others to a corporation. RIAs manage a client's entire investment portfolio. They do not advise clients on other aspects of financial planning such as insurance. They do, however, have a fiduciary responsibility to their clients, which means the recommendations they make must be in the best financial interest of the client.

RIAs are licensed by the state in which they work and the SEC. While state requirements vary, the SEC requires an RIA to have passed the Series 65 Uniform Investment Advisor exm or the Series 7 and Series 66 exams.

While we've covered the basics of financial planning here, there is much more to implementing a financial plan. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.

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