SUMMARY: Do you know the differences between a CFP, a CFA and a CPA? Read this blog to learn what certifications to look for in a wealth advisor.
Of the many qualities you want in a financial advisor—warmth, excellent listening skills, a comprehensive knowledge of the business—they won’t be nearly as helpful to you if he or she doesn’t have the proper certifications. But the alphabet soup that often follows an advisor’s name can be a bit overwhelming.
Here, we break down the acronyms to give you a clearer understanding of what certifications your advisor may (or may not) have.
Certified Financial Planner (CFP)
This is the gold standard of certifications. An advisor who has these initials following her name has met very high standards set by the Certified Financial Planner Board of Standards. Initial certification requires three basic standards:
- Education. The board requires a bachelor’s degree with a strong component of financial planning coursework, which includes investment, education, insurance, taxes, retirement and estate planning.
- Experience. Your CFP will have at least three years of experience in a professional financial management capacity before he gets to list those letters after his name. And she must always follow the Rules of Conduct and meet the Fitness Standards for Candidates and Registrants.
- Examination. Future CFPs need to put in around 1,000 hours of coursework to be adequately prepared for the comprehensive, six-hour, one-day certification exam.
Chartered Financial Analyst (CFA)
Generally considered to be the most difficult of credentials to obtain, a CFA is usually the marker of a wizard in investment research and portfolio management. Its governing body, CFA Institute, puts applicants through some fairly rigorous requirements before allowing them to hold the title:
- Education. Graduate-level work includes a variety of topics related to investments and the markets, such as economic theory, portfolio management, corporate financial structures and quantitative analysis.
- Experience. Candidates need to have been advising clients on investment decisions for at least four years prior to taking the certification exam.
- Examination. A CFA credential requires three exams and approximately 900 hours of study, and has a pass rate of just 44 percent. Each level is only offered a handful of times annually, so testers that fail may have to wait for as long as a year to try again.
Certified Public Accountant (CPA)
Arguably the most commonly known certification, a CPA title encompasses accountants, financial analysts and tax experts.
- Examination. The American Institute of CPAs (AICPA) runs the testing program, which usually requires 150 hours of coursework. The exam tests on financial accounting and reporting, and auditing and attestation, as well as business environment and regulation.
- Education and Experience. Although the CPA exam is standardized across the country, every state and jurisdiction has its own requirements for education and experience.
Personal Financial Specialist (PFS)
A PFS is a CPA who has attained an expert level of knowledge and experience in financial planning and taxes.
- Education. Candidates must have at least 75 hours of education in retirement planning, estate planning, insurance, investing and other personal financial planning topics in the five years leading up to their PFS application.
- Experience. They need at least two years (the equivalent of 3,000 hours) of industry experience or as a full-time instructor.
- Examination. Applicants must answer 160 multiple-choice questions over the course of five hours.
Financial Risk Manager (FRM)
An FRM is a wealth advisor who specializes in risk management. If your portfolio is particularly complex or more heavily weighted toward stocks and other high-risk investments, you may want to keep an eye out for these initials.
- Education. There are no formal education requirements to become an FRM.
- Experience. FRMs have worked for at least two years in the most significant areas of risk management, which include investment management, credit risk, market risk and operational risk.
- Examination. Advisors are required to complete a two-part, eight-hour multiple-choice exam—overseen by the Global Association of Risk Professionals (GARP)— for which pass rates often fall below 50 percent.
Although you want to have a warm, friendly relationship with your wealth advisor, all the charm and firm handshakes in the world can’t replace the hard value of proper certification. Get it out of the way immediately—ask her about those initials. Odds are, she’s had to study and work hard to be sitting behind that desk.
At TDECU, our fully credentialed wealth advisors help thousands of investors put their hard-earned money to work. Our wealth advisor checklist can put you in touch with the right financial professional to help you plan for the future.