Wise Money: CFPs can be good advisers but also salesmen
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Q: I’m searching for a new financial adviser, and I see that some have “CFP” after their names. What does this stand for? Is it important?
A: This stands for “certified financial planner.” And yes, it can be a good thing.
CFPs must pass a series of exams and acquire a certain amount of experience, although the CFP board recently reduced the minimum experience level required. While the board has been criticized for this and for no longer requiring that members who file for bankruptcy be suspended — instead, it will now just issue a news release informing the public of the bankruptcy — the CFP credential is worthwhile and respectable.
However, knowledge and education don’t necessarily signify integrity. Just because an individual is a CFP doesn’t mean that he or she is necessarily a fiduciary — a legal/regulatory term indicating a duty to put clients’ interests first, avoiding even the appearance of a conflict of interest.
On one level, there are the financial fiduciaries regulated by the Securities and Exchange Commission. Known as registered investment advisers, they are held to fiduciary standards regarding the advice they give. (Many RIAs are also CFPs.) Yet neither SEC rules nor the CFP code of ethics prohibit advisers from selling products, such as insurance and mutual funds, for commissions. Those who provide advice and sell products for commissions are known as fee-based advisers. The overwhelming majority of advisers are fee-based, and this includes many CFPs.
But consumers, be warned: Fee-based advisers shouldn’t in any way be confused with fee-only advisers, who earn no compensation from any product sales. They are paid only for their advice and service to clients.
By contrast, fee-based advisers can play the dual role of adviser and salesman, which is confusing and unfortunate for consumers.
SEC rules prohibit advisers from engaging in conflicts while they’re wearing their RIA hat. And the CFP code of ethics generally prohibits conflicts of interest. But there’s nothing in SEC regulations or the CFP code that prohibits them from taking their adviser hat off and donning their salesperson hat.
When investors experience this, suddenly they are no longer looking across the desk at a trusted fiduciary, but instead are potentially receiving some sales pitch.
The best route to objective investment advice is to seek fee-only advisers. One way to determine whether they’re fee-only is to find out if they’re registered with the National Association of Personal Financial Advisors, which strictly limits membership to feeonly advisers.
