A financial planner or a Certified Financial Planner?

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“Martha” and “Matt” have goals. They want to find the time and money to travel with their kids. They want to help pay for their kids to attend college. They want to better manage their household finances. They want to save enough now to eventually live comfortably in retirement. And they want a financial professional to help them develop a plan that puts them on track to meet their goals.

The couple has narrowed their search to two financial professionals, one who is a Certified Financial Planner professional, or CFP, and one who calls himself a “financial planner” but who has not earned the CFP designation. Both candidates seem experienced and well-qualified. But now Martha and Matt are wondering if there are distinctions between a CFP and a generic “financial planner,” and, if so, whether those distinctions matter.

Anyone can call themselves a financial planner – for example, that includes people who exclusively sell insurance. However, not everyone can call themselves a CFP professional. “Certified Financial Planner” is a registered trademark indicating that the individual has met a series of substantive criteria demonstrating their professional qualifications to provide unbiased, comprehensive financial-planning advice. This is coupled with ongoing educational, ethics and practice standards.

It is critical for consumers to be aware of the differences between a Certified Financial Planner and a “financial planner.”  Here are six that are noteworthy: 

  1. Certified Financial Planner professionals are held to a fiduciary standard. This means that they are obligated under the terms of their CFP designation to always put the interests of their clients first, above their own interests and those of their firm or the company (or companies) whose products and services they represent.

Professionals who aren’t subject to a fiduciary requirement may do business under a less stringent set of requirements called a suitability standard, which requires them to recommend products that are “suitable” for the client – that is, that the recommended security or product fit the client’s investing objectives, needs and circumstances.

When evaluating products that are identical except for their fees, a fiduciary is obligated to recommend the lowest-cost product to the client. A financial professional who’s working under a suitability standard may opt to recommend a higher-cost product, because their interests may lie first with the firm and/or the company whose products they recommend and sell.

The distinction is important – it can make a material financial difference to the consumer because the money an investor pays in fees could instead have gone toward the investment, where it would have the opportunity to grow over time.

  1. CFP professionals are trained and have demonstrated competency in multiple areas of finance. To earn their designation, CFP professionals must complete a comprehensive course of study offered by a college or university program that follows a personal-financial planning curriculum approved by the CFP Board. This course of study encompasses more than 100 topics in stocks, bonds, taxes, insurance, retirement planning and estate planning. In addition, they must have earned a bachelor’s degree from a regionally accredited college or university.
  2. CFP professionals emphasize plan over product. Ever felt like you were being sold a product by someone who never really made an effort to determine whether that product was the right fit for you? CFP professionals are trained to look thoroughly at a client’s circumstances, goals, needs and priorities, then to build a plan around those. Any product recommendations they make to clients must fit in the overall context of that financial plan. 
  3. CFP professionals must disclose how they are paid. It’s not always clear how a financial planner makes money, because they aren’t always up-front about the fees, commissions and other costs they charge customers. The priority for a Certified Financial Planner is to be completely transparent and forthcoming about how they are compensated. They are required to make certain oral and/or written disclosures at certain times during their interactions with clients and prospects. 
  4. CFP professionals see and address the entire picture, not just part of it. They’re trained to synthesize every aspect of a person’s financial life into a coherent, orchestrated plan, something that financial professionals with a narrower focus may not have the education or the expertise to do. A person who calls themself a “financial planner” may in reality only be qualified to handle a segment of a client’s overall financial needs – insurance, for example, or investments.
  5. CFP professionals may work with other advisers as part of a team. When a client’s situation calls for specialized expertise, a CFP practitioner is trained to seek out other professionals to meet the client’s needs. Under the CFP Code of Ethics, CFP professionals are required to recognize “when consultation with other professionals is appropriate or referral to other professionals [is] necessary,” and to act accordingly.

JASON E. SIPERSTEIN, CFA, CFP, is the president of the Financial Planning Association of Rhode Island and president of Eliot Rose Wealth Management. He can be reached by email at jes@eliotrose.com.