If you’ve tried to hire a financial adviser, you may have noticed that many of these professionals have a long string of letters after their names, designations such as CFP or CPFC or PRPS or WMS.
The organizations handing out those initials call them certifications, designations and accreditations. The media calls them “alphabet soup.” The reality is that although some of these designations are legitimate, many others are not.
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Misrepresenting credentials to investors is a low-risk strategy for unscrupulous advisers because they know that most clients won’t check to see what the designations really mean. (Let's give the advisers the benefit of the doubt that they even achieved the designations they say they have, though this is not always the case.)
High-Quality and Low-Quality Designations
At my Investor Watchdog site, we’ve researched and listed 205 certifications, designations and accreditations that financial advisers use to convince people that they're experts in financial planning, investing, insurance and taxes. (If you run into a designation not on the list, email it to us and we’ll research it for you for free within three business days.)
Here’s what Investor Watchdog discovered:
- 75 of the 205 designations — 37 percent — were low quality. These credentials involved no prerequisites, no curriculum, no testing and little or no continuing education.
- 105 of the designations — 51 percent — were mediocre. In other words, they had no significant prerequisites and limited curriculums. They also allowed self-study or open-book examinations and had low requirements for continuing education.
- Only 25 of the designations — or 12 percent — were high quality. These are the ones with prerequisites, curriculums, classroom or online study, timed and/or proctored examinations and 30 hours or more of continuing education requirements. High-quality credentials include: CFA (Chartered Financial Analyst), CFP (Certified Financial Planner), CIMA (Certified Investment Management Analyst) and CPA (Certified Public Accountant).
The spectrum of requirements to earn the various designations is incredibly broad. It takes three years and three proctored examinations to become a CFA, but other designations demand only that an adviser pay a fee to receive them.
The highest-quality certifications have prerequisites such as a specific level of experience, a college degree and other designations; curricula demanding hundreds or thousands of hours of study; tests to measure student knowledge (either proctored in a classroom or timed tests taken over the Internet) and 30 hours a year or more of continuing education.
When I think of legitimate certifications, I think of my daughter, who is currently taking the CPA exams. She will have spent more than 1,000 hours studying for four exams that have an average pass rate of 42 percent.
By contrast, low-quality credentials have little or no prerequisites, minimal or no study requirements, and no tests (or open-book tests). And they require little or no continuing education. Advisers buy these types of certifications to deceive investors into believing that they are experts in their field.
Many of the names of organizations sponsoring designations are relatively unknown by the general public. So it’s a good idea to research online the groups that awarded credentials to your prospective adviser. You should put more value on sponsoring organizations whose website addresses end with .edu or .org, since it’s more likely that they produce meaningful credentials than sites ending with .com.
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Dubious Certification: 3 Red Flags
Watch out for these three red flags that could suggest questionable certification programs:
- Certifications specifically for selling particular types of financial products, such as annuities.
- Certifications that target religious groups and seniors.
- Certifications that use letters mirroring high-quality credentials. For example, don’t confuse CFPN (Christian Financial Professionals Network) with CFP, the legitimate certification for Certified Financial Planners.