Why You Can't Rely on Credentials Alone to Find a Financial Adviser

A recent Wall Street Journal Page-One investigation of financial advisers found that more than 6,300 of the 72,000 financial advisers on the Certified Financial Planner Board of Standards’ website to help investors find Certified Financial Planners (CFP) had customer complaints or faced criminal or regulatory problems that weren’t disclosed on the site.

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That means if you’d gone to the LetsMakeAPlan.org site, you’d have had about a one in 12 chance of picking a planner who violated the CFP Board’s requirement that all advisers with this credential must adhere to the highest standards of ethical behavior. The CFP Board has disclosed the problems to the Financial Industry Regulatory Authority (FINRA), though, the Journal said.

In response to the article, the CFP Board said it would be upgrading the scrutiny of financial planners and would appoint a task force to review its enforcement and disclosure procedures and make recommendations by November.

As an investor advocate, I’m glad to see the CFP Board is taking this lack of transparency seriously. But the Journal’s investigation clearly shows the importance of not relying purely on credentials when choosing a financial adviser.

Being a CFP means a financial professional has a designation based on taking a set of courses and passing one or more standardized tests. It’s not a license.

Does this mean you shouldn’t use the CFP Board’s site to find a qualified financial planning professional? Not necessarily. But it does mean that, for now at least, it’s up to you to dig into that person’s background to identify any potential red flags.

Here’s what you need to know and how to do your own vetting:

The CFP Board isn’t as selective as you might think about who can add CFP to their business cards.

Many designees are brokers, whose commission-based pay model may prevent them fulfilling the CFP Board’s lofty, but unenforceable, standards of always putting clients’ interests first. Some investment advisers who are also brokers receive commissions in certain situations, making it impossible for them to act solely in their clients’ best interests. By contrast, fee-only investment advisers are paid just by their clients.

When you start your hunt for a financial adviser, even if one you’re considering isn’t a broker, look up his or her profile on Brokercheck.org. This site, administered by FINRA, provides information about any licensed broker or investment adviser, including their job history, their securities license and, most importantly, whether they’ve ever been disciplined by FINRA or the Securities and Exchange Commission.

If the person you might hire isn’t listed on this site, or, worse, if infractions appear, move on.

Another way to protect yourself: If you hire a registered investment adviser, you can choose a custodian — the place where your money will be held — at an independent financial institution. While financial advisers can legally serve as custodians, accepting deposits and payments directly from clients, their lack of independence can create a risk.

A custodian that’s an independent financial institution can safeguard your money against theft and loss. Then, when you start working with an adviser, you’ll receive either that person’s or firm’s quarterly report summarizing your portfolio’s performance as well as a monthly statement from the custodian showing the values of your investments, along with trading and transaction activities, including fee payments.

If an adviser you might use offers discretionary investment management, be sure to understand what this means. By giving your adviser discretionary authority, you’ll be letting your money pro execute trades in your account without your approval. Unscrupulous advisers could exploit this relationship by steering your money into inappropriate high-risk investments like hedge funds, managed futures, commodities and foreign currency products, some of which have been known to pay kickbacks to advisers.

That’s why you may instead want your adviser to manage your account in a non-discretionary capacity. With this setup, the person makes investment recommendations but only carries out trading decisions with your consent.

If finding an adviser is an urgent priority, be certain that anyone you select has been thoroughly vetted and has verified credentials. Then, when you start interviewing candidates, make sure they are fiduciaries — professionals required to act in their clients’ best interests.