A couple weeks ago I posted Advice on Selecting a Financial Planner which was, I thought, a great comment from a reader on what a registered investment advisor (RIA) is as well as various viewpoints on the brokerage industry. The latter thoughts are still good, but it appears that the commenter's viewpoint of an RIA may be wrong. (I say MAY because I don't know -- and really don't care -- more on that later). Anyway, here's a series of responses from a regular commenter at Free Money Finance who I do think knows what he's talking about:
Great advice, but he's critically wrong about the RIA. A registered investment advisor is a designation given by the SEC, and refers to the right to give investment advice. It's not actually a certification (i.e. you're not allowed to list it after your name as in "Joe Blow, CPA, RFC, RIA"), and has very minor restrictions -- essentially, nobody but a RIA may manage more than $25 million in assets.
The toughest financial certification to get would have to be CPA, and the additional one that allows CPAs to perform financial planning (I forget the name). Second to that course of action there's the CFP (Certified Financial Planner), which has a phenomenal amount of study and experience requirements (although not as much as CPA); next after that would be the relatively new RFC (Registered Financial Consultant). All three certifications, in contrast to RIA, actually have a code of ethics, continuing study, and consumer appeal procedures.
The poster must have made a typo. RIA is NOT what he's talking about.
He then did some research and came back with another comment:
The CPA certification exam for CPAs wishing to perform financial planning for individuals is "PFS", for "Personal Financial Specialist". (I looked it up on Google.)
The person who sent you that letter is badly mistaken in many areas. For example, he claimed that only RIAs can call themselves "financial planners". Caveat utilitor -- the term "financial planner" is entirely unregulated. Don't assume that because someone calls himself "financial planner" you have recourse.
Look for designations backed by professional societies with strong ethical standards, such as CPA-PFS, CFP, and RFC (and you should check with the society to make sure). Look for experience. Look for helpfulness. Look for references.
And, finally, chapter 3:
Here's a great explanation of RIA.
It's not a bad thing -- it's legally required for certain purposes. But it's not what the post appears to claim it is. A few comments of my own on this: 1. Thanks so much to William Tanksley for taking the time and effort to do some research on this topic. Of course, I want to be accurate and Billy has helped clarify the investment alphabet soup for us all. 2. The original piece still has some good thoughts in it (the RIA part is actually only a portion of the post -- click through on the above link if you want to see for yourself). In particular, I liked this part of it: Let me give you an example to help explain the difference between the financial planner that is held to a fiduciary standard and one that is not. Say an investor, who we will call Bob, has opted to work with a broker at a large brokerage firm. On the recommendation of his broker, Bob purchased a popular class B Fidelity mutual fund. This fund costs Bob a whopping 3% a year, even though the broker was aware of and had access to similar funds that would have been considerably less expensive. Why was Bob sold such an expensive fund without being given any other options? It is simple. The brokerage firm and advisor earn their living by selling products (earning commissions), so of course they are going to sell the more expensive product to drive revenue (at Bob's expense). Unfortunately, this is a perfectly legal practice for brokers and their advisors as long as the investment was suitable for the individual client's age and risk tolerance. It is legal, but it is not in the client's best interest. On the other hand, had Bob been lucky enough to work with a RIA financial planner (edit: as we know now, an RIA is not the only key to success in this area), the financial planner would have been required to explore all options, recommended the option that the planner felt was most advantageous for Bob, and expressly disclose any conflict of interest that the financial planner may have had. As a result, the RIA financial planner may have recommended a comparable Vanguard fund, which only costs a mere .25% per year, in an effort to increase Bob's overall after-expense return. This is what was in Bob's best interest and what Bob deserves. 3. I've revised the original post with a disclaimer at the top that points people to the comments. 4. In the end, who really cares? The main thing, in my opinion, when selecting a financial advisor is something Billy said: Look for experience. Look for helpfulness. Look for references. I especially like the reference part. If I was looking for a financial advisor, I'd ask people I knew for their recommendations, then also ask the planner for extra references if I ever got close to hiring him/her. It's hard to beat a recommendation from someone you know and trust who's had actual experience with a planner. 5. I remain suspect of the entire financial planning industry -- and this alphabet soup of financial qualifications is just another reason why. Are they trying to help or confuse consumers? (I'll let you be the judge.) And while there are some great planners out there and I'm friends with several of them, I still think the industry as a whole is generally filled with people who are more salesmen than advisors and are mostly interested in turning your money into their money. If you want some more thoughts from me on this issue, see these posts:
I'm sorry that you seem to have such disdain for financial professionals and I believe it is largely unfounded. I am a CFP and I work for an RIA that manages clients' assets on a fee-only basis. I also spent more than 10 years as a financial advisor for two of the largest brokerage firms in the world. All of the professionals I have worked with during my career, in both the brokerage and RIA worlds, make recommendations solely in the best interest of their clients. Sure, the industry has its problems and the proliferation of designations is one of them, but you paint a pretty negative picture of the industry that I don't believe it deserves.
Posted by: thc | July 19, 2006 at 09:41 PM
THC -- I don't mean to be negative, really. It's just that I write what I experience -- and all my experience with financial planners (personally, through friends, realtives, etc., and in reading/studying) seems to be running highly in the negative camp. That's just the way I see it.
Feel free to send me all the "my planner made me a gazillion dollars" articles you can find on the web. I'm open to reading/reviewing them if I think the readers here will like the content.
Posted by: FMF | July 19, 2006 at 09:52 PM
I think you are confusing financial planners with investment advisors. A CFP practitioner won't necessarily make you "a gazillion dollars", he/she will help you with estate planning issues, taxes, education planning, retirement planning and other important financial issues as well as investments. Your confusion is easily understood, though. There are loads of investment salespeople who call themselves "financial planners" when they actually don't do any planning at all.
Posted by: thc | July 20, 2006 at 10:09 AM
I'm not confused -- I was trying to say that you can send me any positive articles about planners, investment advisors, bankers or anyone in the financial services industry for that matter. I'd be interested in reading something positive.
Posted by: FMF | July 20, 2006 at 10:24 AM
Trust me, there are many of us within the financial planning industry who share your frustration with the alphabet soup of "planning" designations. Financial planning is a relatively new industry, only a generation or two old, and many of these issues are still being debated within the industry (in fact, even the industry itself is still being defined).
I made a mid-life career change into financial planning in part because of the personal frustration I felt in dealing with a business whose base financial interest is not clearly sided with their clients' interest. Personally, I find the idea of commission-based financial planning to be anathema to the idea of financial planning. You will find most (sorry I don't have data) clients who go to a commission-only or fee-BASED planner for advice leave with a recommendation to buy one or more of the following: cash value life insurance; variable annuities; or loaded mutual funds.
Why? Because it's in the financial interest of that planner to recommend them, because that's where they make their own money!
It's why I chose the fee-ONLY business model. I charge for developing a financial plan and retirement analysis on a project basis. And, as an RIA, I charge based on a percent of assets under management (from 0.6 to 1.0 percent per year), and that fee includes ongoing financial planning advice through the year. I do not accept commissions, favors or incentives of any kind by recommending a financial product or service. It's a tough model to start a business from the ground up, but it is, in my opinion, the right model. Not without some flaws, but the best I have identified.
As well, I chose to become a CFP(r) practitioner because it gave me the broadest education and had extremely high ethical, education and experience standards. Some of the designations, in my opinion, are not worth spit, and some were created by large wirehouses who wanted to give the impression that they were doing financial planning when they were simply changing the appearance of their shop (yes, where DID all those stock brokers go? Now they are financial professionals or financial analysts or planners, etc).
Sorry for the rambling, but please don't get frustrated at an entire industry because of the actions of a few. Skepticism is healthy, to be sure, but let's not do the baby-bathwater thing here.
And if I can add one more question to ask a potential financial professional: how do you get paid (commissions, fees, both)? Know how their bread is buttered before you sign anything, and you can learn this and more from their Form ADV part II.
And don't even get me started on the idea that the major wirehouses don't have a fiduciary obligation to their clients!
[this is my first ever blog post, so if I've committed any sins, pardon my inexperience]
Posted by: Michael Marvin | July 26, 2006 at 09:55 AM