Choosing a financial advisor is difficult, and as a result it’s helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on whether the advisor is a fiduciary, without any acknowledgement of whether the advisor has the training, education, and experience to provide effective financial advice. Consequently, the public increasingly runs the risk of being poorly served by a well-intentioned advisor whose advice is totally incompetent. Ultimately, protecting the public will require setting forth a standard that meets fiduciary and competency requirements. And as it standards right now, the clearest choice for a professional minimum standard appears to be the CFP certification. While the CFP marks – as with any standard – don’t unequivocally mean someone will get the best and most optimal advice because the advisor has the CFP, that’s not the point; in the end, the purpose of such a standard is not to define a best practice, but instead the minimum acceptable standard to ensure the fundamental protection of the public.
The inspiration for today’s blog post was some recent Twitter conversations I’ve had with other planners regarding the standards that we put forth to the public when selecting an advisor. In recent years, as the regulatory debate has heated up, there has been an increasing focus on the importance of being a fiduciary when providing advice. And while I don’t disagree with the public benefits of holding advice to a fiduciary standard – in point of fact, as I’ve written in the past, I don’t think there IS such a thing as non-fiduciary advice, only non-fiduciary sales – I’m increasingly concerned that in the process, we’re letting the pendulum swing too far and are exposing the public to a wide range of legally-well-meaning-but-totally-untrained advisors who will wreak harm and havoc on the public, not through ill intent, but through sheer incompetence.
The Importance Of Competence
The reality is that when the fiduciary standard alone is the minimum standard we set forth to the public, there’s no particular requirement that the individual actually be competent at what they do, especially given that the current fiduciary standards are overseen by the SEC (or state-registered investment regulators) and pertain only to the delivery of investment advice.
Thus, it is most likely true that an advisor whose sheer incompetence led to the recommendation of putting a client’s life savings into a particular high-risk stock would probably be "busted" for his/her incompetence, in failing to meet the established standards for prudent investment diversification.
However, the challenging reality is that in the financial planning world, we discuss far more than just the allocation of investments in a portfolio. In that regard, the investment-adviser-based fiduciary standard has little if anything to say about all the other advice provided. Yet hopefully most would agree that since anyone can get an RIA registration regardless of having any education, training or experience whatsoever, it’s probably not the best idea to get insurance, tax, estate planning, debt, spending, and saving advice from someone who has no requirement for one iota of actual knowledge about any of those subjects. Just being a fiduciary doesn’t mean you know how to recommend the amount of life insurance someone should have, or the rules that pertain to IRAs, or how to properly structure retirement account beneficiary designations for young children, or any number of topics for which advisors provide advice outside of the raw construction of a portfolio.
In turn, this means that merely being a fiduciary actually says remarkably little about one’s capabilities to be an advisor. Simply put, acting as a fiduciary should be a necessary criterion to select an advisor, but is an entirely insufficient one to come to any conclusion about whether the advisor is actually capable of delivering effective advice and positive results for clients.
Of course, this discussion immediately raises the question: so what would an appropriate standard for competence actually be? Given the current landscape in financial planning, it seems to me there is one clear answer: the CFP certification.
Although the CFP marks have had a varied history, the standards for the certification have been consistently raised over time, and while the CFP certification arguably still has a ways to go, the fact remains that it is by far the best option available. The CFP certification requires both an increasingly broad and rigorous educational curriculum, and mandates a certain minimum level of experience. It requires a comprehensive exam, which includes questions that demand test takers actually apply the knowledge to pass (i.e., the test is more than just the regurgitation of rote memorization). And perhaps most important, the CFP Board – unlike virtually every other organization that puts forth a standard of care – actually has a process to enforce the CFP certification Practice Standards (albeit a process that the CFP Board could still improve further) and can censure and suspend certificants or even revoke the certification.
While there are other credentials in the financial planning space, none seem to maintain the particular combination of competency standards that the CFP Board puts forth, including especially the comprehensive exam (which the ChFC doesn’t require) and a process and commitment to enforce the standards of those who maintain the certification (which the PFS lacks). Also notable is the fact that unlike many other designation programs, the CFP Board continues to elevate its standards over time. It’s certainly possible that some other designation, or a new one that doesn’t even exist yet, could step up to surpass the CFP certification at some point in the future; as it stands now, though, the leading choice seems rather clear.
The Challenge Of A Competency Standard
Of course, the reality is that having a CFP certification alone does not unequivocally mean someone is going to get the greatest/best/optimal advice. That is true of any standard. Not only because there will be people from time to time who violate the standard (just as there are criminals who violate the fiduciary standard, steal client money, embezzle, etc.), but because a minimum standard is not meant to be a sign of best competency but simply minimally acceptable competency.
Most people have already experienced this in the context of other professions. Just because a lawyer has passed law school and the bar exam does not mean every lawyer has the same depth of expertise and experience. Similarly, not all doctors provide the same quality of results because they have gone through medical school and residency, and passed the medical board exams. There are still some lawyers and doctors who are better than others, even though all of them passed the same professional entrance requirements.
Nonetheless, we certainly don’t suggest to the public that if your neighbor has steady hands and some offhand knowledge of anatomy that he’d be a good surgeon to remove your appendix or repair a heart valve. Nor is it a good idea to retain someone as your trial defense lawyer simply because he happens to be articulate and a good debater. Although it’s certainly possible that someone out there who hasn’t gone through a legal or medical educational, experience, and testing standards might actually turn out to be as good as the people who have, it doesn’t change the fact that when recommending a professional to the public, we don’t recommend those who haven’t met the minimum standards, because the likelihood and risks of incompetence to the public are too great.
In a similar manner, it’s time for the financial planning profession to set forth its minimum unified standard for the public in terms of not just a requirement for fiduciary, but also for a minimum level of competency. Not because having the CFP marks automatically means the advisor will deliver the perfect, best advice in any and every situation, but because it’s a hazard to recommend to the public that they seek out advice from someone without determining if that individual has met any actual minimum standards for financial planning knowledge or experience. Especially since in reality, the CFP certification accomplishes both goals, as it already is a requirement for anyone with the CFP certification delivering material elements of financial planning!
And ultimately, if you want to set forth a minimum standard to the public, it needs to be a minimum standard, not a series of options. As P. Kemp Fain said many years ago, if we want one profession, we need to have [just] one designation.
So what do you think? Is it time for the profession to focus less on "just" fiduciary and focus instead on competency? Which do you think is better: an experienced CFP broker not subject to the fiduciary standard, or an uneducated RIA fiduciary? Is the CFP certification a reasonable standard of minimum competency? Is there a different/better alternative? Is it a good idea to have a minimum standard for competency?