Historically, the competency standards to become a “financial advisor” have been very low. After all, technically in order for someone to hold themselves out as offering “comprehensive financial advice” and get paid for it, all they really need to do is pass a 3-hour regulatory exam that takes just a week or few of preparation. In the meantime, though, salespeople who are “only” licensed to sell insurance or investment products and technically can’t be paid for their advice itself can also still publicly call themselves financial advisors as well. Which is why it’s so difficult for consumers to tell which is which, and for comprehensive financial planners themselves to differentiate their services from the army of other “advisors” out there who say they do the same thing… even though they don’t, and can’t actually be paid for it in the first place. That challenge, in turn, has led many to wonder if there’s a path for regulators to enact (and enforce) rules requiring anyone who says they provide comprehensive financial advice to actually be trained and educated to do so, and whether it might make sense to someday require a minimum standard like CFP certification as a licensing requirement to provide financial advice.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the CFP marks are not a license to practice now, the differences between the CFP certification and a bona fide license like the CPA, possible avenues to transition the CFP certification from a trademark into an actual license, a few of the many hurdles such a potential transition would encounter… and why it still might be a worthy goal to pursue anyway.
It’s important to understand that, unlike a CPA license – which is granted by a state certifying body and grants accountants legal authority to perform certain tasks (e.g., attesting an audit) that they wouldn’t be able to do otherwise – the CFP certification does not fall under any state or federal regulatory body, and instead is a trademark that the CFP Board allows advisors to use if and only if they agree to honor the Board’s Terms and Conditions (which happen to include following the Four E’s of the CFP education, exam, experience, and ethics requirements). But that also means that financial advisors aren’t required to obtain CFP certification, or any substantive education or experience, in order to hold out as providing (and get paid for) financial advice, and instead need only to pass some very basic licensing exams.
In the past, this wasn’t a big deal, as the industry was focused primarily on selling investment and insurance products in the first place, for which financial planning was an effective sales strategy. However, in a world where products are increasingly accessible through technology itself, the value that advisors must bring to the table has less and less to do with financial products that are sold, and more and more to do with the quality of advice itself. Yet without the proper education, examination, experience, and ethics requirements that could be prescribed (and then overseen) by a regulatory body, financial advisors aren’t being held to the sort of standards common to professionals in other industries where the advice provided often makes such a significant impact on clients’ lives (and where the depth of expertise of the professional makes it difficult for consumers to vet who is “good” or “bad” in advance).
Unfortunately, the pathway towards turning the CFP certification into a required license to provide financial advice is difficult, as it must fall under the purview of either state or Federal regulators, and both have their own unique challenges. State regulation is often easier to implement – at least something – but rarely ends out being uniform, in a world where advisors are increasingly likely to work with clients across state lines. Federal regulation allows for uniformity across all 50 states, but can be difficult to prevail against concentrated industry lobbying forces, and ironically existing regulators themselves may not want to see their existing regulatory purview entrenched upon!
Nonetheless, the transition to higher competency standards for financial advisors might become inevitable, given the accelerating rate of adoption of the CFP certification itself amongst advisors. Because at some point, the CFP marks will become so ubiquitous that it will be “easy” for the industry to demand that anyone getting paid for providing financial advice should be required to have CFP certification to do so… simply because most advisors already will have it at that point (and the majority will then require the rest to conform).
Ultimately, though, the key point is simply to recognize that CFP certification is not a license today, and realistically can’t become one while it’s still only held by a minority (about 30%) of all financial advisors. But ironically, the best path to enshrining a minimum competency standard like CFP certification into licensing regulation may simply be to support its continued and ever-broadening adoption – which appears poised to accelerate further as it becomes a “mainstream” certification – because at the point most advisors have voluntarily adopted the standard anyway, it’s not a big leap to make it official… and set a formal competency standard akin to other recognized and true professions!