The alphabet soup worth of titles in the financial industry weaves a pretty compelling story about financial professionals and the industry at large.
Over the last several years, story has gotten longer.
There are more financial certifications than there ever has been before. From CFP (Certified Financial Planner) to ADPA, CMFC and AAMS, it can be challenging to know what level of financial expertise is associated with a particular designation.
Not to worry, here’s the story behind the three most familiar financial designations.
Financial professionals who have earned letters after their names are trained to offer advice and help with financial decisions – but at different levels and different areas of finance.
Certified Public Accountant (CPA)
This designation is widely known and familiar to most people. It was the first financial credentials to be recognized in the United States in 1896, and the requirements are rigorous to this day.
The passing rates for the 19-hour CPA exam are roughly one-half¹ and many states require coursework in business law. A CPA is the credential you will look for when seeking the highest level of tax specialization.
Certified Financial Planner (CFP)
The little brother to the CPA, CFP credential was recognized in 1985 with the creation of the Certified Financial Planning Board. While some financial professionals specialize in niche areas such as mutual fund investing or risk management, the CFP is trained in everything related to financial planning. This is your well-rounded financial professional that looks at your total wealth picture, not just pieces.
Similar to the CPA exam, becoming a CFP also requires testing and an exam, but is not quite as rigorous. The CFP Board reports that roughly a third of people who sit for the 10-hour exam do not pass². The course of study covers all areas of the financial planning industry, and even after passing the exam there's still a 3-year experience requirement in addition to earning a bachelor's degree. In any case, knowing what is required for your financial professionals to even have these three letters at the end of their name offers a window into their level of their education and experience.
Chartered Financial Analyst (CFA)
Well, this designation just might be the most difficult credential to earn. The CFA is so hard-won that only a select (and persistent) group possess it. CFA Institute is a global association of investment professionals that traces its lineage back to the establishment of the Financial Analysts Federation (FAF) in 1947 and the first CFA exam was administered in 1963. (CFA Institute)
It’s widely respected for signifying a high level of expertise. In fact, the pass rate for level 1 is even lower than that of CPA or CFP. Only 43% of test-takers pass round one of the exams (there are 3 levels). In many cases, those who do have their CFA had to retest a couple times before passing and spend years studying. The three levels of exams that must be passed are only offered one time a year, so if a financial professional doesn’t pass – they have to wait twelve months until they can retest again (source).
Only around 12% of the people who sit for the CFA exam pass all three levels…it's just that difficult! So, next time you meet someone with a CFA – even if they are seasoned financial professionals – why not congratulate them on their accomplishment! It could not have been easy for him or her.
So, what are you getting when you hire a CFA? Superior investment management advice. CFA's may not take quite as much coursework as CPAs, but their three years' worth trains them in wide range of investment topics. These financial professionals are the ones who will understand how the recommended investments in your portfolio are structured and intended to work. They are the math wizards and statisticians who monitor trends, performance and projections. They often time work as or with CFPs and fund managers to build the investment portfolios people invest into.
Recap
Next time you sit down with a financial professional and you see the string of letters tailing their name, you will have a greater sense for what those signify. Not all financial designations are created equal; however, in the case of the big three we talked about today, you now know how hard these professionals worked so that they could provide you with financial services.
References
- Uniform CPA Examination Passing Rates 2016. American Institute of CPAs. Retrieved 4/22/2016
- CFP® Examination Statistics. Retrieved 4/22/2016
- CFA Exam Results. Retrieved 4/22/2016
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Kenneth Klabunde, MS, CFP® is the principal at Precedent Asset Management, a fee-only wealth management firm located in Indianapolis, Indiana. Kenneth specializes in providing comprehensive planning and investment services for clients looking to build, manage and preserve their wealth. Kenneth and I became friends after meeting at a conference and I asked him to share some thoughts as a guest for this site. |
Kenneth Klabunde | Precedent Asset Management