Sorting through the ­alphabet soup of investment credentials

Because the financial services industry is fragmented, the requirements to become an investment professional vary depending on which part of the financial services sector the professional operates. In a previous article ,we discussed the haphazard nature of the titles used by investment professionals. Here we take a look at the credentials used by investment professionals, another source of confusion for investors. Credentials may be acquired by formal training, certifications or experience. Unfortunately, there is not a uniform standard for credentials that applies throughout the financial services industry. Instead, the barriers to entry for an investment professional are based on licensing and registration. These are minimal barriers. The universe of investment professionals can be distilled into two basic types: registered representatives (in the past more commonly known as brokers) and investment adviser representatives. Individuals associated with a broker-dealer are commonly referred to as "registered reps." They are subject to FINRA's licensing requirements and to both FINRA and SEC oversight. Individuals associated with an investment advisory firm are "investment adviser representatives." They are subject to oversight by the SEC or the state's securities authority. Registered reps must pass two licensing exams administered by FINRA and obtain a Series 7 license and a Series 63 license. The Series 7 exam is the more comprehensive and covers topics such as investment risk, taxation, equity and debt instruments, various types of funds, options and retirement plans. The exam consists of 250 multiple-choice questions over six hours of testing. A passing score is 72 percent. A candidate for the exam must be sponsored by a firm that is a FINRA member. The firm may impose its own requirements for candidates, but FINRA does not impose any educational requirements to become a broker. The path to becoming a registered investment adviser is quite different. Unlike registered reps, investment advisers do not need to be sponsored by a broker-dealer and there are no licensure requirements to register with the SEC. In some cases, there may be state licensing requirements for the advisers associated with the firm. In any case, having the requisite securities license or registration does not confer any official stamp of approval on the adviser. It simply means that the individual has met the minimal regulatory threshold to be in business. Being authorized to do business, however, is not the same as being qualified to do business. The truth is that-apart from the regulatory thresholds of licensure and registration-no particular qualifications or credentials are required for an investment professional to open for business. That is not to say that there are not any meaningful qualifications or credentials, only that whatever exists by way of qualifications and credentials is not required to be in business. Investment professionals acquire credentials or professional designations not because they are required to do so, but because they want to enhance their professional knowledge or their professional profile for marketing purposes. The sheer number of professional designations currently in use (well over 100) is a source of confusion for investors. Almost two-thirds of these designations begin with the word "certified." FINRA maintains a comprehensive database of designations and the requirements to obtain them. (See, https://www.finra.org/investors/professional-designations.) However, the FINRA list is not an endorsement of any designation. FINRA does not approve or endorse any professional credential or designation. FINRA has expressed concern that the profusion of designations can provide cover for financial fraud. There are so many designations that fraudsters can easily make up a designation or claim to hold an obscure but actual designation. As FINRA warns, "credibility can be faked." Some designations are based on rigorous testing of substantive knowledge, but many are not. Four of the most prominent designations are worth a closer look: chartered financial analyst (CFA), certified financial planner (CFP), certified investment management analyst (CIMA), and chartered financial consultant (ChFC). The chartered financial analyst (CFA) designation is without a doubt the most challenging professional designation to obtain. Prerequisites include an undergraduate degree or higher, completion of a prescribed course of study, up to four years of work experience and completion of a prescribed course of study. The program of study covers investment analysis and portfolio management and requires passing three six-hour exams demonstrating competency in these areas. It is widely viewed as the most rigorous designation pertaining to investment management, but that doesn't mean that it is always the most relevant credential for all investors. This designation is often pursued by those who work for institutional investment managers. It is not geared toward financial planning issues. The certified investment management analyst (CIMA) designation does not have as long a history as the CFA designation, but within the last 10 years it has become a widely respected credential for investment management. Prerequisites include three years of experience in financial services, completion of a prescribed course of study and passing two examinations administered by IMCA. The course of study covers analyzing and recommending investments, asset allocation, risk measurement, investment policy, selection of managers, performance measurement, due diligence and ethics. Advisers who interact with clients, whether individual or institutional, often pursue this designation. The certified financial planner (CFP) designation is widely viewed as the leading designation for financial planning. Prerequisites include an undergraduate degree or higher, completion of a prescribed course of study, the equivalent of three years of financial planning experience, and passing a six-hour examination. The course of study must be the equivalent of 18 semester credit hours at an undergraduate or higher educational institution. The topics covered include investment planning, tax planning, retirement planning, insurance planning, estate planning and developing financial plans. The chartered financial consultant (ChFC) designation is based on a course of study that is very similar to that required for certified financial planners with a heavy emphasis on a variety of financial planning skills. Like the CFP designation, an exam is taken after each course of study but, unlike the CFP, it does not require a final comprehensive examination. Historically, a high percentage of those who pursue this designation are insurance agents. The focus on these four designations does not mean that they are the only ones to look for. If you come across others, screen them using the FINRA professional designation database and assess the rigor and relevance of that designation for yourself. At the very least, use the FINRA database to verify that the person you are considering is not using a false credential. You should not select an investment professional simply because they carry one of these designations. Nor should you exclude someone solely because they do not carry a particular designation. Plenty of excellent professionals do not carry any designations and even a respected designation is only one factor among many to consider. ----- David Peartree is a registered investment adviser offering fee-only investment and financial planning advice. This column is a collaborative work by Patricia Foster and David Peartree. Patricia Foster is a securities law attorney who represents clients in various sectors of the financial services industry, including broker-dealers, investment advisers and investment companies. The information in this article is provided for educational purposes and does not constitute legal or investment advice Published: Thu, Apr 18, 2019