Evaluating a Financial Advisor’s Qualifications

By Stephen Hart

Learn more about Stephen on NerdWallet’s Ask an Advisor

About a year ago, the CFP Board — the Certified Financial Planner designation’s certification-granting and standard-setting association — began running commercials to promote the credential. In one commercial, a clean-cut gentleman in a nice suit is giving financial advice to several individuals. He ends the meeting by asking if they trust him, which they all agree they do. He then reveals that he has no financial background and is, in fact, a club DJ who got a nice haircut.

This particular commercial reminds consumers of the importance of knowing that their advisor is a trustworthy and qualified financial professional — but the truth is that there are a host of pathways to becoming a financial advisor. It would be easiest to say that you should work only with someone who has a certain designation, but I know many qualified and knowledgeable advisors who don’t have any.

No matter whom you choose to advise you, there are key areas you should ask about before you get started. In particular, learn about your potential advisor’s education, designations and licensing.

Education

When interviewing potential advisors, find out about their education and what they do to ensure they are up to date on the ever-changing economic environment and industry best practices. Ask:

• What is your educational background and how did you arrive at financial advising as a career?
• What experience do you have working in the industry?
• Are you required to take regular continuing education, or CE, courses? If not, how do you stay current?

Some designations — such as CFP, CFA or CPA — require applicants to have a college degree or higher. On the other hand, most licensing exams — the most common are the Series 6, 7, 63 and 65 — don’t require a degree, though this can vary by state. (More on the distinction between designations and licensing below.) It’s not a hard-and-fast rule, but you probably want to work with someone who has earned at least a bachelor’s degree. CFPs, CFAs and CPAs also have additional education requirements to receive the designation.

And most designations also require advisors to regularly receive CE credits once they’ve received the title. Individuals who’ve passed licensing exams aren’t necessarily required to fulfill these, but like all working professionals, they should seek out ways to stay current in their fields. If you ask your advisor about this, and his or her answer is, “I read The Wall Street Journal sometimes,” it’s probably best for you to move along.

Designations vs. licensing exams

Generally speaking, designations are granted by industry associations and require more in-depth proficiency in a specific area of the industry than licensing, which your state handles. Licensing exams test basic knowledge about financial products and the laws regulating them.

Think of it this way: The SAT and ACT test your general knowledge and help you get admitted to a university. Beyond that, you must meet certain requirements to be admitted to a specific college or degree plan. Similarly, a licensing exam allows an advisor to function within the broad investment world, but a designation shows that he or she is an expert in a specific field.

Financial advisors are required to have the appropriate licenses from their states to give investment advice, buy or sell securities, or sell insurance and other products, but they’re not required to hold a designation. Yet many designations require licensing in a specific area.

In other words, your advisor could be licensed as an investment advisor — having passed the Series 65 — but not be a CFP. Or your advisor could hold the CFP designation and be able to recommend a product, but not actually sell it. (This is OK, because your advisor can usually help you find an investment professional or insurance agent who can.)

Unfortunately, the various licenses can be confusing. Requirements vary by state, type of product and even the size of the advisor’s firm. On top of that, some designations — like being a CFP — exempt you from certain exams, like the Series 65, in some states. And the Financial Industry Regulatory Authority currently recognizes more than 150 designations, including CFP, CPA and CFA. That’s why it’s important that you ask your potential advisor:

• Which licenses or designations have you obtained and what does each allow you to do?
• Are you licensed to sell the products you recommend?
• Have you had a license revoked or had disciplinary action taken against you?

The good news is that it’s nearly impossible for an advisor to operate in any area of the market without the proper licensing. But it’s still important to ask. If your advisor has trouble answering these questions or has a history of regulatory issues, you probably want to find someone else. If you still have questions about various licensing requirements, use FINRA’s tool to compare designations or check with your state securities regulator.

Do your research

Once you’ve gathered this information, validate your advisor’s answers with FINRA’s BrokerCheck site. Industry regulators FINRA and the Securities and Exchange Commission share a database of information on financial advisors and their credentials, licenses and disciplinary histories.

You should also understand how your advisor is compensated and how you will be charged. And beyond that, of course, you should like your advisor and feel comfortable with his or her frequency and type of communication. Will you meet once a year or quarterly or more? Will you be able to call whenever you have a question or issue?

Understanding your advisor’s qualifications is a crucial step in the evaluation process, but it’s just as important that you trust him or her — just as long as it’s not based only on a haircut. Your goal should be to find an advisor you feel confident about and will enjoy working with.

Stephen Hart is a senior financial planner and wealth management advisor at Talis Advisory Services in Plano, Texas.