Enlist the Perfect Financial Advisors for Your Team

Physician's Money DigestOctober15 2004
Volume 11
Issue 19

Who cannot give good counsel? 'Tis cheap, it costs them nothing." This quote from Robert Burton indeed rings true. When people call themselves financial planners, it's not their money they're risking—it's yours. So, how do you find qualified professionals to handle some of the most important issues in your life?

For some professionals, such as accountants and lawyers, you can look to licensing and educational requirements. But when it comes to choosing the cornerstone of your financial team (ie, the financial planner), there are no legal or licensing requirements on which to rely. "Financial planning doesn't have that. Unfortunately, there's really nothing on the books," explains Michael E. Kitces, director of financial planning for Pinnacle Advisory Group, a Columbia, Md-based wealth management firm. People can call themselves financial planners without having adequate education, experience, or qualifications. But this doesn't mean that there aren't ways to evaluate a financial planner.

"The only alternative is to get familiar with the professional designations and use the designations to evaluate competence," Kitces says—and he should know. After his name, you'll find MSFS, CFP, CLU, ChFC, RHU, and REBC. Yet, Kitces readily admits that "the alphabet soup of designations is unquestionably quite confusing. People entering our industry, and even some people in the industry, are confused by it." He also points out that many new designations are being introduced. "The average consumer has no way of knowing which ones are legitimate and which ones are fly-bynight," he explains. "It's problematic."

Select a Leader

First, let's cover what a financial planner does. According to the Financial Planning Association (FPA; www.fpanet.org), two of the myths surrounding planners are that they're the same as stockbrokers or other financial salespeople, and they're primarily investment advisors. Instead, the FPA advises investors to "think of the financial planner as a football coach designing a financial game plan and seeing that it is properly executed, often with the help of outside specialists such as attorneys, stockbrokers, insurance agents, and certified public accountants (CPAs)."

"As financial planners, we have a unique burden," Kitces says, referring to the familiarity planners must have with a great variety of issues, including taxes, retirement, insurance, investing, and more. "The planner's main role," he points out, "is keeping the big picture in mind." This is especially true when financial team members (eg, the life insurance agent or tax advisor) are doing things that disrupt each other's work.

One option is to work with a large firm that has all of these professionals under one roof. However, by the time a physician-investor can afford such a firm, Kitces notes, they're likely to already have an established relationship with an attorney and accountant. For this reason, many investors go to firms that instead have close ties with other associates.

When it comes to financial planners, the primary designation to look for is the Certified Financial Planner™ (CFP®) designation. According to Kitces, this designation is "absolutely key." To qualify, an individual must meet the four e's, as specified by the CFP® Board (888-237-6275; www.cfp.net). In addition to subscribing to a code of ethics, financial planners must meet the following requirements:

• Education. Thirty hours of continuing education must be obtained every 2 years in areas such as estate planning, retirement planning, investment management, tax planning, employee benefits, and insurance.

• Experience. Depending on the level of financial degree work completed in college, an individual must acquire 3 to 5 years' worth of financial planning-related experience to be considered.

• Examination. An individual must pass a comprehensive certification exam, which is modeled on the licensing exams given to attorneys and CPAs.


There are more than 44,000 financial planners who have earned the CFP® designation. While the CFP® Board is the certifying body, the designation is supported by the FPA. You can visit the FPA Web site to access the National Financial Planning Support Center, which has a searchable database of CFP® practitioners, or contact the CFP® Board to check for any disciplinary measures.

Master the Acronyms

Another designation financial planners may have is the Chartered Financial Consultant (ChFC) designation. Since its inception in 1982, more than 40,000 people have earned this designation. It is offered exclusively by the American College (www.amer coll.edu), which is one of the most well known schools of graduate and professional financial education. Designation requirements include course completion, previous experience, ethical standards, and continuing education.

The American College offers several other designations that a physician-investor may run across in their financial planner search. Founded in 1927 as the American College of Life Underwriters, the institution also offers the long-respected Chartered Life Underwriter (CLU) designation. Since the first exams were held, back in 1928, more than 93,000 life insurance and financial professionals have earned this designation.

In recent decades, the American College has broadened its offerings. For example, Kitces earned his Registered Health Underwriter (RHU) and Registered Employee Benefits Consultant (REBC) designations through the American College. In fact, these two professional financial designations are offered exclusively by the institution.

One more designation in the alphabet soup is the Chartered Financial Analyst (CFA) designation. According to the CFA Institute (formerly the Association for Investment Management and Research; www.cfainstitute.org), the CFA program is a rigorous self-study curriculum that requires candidates to pass a series of three 6-hour examinations over the course of at least 2 years. The curriculum covers a number of topics, including investment analysis, portfolio management, financial statement analysis, corporate finance, economics, performance measurement, and professional ethics.

Kitces notes that the CFA® designation is substantively different from other designations. Essentially, these professionals commonly hold the position of mutual fund manager rather than financial advisor. "It's an extremely difficult designation to get," Kitces admits. Indeed, of the more than 480,000 CFA exams administered since its inception in 1963, only about 55,000 investment professionals have earned the CFA designation.

Deal with Payment

No discussion on financial planners is complete without the mention of their payment structure. Fee-based planners are paid for their advice and can be paid by the hour or by the project. Commission-based planners receive compensation from a third party if they sell you a financial product. Naturally, conflicts of interest can arise when you're dealing with a commission- based planner. Because of this, many people advise against this payment method.

Investment News

When it comes to commission-based vs fee-based services, one investor who prefers the latter is William J. Bernstein, MD, a practicing neurologist and coprincipal of the money management firm Efficient Frontier (www.efficientfrontier.com), which is based in Eastford, Conn. In a recent article in , Dr. Bernstein admits, "The average financial planner, the average financial broker, is somebody who is not as well trained as they should be and is probably going to have some ethical conflicts in the way that they are paid—in other words, if they're commission-based."

The National Association for Personal Financial Advisors (NAPFA; www.napfa.org) agrees with Dr. Bernstein. Established in 1983, the group is comprised of more than 900 members who believe in fee-only compensation. The NAPFA-Registered Financial Advisor, the group's highest level of membership, was created in 2002. The NAPFA Web site offers a searchable database of members, the checklist "How to choose a Financial Advisor," and consumer tips and articles on a variety of financial planning topics.

Why would an investor choose a commission-based financial planner? Kitces credits human nature. "People are still more comfortable paying commissions," he confesses, a lesson the financial planning director learned while working at a firm that offered a choice between commissions and fees. In one case, Kitces explains, the client chose commissions because "she could not bear writing us a $500 check by hand."

And there is an advantage to commission-based planners. "They're great implementers," Kitces says. Often, clients will receive advice from a fee-based planner and do one of two things. They'll either delay taking action or wind up seeking more information months later. Of course, in the latter case, clients will have another fee to pay. "There's a lot to be said for working with a commission-based planner—and, of course, the caveats," Kitces admits.

Regardless of which type of planner you decide to hire, Kitces offers the following advice: "Look for someone who is educated, competent, professional, and ethical. If they really possess those qualities, the method of compensation doesn't matter."

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