Many of us have long held that designations like the CFP, ChFC and CFA matter. The training for such credentials is robust and applicable, the exams are rigorous and the ethical codes are well-developed and put clients first.
Some certifying agencies even spend a lot of money on advertising to tout these claims. But are the claims valid? Should consumers expect a more ethical, expert result from those who have studied and committed to strenuous ethical codes? Should a client expect the same difference in advisory quality, say, as between an M.D. and a drug store clerk?
I began my personal quest for financial knowledge back in 1990 as a disillusioned stockbroker. While I had passed the Series 7 in 1984 with ease — they gave me a book and a week later I was licensed to sell options, tax shelters, on margin and all kinds of stuff! — my degree in chemistry had ill-prepared me for the complex business I found myself in.
So I started with the CFP, then completed the ChFC, CLU, CFA, CFS, BCM, EA and MSFS programs. I have just received a master’s degree and Ph.D. in financial and retirement planning from the American College of Financial Services.
I sought graduate degrees I because I believed I needed to know much more to better serve my clients. At its highest levels, wealth planning and management is as complex as medicine or law. Despite this, the tickets to entry — FINRA and life insurance sales licenses for most — are sadly too easy to obtain. It is astonishing that even those found cheating on FINRA exams can still get licensed.
The CFP, CFA and ChFC are common choices to raise the bar. Certainly the education is hard and applicable. At the same time, certifying institutions such as the CFP Board, the American College and CFA Institute are generous with marketing claims of how much better their designees are, and why the public should trust them.
But surprisingly, there has been very little research into whether designations have a legitimate effect on practice quality. So I based my dissertation on its study for my PhD at the American College.
I used disclosed FINRA misconduct — U4 yes answers — as a proxy for advisory quality. I limited the study to FINRA registered rep advisers who are permitted to sell product on a suitability basis.
I looked at all FINRA registrants in Florida who appeared to be retail advisers using data from 2015. There were about 27,000 Series 6 and 7s. Of this group, only about 12% had at least one of the CFP, ChFC or CFA designations. About 10% had CFPs, 4% ChFCs and only 0.4% had the CFA.
I compared advisers with at least one designation to those with none. I looked at disclosed misconduct from several perspectives, but the acid test was a score based on U4 yes answers that 1) only pertained to advisory matters (financial fraud vs. DWI), and 2) showed clear findings of culpability vs. mere allegation.
I used 18 statistical techniques and tests to verify the robustness of the findings. I was able to reach the same conclusions from several different perspectives, which gives a high degree of confidence that the findings are valid. They were also very highly statistically significant, meaning there is only a very, very tiny chance that the conclusions are erroneous.
Not surprisingly, I discovered that much lower misconduct is associated with having one of the designations.
In short, my analysis shows that designations really seem to matter in finding advisors less likely to have FINRA disclosures and discipline problems, in that designees have cleaner records than other FINRA advisers. On the face of it, it seems that designees offer higher standard of advice.
One may attribute this to higher educational and ethical standards. The designation quality signal — that consumers can expect better and more ethical advice from those with these designations — is strongly validated. There seems to be a very real connection.
There is much to ponder in these findings, but we can all take cheer in the clear indications of the designation effect. In other words, it seems consumers can expect a better experience and result using advisors with serious credentials, and that’s worth bragging about. It finally puts some teeth in our marketing claims, and that’s surely a drum worth beating.
The academic version of this study, “The Relationship between Financial Advisory Designations and FINRA Misconduct” is under review for publication by the journal Financial Services Review.
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