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May 1994

Personal financial planning. (response to broadcast by radio host who gives financial advice)

by Blackman, Andrew B.

    Abstract- The advice given to a caller by a prominent radio host on the selection of a financial planner was not very accurate. During this particular broadcast, the radio host advised the caller to seek a trusted financial planner; to choose planners with legitimate credentials, preferrably those of Certified Financial Planner and Registered Investment Advisor (RIA); and to take stock of the RIA credential because it indicates a more solid educational background. While some of this advice had merit, other parts of it were misleading. In particular, the linkage between the planner's RIA credential and quality of education was a misrepresentation since this credential can be obtained from the SEC simply by submitting an application and paying a nominal fee. In addition, the relevance of RIA is confined solely to the dispensing of investment advice. It means nothing for other types of personal financial planning services.

While the letter was in response to a specific discussion, it also serves as an excellent comparison of the attributes of the various financial planners and their educational requirements.

The designations (and the organizations which issue them) cited in the letter are as follows:

PFS - Personal Financial Specialist, AICPA

RIA - Registered Investment Advisor, Securities and Exchange Commission.

CFP - Certified Financial Planner, International Board of Standards and Practices for Certified Financial Planners.

ChFC - Chartered Financial Consultant, The American College (Insurance Specialty)

To Whom It May Concern:

We spoke briefly by telephone today, and you suggested I write this letter to you. I am a CPA/PFS, CFP, and I want to address the comments made today on how to locate a competent personal financial planner.

The advice given to the caller may be summarized as follows:

* Select a planner with whom you are comfortable and who relates to you well, someone you trust;

* Select a planner that has bona fide credentials; CFP and RIA were mentioned as the preferred credentials, while ChFC was accorded a lesser standing due to a perceived insurance bias; and

* Consider the RIA credential, because it evidences a stronger educational background and allows the planner to sell and/or advise upon a more diverse universe of investment products.

While I heartily agree with some of this advice, I do not believe all of it is accurate. Furthermore, I feel there were several significant issues that were omitted from the discussion.

Specifically, the assertion that the RIA credential requires a greater educational background is a misrepresentation. I understand that registration with the SEC requires only the completion of an application and the payment of a nominal fee ($150). All it seems to guarantee is that the SEC has the planner's name in its files and that the SEC may then choose to audit or otherwise investigate the planner. It is also my understanding that in practice, the SEC tends to audit registrants infrequently. Furthermore, the RIA only relates to the rendering of investment advice. It is not relevant to any other type of personal financial planning services. Unfortunately, too many people think investment planning is synonymous with personal financial planning. It is only a small piece. More importantly, no mention was made in the discussion of the different compensation arrangements available in the marketplace and the conflicts of interest that exist with commission- driven planners. Lastly, the omission of CPAs from the list of alternative choices for a planner overlooks potentially the ideal choice.

CPAs were providing personal financial planning services long before the phrase for the discipline was coined. This occurred because CPAs were recognized by their clients as their most trusted personal advisor. This element of trust goes right to the heart of the paramount criteria mentioned on the program. The CPA's advice was also sought because the CPA was already intimately familiar with many aspects of the client's situation. The CPA already had valuable insight.

From the comments made regarding the RIA credential, I infer that additional education and regulatory oversight are viewed as desirable. I submit to you that it is the CPA who has the most demanding initial and continuing education requirements of any credential. Furthermore, CPAs are licensed by their individual states and must adhere to the rules and regulations of their boards of accountancy and, if they are members, the strict codes of ethics promulgated by the AICPA and various state institutes and societies.

The AICPA Code of Professional Conduct states that "a member shall undertake only those professional services that a member or the member's firm can reasonably expect to be completed with professional competence..." (Rule 201) and that "a member shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgement to others" (Rule 102). Accordingly, CPAs, especially ones who are members of the AICPA, are regulated to a greater degree than other planners. This type of oversight would appear to offer more protection to consumers than that associated with the RIA designation.

There are other important factors that should give consumers confidence selecting a CPA to be their planner. CPAs must pass one of the most demanding entrance exams of any profession. CPAs gain a diversity and depth of experience in financial matters that come from working with a varied clientele. Most importantly, however, CPAs are generally prohibited from earning commissions. Accordingly, a client is assured under state law (in the 41 states which prohibit commissions) that the planner will always act as the client's advocate and receive nothing but objective and unbiased advice. It is also generally acknowledged that CPAs are more knowledgeable in the areas of estate and income taxes, cash flow analysis, and retirement plan rules and regulations then other types of planners.

Not to be one-sided, I will address the area for which CPA planners are usually criticized. CPAs are considered by many to be less knowledgeable than product-oriented planners in the areas of investments and insurance. First, the importance of those areas to overall personal financial planning can often be over-emphasized, especially by planners who want to sell products. Secondly, there are many CPAs competent to give advice on these areas though they do not sell the products. In fact, I would argue that a separation between advising and selling is highly desirable, as it avoids conflicts of interest that are potentially harmful to consumers.

How would a consumer locate a CPA who is skilled in the insurance and investment areas in addition to the other personal financial planning subjects? Asking for the CPA's years and type of experience in planning is a good starting point. Ask the CPA to furnish client references. Inquire about specialized training or areas of expertise. Furthermore, CPAs who specialize in personal financial planning can earn a specialist's designation, the Personal Financial Specialist (PFS). This designation can only be acquired by CPAs who are AICPA members (binding them to the Code of Professional Conduct), have at least three years of experience in planning, and pass a comprehensive and rigorous personal financial planning exam. There are 1,000 CPAs at the moment with this credential and the group is growing. Unfortunately, your program host did not mention this prestigious designation in reviewing the credential issue.

Before I leave this subject, I want to address the registration issue, as it is often a one-sided debate when the financial press gets involved. The SEC would like anyone who even mentions planning as part of their practice to register, and, accordingly, the financial press views anyone that is unregistered as unqualified.

What is the SEC and what is its charge? It is a governmental body similar to the IRS, and it is charged with interpreting and enforcing the laws passed by Congress.

Taxpayers and their advisors do not always agree with the IRS and their interpretations. In fact, the IRS is not always correct, as evidenced by the fact that they lose cases in court. Similarly, I believe the SEC's position on the subject of registration is open to question.

CPAs who choose not to register with the SEC believe the professional's exclusion to registration (found in the 1940 Investment Advisors Act) applies to CPAs doing personal financial planning. Any lawyer, accountant, engineer, or teacher who advises others on investments for compensation, solely incidental to the practice of their profession (as a lawyer, accountant, engineer, or teacher) is excluded from the registration requirements. Obviously, this will one day be clarified by case law or Congress. Meanwhile, it is unfair to label anyone who believes they are in compliance, based upon the interpretation offered here, to be branded as a scofflaw.

I believe much of what I have stated here represents how many CPAs view this subject. The public exposure of these differences will undoubtedly benefit your listeners.

Yours sincerely,

Andrew B. Blackman, CPA/PFS, CFP, Shapiro & Lobel

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