I’m busy kicking my nephew’s butts at board games, so you’re off the hook this week. Instead of me blathering on about some inane topic, Tom Cleveland from Forex Traders wrote us a nice piece about verifying the credentials of your investment advisor. Take it away, Tom!
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What Type of Advisor Has Your Best Interest at Heart?
The rally in stock prices that began last October has been nothing short of outstanding. The S&P 500 index has risen more than 27%, sitting just over 1,400. This rise is even more impressive because it has happened when volumes were low and without any kind of recovery in the housing sector. Europe seems to have temporarily stopped the bleeding, removing much of the market uncertainty and volatility in the process, but the global economic recovery is still straining to “get legs” and produce prosperity for all concerned down the road.
Where will the markets go from here and whose advice counts most when trying to find this answer? Do you want to believe someone that is looking out for your financial interests or someone trying to sell you securities on the side? Investors need consultants that they can trust that accept their fiduciary duty to assist you in planning your financial future, taking into account every variable that may have an impact going forward.
This person is surely not a broker/dealer.
Marketing types in the investment industry often disguise themselves in a “cloak of authenticity” when they approach you with the latest and greatest stock to own. They may claim to be an “adviser”, using the term quite loosely to gain your confidence and make a sale. They get away with this subterfuge because the average retail investor, as confirmed by study after study, rarely understands the various professional designations in the investment industry.
A financial planner or analyst must pass rigorous exams and educational requirements in order to earn the coveted “CFP” or “CFA” certifications. The simple fact is that the proposal from your broker/dealer may actually be a good one, but prudent due diligence would suggest that you first review the sales proposal with a professional advisor that will not bias his opinion due to some unseen commission structure.
What are the differences between these two professionals?
Put quite simply, a “Certified Financial Planner” deals directly with the public and a “Certified Financial Analyst” deals primarily in a corporate setting. Each has completed a strenuous college curriculum, steeped in investment issues, mathematics, insurance, and complex methods of fundamental and technical analysis. Professional examinations, actual focused time in the workplace, and continuing education round out the necessary knowledge and experience components.
A CFP will typically possess very good communication skills and enjoy working directly with clients. He will help you develop a financial plan for the retirement, protect your assets and family from risks with insurance, and advise you on proper ways to manage your portfolio of investments. Estate and tax planning are also topics within his area of competency. He has been trained to understand complex financial issues and know how to describe them in layman’s term for your benefit.
A CFA generally pursues a career more corporate in nature, performing similar functions that require complex analysis in a corporate setting. Whether managing the assets in a retirement trust for optimum return, hedging a currency risk when FX charts deems it appropriate, or minimizing the risks surrounding a business activity, he or she has the ability to use the tools of the trade to guide firms in the most prudent financial direction. Their backgrounds of study tend to be more in depth than that required for a CFP, since the amounts of money involved can be significant in the corporate world and the legal and financial issues, broader than with most individuals.
In either case, you are in good hands when you are dealing with a truly certified professional in the investment industry.