CFP Mark Standards Too Low?

April 16, 2009 • Somnath Basu

[The following was written in response to "In Defense Of The CFP Mark" and other criticisms of Basu's article, "Restoring Trust In The CFP Mark."]

First of all, I would like to express my gratitude to all of you to have been so engaged in this discussion, which shows a keen understanding of just how important it is to maintain individual financial and mental health, as well as preserve society's well being. I received numerous e-mails that were nearly unanimous in support of my unwavering opinions about restoring trust in the CFP mark, as the title of my op-ed piece suggests. I thank you all for speaking your mind, regardless of whether or not you support my position, and believe that we become intellectually richer as a nation when we express such spirited disagreement.

Of course, I feel compelled to respond to some of the points that Financial Advisor readers raised. Let me begin by saying that the CFP mark is indeed the hallmark in this financial advisory field, which is cluttered by credentials that have created a veritable alphabet soup of professional designations. It is obvious from the proliferation of these credentials that the target is an unsuspecting public. To that effect, owners of the CFP mark seek a role to differentiate themselves as purveyors of the profession/trade of a higher order and quality of service.

Having said that, it becomes even more important for the CFP board (and all the certificants) to be introspective, and accept and understand the inherent weaknesses of the mark so that the necessary improvements can be made. Here are some of these weaknesses I have observed that require further scrutiny:

1) The requirement for three years of experience, which can be earned by working in a financial institution (e.g., brokerage houses and insurance agencies) that clearly specify the only way to survive in the job is to sell to the "natural market" (i.e., to family and friends). Sales volume targets are specified. As long as you can sell, you earn commissions. Otherwise, you are out the door. And by the way, the fine print in your contract mentions that you cannot take with you any friends and family (now the company's clients). Most anyone who really wants one of these jobs can get one and deliver their natural markets to these companies. I once heard an internal presentation to agents on selling techniques that suggested creating a pleasant aroma by heating a cinnamon roll in a microwave oven before the client was shown in!

a. This kind of work does not constitute experience, which leads to a serious ethical problem whether attained within or outside such institutions.

b. Financial institutions are supposed to teach their employees about the suitability of different financial products for different types of clients. This is an abomination that the SEC and its compliant arm, FINRA, have created. Which company in its right mind (i.e., maximizing shareholder wealth) would want to train its employees to minimize sales? Thus, it is unfair to lump employees as being unethical. Brokers/agents have families to care for and mortgages to pay just like anyone else. If their institutional sales targets make the unsuitable products the most easy and lucrative to sell, then how many of us would not want to maximize our (and our family's) own utilities for the sake of our conscience and ethics?

c. Bundling insurance and investment products that sell fear of premature death with a high commission/surrender charge tag in the form of a variable life policy or annuity is one of the ways in which these unsuitable products evolved. Selling insurance is not the same as selling investment products-why do so?

2) The CFP exam is not "Darwinian." A simple check of the CPA/CFA exam will reveal this fallacy; leave alone the bar or the medical exams. Case in point: There are 89 topics that the board curriculum covers. About half have analytical content. Yet, in all my years of exam feedback, I have heard the singular comment that not more than 10 to 15 of the questions (out of 285) require a calculator. The exam is randomly selected from about 14,000 questions. I cannot understand the underlying probability conditions. Maybe it's a couple of classes I missed. It was my standard gripe when I attended CFP program director meetings. No one listened to me then and probably no one will ever listen. I am a professor of investments (the only area I understand within financial planning). Professors from other fields may have similar recertification examination ideas. Obviously, the idea is to test the depth, and not breadth, of knowledge.

a. As another example, consider the single topic (of 89 topics) on macroeconomics. How important is an understanding of this subject in managing money? One could easily do two semester level courses to scratch this subject, yet people with the understanding from a single topic manage millions of dollars. How about certificants taking a basic business school investment exam (undergraduate or graduate) as a recertification requirement-and yes, do not forget to bring those calculators?

b. The above issues lead to a serious competency problem.

c. The 89 topic list should be made public (i.e., easily accessible and widely disseminated) so that any and all consumers (especially knowledgeable ones) can decide whether or not the topics are product-based.

Finally, for those commentators who feel that I am an armchair professor with no practical experience, I have managed (moonlighting) more money than the average dollars under management for all those who profess this trade. I also once qualified for a financial advisory job with a large firm (earned my Series 7, which is still a bad joke, and insurance license) and served as a financial advisor for half a day! But that is another story.

I am still a fervent believer that consumers deserve high quality (i.e., ethical and competent) service and that the CFP board truly has an opportunity to develop exemplary professionals for the future.

As previously mentioned, I am a professor of finance and not a financial planner. I know how much I do not know about investments. After 25 years of work in this field, I feel I know the subject of investments a little bit more than anything else. It is thus very humbling to be able to offer up my opinion to each of you. For that, I express my gratitude and warmest regards.

Somnath Basu, Ph.D., is program director of the California Institute of Finance in the School of Business at California Lutheran University where he's also a professor of finance. He can be reached at (805) 493 3980 or [email protected].

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13 Comments

Comments

15 years ago

Teaching to the test

Firstly, let me say that I have a B.S. and a M.S. in Economics from a very reputable university and at no time were we taught test-taking techniques because it was all about testing your level of competence.I wish it was the same for the CFP-test! Having gone through the CFP Certification process I can say that it is all about getting a "C" (which is a "Pass"). I figured that out fairly quickly when I saw the requirements. I reversed engineered the six modules to get passed them and the only "book" that I ever studied was the exam-prep material that could give me my Pass (i.e. "C").In my defence, I will have to say that because of my background, personal skill-set, integrity, passion and always wanting my clients to get the best financial planning possible, I believe my clients are well taken care of (and they do not have an insurance portfolio or an investment portfolio from one provider either!).The CFP-Board need to take a hard look at their requirements because the CFP-mark should be the Gold-Standard of our industry.
Koan 15 years ago

Dr. Basu is correct

I earned my CFP designation in 1992. The criteria at the time was to pass six three hour exams, one on each main topic.A brief synopsis of my background, I have a BS in Mechanical Engineering and earned my MBA concentrating in Finance. I tend to be an analytical "problem solving" person. My opinion is that exams I endured were very analytical in nature. The tax, investment, life insurance, and estate planning exams required the use of an HP 12C calculator. While this required the ability to solve problems , it also required an ability to have a deep understanding of the material as well as intuition about the topics covered.A year and a half ago I worked in a Wealth Management department as a Financial Planner. Two of the sales reps had just passed the CFP exam. Neither had any knowledge of AMT, trust look back periods, Crummey provisions, 1035 exchanges, 1031 exchanges, how estate taxes were calculated, how to analyze life insurance needs through capital needs analysis, how the present value of a perpetuity was calculated, or how to calculate the geometric average of a stream of returns. The most advances topics were not within their scope at all.It created an egregious disservice to the clients when the wealth management department was re-organized to not allow the Financial Planners to even have access to the planning software. The Financial Planners now had the sole responsibility of selling the planning process and presenting plans they did not create. The most egregious example of both client disservice and the CFP mark being diluted was that a person who was entering the plan data, who had just passed the CFP exam, would routinely confuse assets and net worth and had no functional knowledge of income or estate tax issues nor much else. It was clear I was being asked to present inaccuracies in lieu of real planning for the sole purpose of generating fees which were completely unjustified. At the heart of this is how the CFP mark is tainted and how the lower standards are actually complicit in reducing the level of competent, ethical service to clients.In these cases, the CFP mark was used as a lever to convey non-existent credibility with clients and assist in generating unjustified fees. The mark has suffered, but the general public is not yet aware, and many who are aware seem to think the emperor's clothes are beautiful the way they are.When a CFP charges $3,000 to a client for a plan and then suggests a single 45 year old woman put all her liquid funds in a variable annuity that she (the CFP) sells, something I have personally witnessed, it is obvious the mark has suffered. When CFP designees use their credentials and unethically manage planners as described above, the mark suffers.
15 years ago

Excellent Comments RonR

RonR's comments were superb and on par with a ton of the greater issues beyond just "need more requirements" as Dr. Basu raises and "declare fiduciary status" as is ofen declared the solution.One thing, that may have been addressed somewhere but needs to be raised again is how the issues of supply and demand will impact the education, experience, and fiduciary requirements of financial planning credentials and FP professionals as a whole. Idealism aside, we can't ignore the compensation issues within the selection of a profession and its ultimate requirements. For example, why would a young person (or career changer) select a super heightened level of training in financial planning (I.E. attorney/accountant/or physician level)as Dr. Basu's suggests, to simply earn $35,000 a year initially, and maybe $75k after 4 or 5 years (and this is under the old model before the recent crash)? This is why the brokerage model is remotely successful--its been extremely profitable.Yes, I understand huge financial rewards are always on the entreprenurial side, but CPA's, Doctor's and Attorneys can earn a pretty decent income out of the gate (as employees) that can make the increased education bearable. As an employee, there is only relatively modest income to be earned in the financial services world (on the RIA)-compared to the other professions-even after some experience... Financial planning is clearly not seen as an equal service (as law or medicine) from a value perspective, so how is a business owner going to pass along the cost to the consumer-to pay for these supereducated registered professionals? Easy, they won't. If they try to, consumers will just drop the service unless value from a cost perspective is clearly conveyed and outweighs not utilizing the service.I guess if we were all idealists it may work (huge amounts of education for little pay) but frankly that's not true, most people, if they spend a fortune on a lengthy education want to be rewarded for it... I think the market (and current regulatory climate) is shifting the industry more the overall direction that Dr. Basu touches on (at least proclaiming a fiduciary status). I just think that we need to be careful about how fast we push it along until the market demands it and is willing to pay for it.
15 years ago

Disinterested advise

Some excellent responses on Dr. Basu's commentaries; and, some responses that seemed too quick out of the gate. If he has the profession's best interest at heart, is offering "disinterested" advice based on a minimum level of expertise, and particularly if he hits on some weaknesses that are valid, we should appreciate his taking the time to offer his "outside" perspective. Dr. Basu acknowledges the CFP designation's prominence ("the hallmark in the financial advisory field"). (Yes, he also may not be fully aware and thus appreciate the strides that have already been made in raising standards.) Though we may disagree, his comments are hardly off the cuff. At the end of the day if Dr. Basu has hit on something, it speaks better of the profession to acknowledge weaknesses, address them and build greater support for the profession from doing so.
15 years ago

"relevant" experience?

I could not agree more with Dr. Basu's assessment of the current requirements of the CFP mark. I have an MBA and a B.S. in Economics from 2 of the top 15 undergraduate and graduate institutions in the country. Spent 2.5 years at a big 4 accounting firm as a consultant and was owner and CEO of a company that I grew to $30MM in sales and then successfully sold. Throughout this 24 year period I dealt extensively with both the personal and business dimensions of benefits, risk management,portfolio management and design, estate issues etc. Disenchanted with the advice I was receiving regarding wealth management after the sale of my venture, I decided to "come to the other side of the table" and develop my own practice in the mode I thought best served the entrepreneur (Independent, fee only, open architecture etc). I passed the CFP exam in July of 2007, but I cannot claim the mark just yet because I need to complete the 3 years of "relevant" experience. Meaning no offense to other early stage practitioners, I would be willing to pit my experience/education against anyone who, as Dr. Basu asserts, has simply spent 3 years in a wirehouse environment selling product. There is certainly something amiss with a system that endorses this double standard.
Police1 15 years ago

The professor's comments about the CFA are misplaced. The CFA Institute has been phasing out the importance of needing a calculator for years. At this time, there is very little need to do calculations. The majority of the questions (at all three CFA exam levels) relates to the concepts surrounding the body of knowledge. My guess is that Mr Basu is not familiar with the CFA programIncidentally, the CFA--with it's distance learning format and work experience requirements--is very similiar to the CFP. One thing is true. We all continue to learn as time goes on. This does not mean that we are not professionals. certainly, there is much more to learn about finance even after taking Mr Basu's courses. This does not mean that his students should nor pursue a career in finance, does it?
15 years ago

Kudos, for Fostering Discussion

Professor Basu and readers of this forum:Thank you, Professor Basu, for your commentary about the CFP(r) mark and about this emerging profession of financial planning. Raising issues, and fostering discussion, is indeed valuable, as we all seek to advance the profession of financial planning.There are many issues present as financial planning enters the domain of a "true profession."[b]1. Who Will Regulate?[/b] A lot of attention right now is focused on "regulatory reform." Who will regulate financial planning, if indeed it is to be regulated. There are many possibilities.[b]2. What "standards of conduct" should be applied?[/b] Should consumers expect "arms-length relationships" with their financial advisors, in which the rule of caveat emptor largely exists. Or can they look to all financial advisors as trusted, fiduciary, professional advisors? If fiduciary standards are to be applied, how "strictly"? What specific fiduciary duties exist? How best can financial planners comply with these duties?[b]3. What is the educational background required to become a licensed (by the state or federal governments) financial planner?[/b] A college degree? Course work during college in the field of finance, economics, investments, tax, or more? What education should be specfic to "comprehensive financial planning" - i.e., the ability to bring all of the planning issues together and address them holistically? What testing should occur as a requirement for entry into the profession? What continued education requirements should exist for those already admitted to the profession? Should ongoing proficiency examinations be required? What should be the content of any exam, and how are those exams kept relevant to the ever-changing laws, regulations, practice methodologies, tools, and techniques of financial planning?[b]4. How are the duties of financial planners enforced?[/b] Through periodic inspections of firms, or of the professional? By peer review, every 2 or 3 years, paid for by the financial planner? By state-based peer review, acting in response to probable cause determinations (or inquiries)? How is custody of assets verified? How often should inspections occur? Who should conduct the inspections?[b]5. What exclusions, if any, should exist from financial planner regulation?[/b] Trust officers? Other bankers? Attorneys? CPAs? Insurance agents? Product wholesalers? What is the scope of exemption for other financial services intermediaries? Are we seeking to regulate only those who provide advice to individual consumers, or those who provide advice to some wider set of clients (trustees of trusts of various types, institutional investors of various types etc.)?[i][b]These and many, many other questions exist.[/b][/i] There are many views on these issues. And it is altogether important that our organization's leadership listen to these varied views, seek to understand each person's perspective, and with conscious effort move in a direction forward, guided by a core set of principles.Fortunately, there are many fine people at the CFP Board, FPA, NAPFA, the IAA, and other organizations who are hard at work on these issues. The Professor's article, the response thereto, and the Professor's reply published earlier today, are all certain to add to the discussion of appropriate educational and other standards for those who provide financial planning advice to our fellow citizens.Let us applaud all who contribute their perspectives in such a constructive fashion, as Professor Basu has done. We may not always agree with each others' views, but we certainly can agree that the many varied perspectives on the issues are worthy of our attention, as an aid to each of us in garnering greater understanding.Thank you, Professor, for raising the awareness of the issues, and for fostering their discussion.
15 years ago

Ethics?????

Liars and FraudsGrossly IncompetentConveniently Stupid Simply UnethicalThe bulk of the commentary seems to focus on ethics and fiduciary duty to clients. It does not now nor has ever existed. Fiduciary: "As fiduciaries, financial planners must make fair and complete disclosure of all material facts and must employ reasonable care to avoid misleading their clients. The utmost good faith is required in all their dealings. Simply put, fiduciaries must exhibit the highest form of trust, fidelity and confidence, and are expected to act in the best interest of their clients at all times."The bulk of planners violate that tenet and always have. A fiduciary MUST be legal. The idea that one is practicing ethically while never being legal is an affront to any rational person. Or shall we simply say a "prudent man" at as minimum. As a fact, about 35 states require licensing that planners don't want to hear about, never mind adhere to. California- with 8,000 CFPs- has only ONE that is fully licensed and legal to offer comprehensive fee services. Where is the outrage from CFPs regarding this- and what the other 35 states demand?Nothing at all. The Board has actively engaged in a conspiracy of silence regarding such duty. NAPFA is a joke and always has been regarding high standards. Yet not one CFP apparently even cares. That is being a fiduciary??? It goes further. The UC system in California was also made aware of this deception more than a decade ago- yet did nothing. The illegal planners/instructors were left to "instruct and guide" new planners to the same level of illegality and fraud. You simply have a wholesale violation of integrity and honesty permeate the educational system and no one cares. I am not sure California Lutheran knows of the deception either. I doubt it. Does that make the lack of integrity and knowledge any the less worse? No. You have to know what is required legally to perform a function. Every commentator would immediately notify regulators if a physician or attorney was practicing illegally. Yet nothing here. Is this a double standard by CFPs et all to allow themselves a free pass from licensing? Sure. Every officer, director and most staff members of the Board since Bob Goss has been aware of the fraud. All on formal written record since 1995 at the very least.Not one CFP in this commentary venue has even bothered to address illegal and unethical activity- yet while extolling the virtues of the organization and themselves. What about the New Disciplinary Board Members? Are they not aware of the breach? If not, why not. Incompetency? If they do now, then why have they done nothing? Conveniently stupid? Worse???. Steven Covey noted "Integrity means avoiding any communication that is deceptive, full of guile or beneath the dignity of people. "A lie is any communication with intent to deceive." Whether we communicate with words or behavior, if we have integrity, our intent cannot be to deceive." FA is also aware of the lies and deception and at least has allowed this discussion. But to have further commentary from Board officers extolling the virtues of their standards and the highest integrity is disingenuous at best and a fraud at its worst. Worse yet, we have these same organizations and people deceptively going to Congress to instill this level of a breach of duty to the American public. Yet hardly an outcry because the deception is so good and because members would benefit. So we have a benefit by deception. Shame on all of you for not forcing the issue of being a true fiduciary. But then again, 'it is a lot easier to talk about your ethics than to live up to them."The standards might be fine. But who cares if they do not have to be adhered to. Is that not the real question????
15 years ago

see both sides

The professor brings up some valid arguments that we must acknowledge to further our profession.This debate on the strength of the CFP designation ties in directly with the current regulatory discussions regarding need for a fiduciary standard for financial planners. Would a more rigorous examination, tougher education requirements and a fiduciary standard make the designation more valuable both to planners and the public?It's a great debate that we should encourage. I for one am proud to be a CFP, but have no problem in advocating for higher standards even if it requires more education and/or testing for current certificants.
15 years ago

"Finally, for those commentators who feel that I am an armchair professor with no practical experience, I have managed (moonlighting) more money than the average dollars under management for all those who profess this trade. I also once qualified for a financial advisory job with a large firm (earned my Series 7, which is still a bad joke, and insurance license) and served as a financial advisor for half a day!"--------------------I believe the above statement speaks volumes. Those of us who reside in the real world with real live clients know all too well what it takes run an efficient ethical practice.Quite honestly I fail to see the value of having a 'professor' given the space to lecture those of us actually running successful Financial Planning practices. Surely during these most trying economic times for the nation and our clients the space could have been devoted to something far more worthwhile.
15 years ago

Misunderstanding CFP

Professor Basu is doing a great service by bringing up the question as to whether the standards for the CFP marks are too low. We'll forgive his lack of understanding and thank him for bringing up the question. Financial planning is not a subspecialty under business, finance or accounting. It has some areas of subject matter in common with all three, but it is a generalist's designation and profession. Some of us may specialize, but the value most of us have in the marketplace is in our ability to help our clients with their financial affairs, coordinating personal finance principals with the technical areas of financial planning to create and maintain a balanced life. Similar to engineering and medical practice, there is a lot to learn in the doing. CFP professional education is largely a language course where concepts are broached and integrated. Without the "lab" or "residency" training of practice, malpractice is highly probable. Three years may be the requirement for certification, but it may be insufficient preparation for those who wish to be fully competent and valuabe to the public. That is why we are to judge and practice only in areas in which we can assert competence. Professor Basu is trying to understand our profession much in the same way that a farmer might try to understand what a chef does. As far as the farmer is concerned, the chef doesn't know enough about grain. As far as the chef is concerned, through experience he learns enough and applies his skill sufficiently to be able to create delicious food that satisfies those who eat it, though occasionally he may suffer a bad result in his kitchen. His supervised training in the kitchen can keep him out of trouble until he is capable of applying his knowledge and skill. I suggest that most academic departments that attempt to train financial planners are similar in their lack of understanding of the professionals they are preparing. Until there are faculty who have been successful in the practice of the craft of financial planning, we will have this problem.
nodroj1 15 years ago

How professorish! One who admits he's not a financial planner sits in judgement of the FPs mark of expertise.He further states that he really only knows investments.There's more to Financial Planning than investments. Real people and real families and real heritages are involved. I suppose Basu is tenured. How much C E does a tenured professor have to do?Just wonderingGiff JordonNo designations--just 48 years of financial planning without a single complaint.
CYA 15 years ago

Calculators

I am sure that the CFP Board will respond to your new posting but I would like to state that I think that your desire to have more questions requiring the use of a calculator may be misplaced. I taught the investment module of the CFP Program and after the first semester decided that it is better to work on the concepts of waht the calculator is telling us rather than the keystrokes.Data on onvestment performance is readily available and software will be used to create more spreadsheets and reports than a calculator that I really feel that the HP 12C etc is becoming less of a tool.Ethical and Competency are worthwhile objectives in all professions.

CFP Mark Standards Too Low?

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