The capital letters after your advisor's name denote more than alphabet soup. Here's a breakdown of what the letters mean and how your advisor can—and cannot—help you.
As you seek advice regarding savings and investments, you come across professionals with capitalized designations after their names. Sometimes two letters, sometimes three, sometimes a string linked by commas and trademark symbols like railcars hooked together on a train.
You must understand that those letters qualify your advisor, and building a financial plan to fit your needs means finding the right qualifications in an advisor. Your advisor should hold a qualified designation as a minimum requirement before you start your planning.
Here are some:
Certified financial planner (CFP). Holders of this gold-standard designation in the financial services industry must take college-level financial planning courses, log at least three years' experience in financial planning and pass a 10-hour examination.
That exam is no quick green light: The CFP Board of Standards, which owns and awards the designation, reports that in the past 18 months only 63% of the 8,596 advisors who sat for the CFP exam passed.
According to the CFP Board, a recent survey revealed that among clients working with a financial advisor, 87% report being satisfied or very satisfied working with a CFP compared with 72% of those working with an advisor without certification.
Chartered financial consultant (ChFC). This designation aligns with the CFP regarding knowledge needed and required. The American College of Financial Services owns and awards the ChFC, the exam for which takes 18 hours.
Professionals must undertake nine college courses (seven required and two elective) in such subjects as insurance, estate planning, retirement funding, investments and others in financial planning. Average study time for the program exceeds 400 hours and advisors, who frequently spend years earning the designation, also complete at least 30 hours' continuing professional education every two years.
Chartered financial analyst (CFA). These professionals study security analysis, stocks, bonds, investment management and corporate finance. They take three levels of examinations to earn the designation, which many mutual fund managers, pension fund managers and endowment managers hold.
CFA charterholders commit an average of four years to complete the program. A recent survey by the CFA Institute shows that almost three out of five advisors sat for the CFA exams to advance their careers or improve their overall professional knowledge.
Certified public accountant (CPA). These pass the Uniform Certified Public Accountant exam given by the American Institute of Certified Public Accountants (AICPA). CPAs qualify to prepare state, local and federal tax returns and provide auditing services for companies. CPAs also represent you in proceedings before the IRS, such as audits.
Each state maintains its own Board of Accountancy for licensing CPAs practicing in that state and each board issues rules governing how a professional becomes a CPA. According to the AICPA, 40 states now require CPA exam candidates to complete 150 hours of relevant college-level education, typically "a good balance of accounting, business and general education," according to the Institute.
Enrolled agent (EA). EAs pass three IRS exams involving personal taxation, business taxation and general tax principles and also represent you in tax proceedings before the IRS. They also complete 72 hours' continuing education courses every three years.
Picking an advisor of course means more than decoding letters: You must find an advisor you connect with and who appreciates your life goals. Examining qualifications and designations gets you off to a great start.