There are many factors to consider when deciding which financial advisor you should retain.
One of the most important ones is to be sure they are registered investment advisors. These advisors (known as “RIAs”) are required by law to make extensive disclosures, especially about their fees and any conflicts of interest. They must always put your interests above their own.
Once you have narrowed your search further, you should carefully consider the qualifications of each advisor.
Here’s information you may find helpful.
Unless they fall into one of the exemption categories, RIAs must pass the Series 65 exam, which is administered by the Financial Industry Regulatory Authority. This test takes 3 hours to complete. Applicants are required to correctly answer 94 of the 130 scored questions.
You may be surprised to learn that passing this exam is the only requirement for becoming an RIA, in addition to registering with the Securities and Exchange Commission or the state (or states) where the advisor will be doing business.
There are no minimum educational requirements to become an RIA. You don’t even need to be a high school graduate.
Currently, there are no continuing education requirements for RIAs in Missouri.
You could find yourself interviewing two RIAs at different firms. One never graduated from high school and took no continuing education. The other has a graduate degree and certifications reflecting years of advanced study.
It’s up to you to educate yourself on which credentials are meaningful to you.
You may have noticed a confusing array of acronyms after the name of some financial advisors. Some of these designations are meaningful. Others might reflect a week-end or less of online study.
Here’s a list of the most widely used designations that reflect significant study and expertise (in no particular order):
1. Ph.D. in Finance
Relatively few RIAs hold a Ph.D. in Finance from an accredited educational institution. To attain this degree, applicants are required to meet rigorous educational requirements, which can take 3-7 years of graduate study.
Chartered Financial Analysts undertake 300+ hours of study over a 4-year span, and are required to pass three examinations.
Earning a masters degree in business administration requires two years of full time study, focusing on accounting and finance subjects.
Certified Financial Planners must demonstrate experience giving financial planning advice, meet requirements relating to ethics, meet certain educational requirements and pass an examination.
Aspiring certified public accountants must have a bachelor’s degree and at least 150 hours of coursework. If applicants did not major in accounting or business, they must complete a minimum number of accounting-related credits, as determined by the accounting board in each state.
All states require candidates to pass a rigorous examination, administered by the American Institute of Certified Public Accountants, consisting of 4 parts. Most states give applicants eighteen months from the time they pass the first test to pass the balance.
The CPA examination is very challenging. The average national pass rate is around 50%.
CPAs are required to maintain a state license in order to practice, complete 120 hours of continuing education every 3 years to stay certified and commit to a code of conduct, which includes intensive training in ethics.
CPA’s have specialized knowledge in areas that may benefit you as an investor, which is why you should consider financial advisors who are also CPAs.
Benefits of working with a CPA/financial advisor
You can choose to work with both a financial advisor and a CPA. Should you consider retaining one person or firm that has the expertise to deal with your financial and tax issues?
The answer depends on your particular situation. There are many fine financial advisors who are not CPAs. Here are the areas where CPAs add particular value.
1. Simplifying your life
Not all financial who are CPAs will prepare your tax returns, but some include tax preparation as part of their overall service. Financial advisors who aren’t CPAs will coordinate with your CPA, but that means having to deal with two professionals.
If you want to simplify your life, you may find it beneficial to deal with one person or firm where all your financial needs are met.
2. Better tax planning
Not all financial advisors have an in-depth understanding of tax issues. Having an advisor with a deep understanding of tax laws may provide better tax planning.
3. Bigger picture
CPAs have an in-depth understanding of your future goals and your financial history. They are able to review your historical tax returns to detect patterns and weaknesses.
A CPA who is also a financial advisor may provide a more in-depth understanding of your overall financial picture.
4. Expert guidance
The background and education of a CPA is excellent preparation for rendering a high level of service in areas like investment planning, education planning, estate planning, risk management, strategic business planning and retirement planning.
Providing guidance in these areas often involves an analysis of tax issues, cash flow, recommendations of tax efficient investments and withdrawal strategies, estate tax considerations, reviewing assets, liabilities and cash flow and often complex calculations to determine an acceptable level of risk. A CPA is trained to provide these services.
A CPA/financial advisor can also assist you in other areas, like preparing a financial statement required by a mortgage lender and doing tax projections.
As part of your due diligence in assessing the qualifications of a financial advisor, you may want to consider advisors who are also CPAs.