"In your best interest" - a dirty little secret

Consumers of financial advice have long faced the question, "How do I decide who to trust?" This has always been a tough question. Recently, it has become even tougher. As if tax laws, inflation and business risk weren't enough, today's investment advisor has to be proficient in deciphering the effect of economic bailouts, political uncertainty and an exceptionally volitile stock market.

Today, I'm going to talk about what industry insiders call "designations." Designations are the alphabet soup that many advisors place after their names. The general belief is that the more letters the salesperson can insert after their name, the more credible they become in the eyes of the potential client. This "more is better" approach can be summed up thusly: "Missy Doe, CFP, MBA, ChFC" must be more educated and more ethical than "Jane Doe." Even though it might be true in some cases, educated investors know these extras are often nothing more than peacocking and puffery.

One of the most popular designations is the CFP or Certified Financial Planner. In my opinion, there is an awful lot of misinformation about what this really means. A CFP is a generalist. A study conducted by the University of Arkansas points out how little this actually means to the investing public. This study asked current Financial Advisors who earned the CFP how well it prepared them to provide investment advice and services. The responses are shocking: the average answer was only "somewhat." Compare that to the 75% of respondents who said they earned the CFP to "Establish their professional credibility." Read the study here.

Another portion of the study worth noting has to do with the concept of fiduciary duty. A fiduciary is someone who is legally required to place the client's best interests ahead of their own. Obviously, this is a far cry from the self-serving sales pitches one might expect from a stockbroker. I have read many articles telling investors to choose a CFP because they are required to place your interests ahead of their own. This simply isn't true. According the University's study, fiduciary duties are not covered in the CFP curriculum. The fact that CFPs are not actually required to act as fiduciaries is also clearly stated by the CFP Board of Standards itself. According to the Board, the CFP code of ethics relies on voluntary compliance from its members. Frankly, that shouldn't be very comforting.

Is there anywhere an investor can go to ensure that he or she finds an advisor who is actually legally obligated to put the client's needs ahead of their own? The answer is a resounding, "Yes." But you are going to have to dig a little deeper than just reading their business card. The Investment Advisors Act of 1940 is the law that governs Registered Investment Advisors. These firms are required by Federal law to act as fiduciaries for their clients.

To search the Federal database of Registered Investment Advisors, click here.

To search for complaints or disciplinary action against a broker or advisor, click here.