Tell us how you really feel.
What’s coming out of this thread is that a CFA charterholder may be able to pick investments well, and perhaps not always need a financial advisor to choose asset allocations or specific securities, but that financial advisors do a lot more than that… there’s tax sheltering, estate planning, insurance, emotion managment, etc… Even to the extent that the CFA charterholder might know how to construct an investment portfolio to match or outperform the market, it may still make sense to offload some of that work and thinking to a financial advisor if the charterholder is overly busy with family and work obligations. This, entirely aside from the tax, insurance, estate, and other planning features. It’s also useful to have somone who talks to people day in and day out. We don’t always think about contingencies we need to consider for ourselves, particularly if we do more institutional kinds of stuff.
So, yeah, there’s no shame in studying for the CFA and using a financial advisor (I’ll note I was the first in the thread to say that there are reasonable reasons to use a financial advisor, though I forgot about the tax and estate planning aspects). The one thing that the charterholder shouldn’t feel good about is blindly following a financial advisor’s stock or fund picks, unless there is good due diligence on the advisor’s track record. They should also demand that the advisor make deeper arguments about their recommendations than the advisor would normally give to a layperson.
Oh, so you can manage your ROTH IRA so you’ll never need an FA? Ok.
I think if the CFA institute sold a book that covered just tax and estate planning in more detail, I would buy it.
pdx, why don’t you list a few ways that you can add value as a CFP? If you are marketing your services to a CFA person, convince us that we should hire you. This would add value to the discussion and might help convince some of these BSDs to contribute to your industry in the future. If a rich financier walks into your office, are you going to try to sell him your service or say “you fat puke, eat shit and die”?
I think I can answer. This is a real life situation with a client at the tax practice:
John and Jane Doe are in their early 60’s, have a lot of wealth, and have adult children. John dies, and leaves his $5m estate to his wife. A couple of years later, the wife remarries, to a guy named Chris Smith. A couple of years later, Jane Doe Smith dies. Jane’s estate, worth $5m, now passes to Chris Smith, and John Doe’s children are left with zero–nothing–nada–zilch. It doesn’t matter what John Doe or Jane Doe wanted–Texas is a community property state, and the property belongs to the surviving spouse.
How could this have been prevented? Well, you could have set up a QTIP trust, or a Qualified Terminal Interest Plan trust. This would have ensured that the assets would have stayed with the wife, then been passed on to the children, instead of to Chris Smith.
Let’s change gears and assume that they DID set up the QTIP trust. The two kids, Joan and Johnny Jr. now have $5m to split between them. (Both Joan and Johnny Jr. have kids of their own.) However, before they distribute the money out of the trust, Johnny Jr. dies. Joan now has $5m, and Johnny Jr’s kids have zero, which was not what they had planned. If they had set up the trust per sterpes, then Johnny’s kids would have inherited his half of the $5m.
Just a couple of examples.
Also, a good CPA should be able to help with most of these types of issues. I’m not sure if CPA+CFA is as good as the CFP, or if the CFP would provide additional benefit beyond CPA+CFA. Maybe pdx can give us his take.
Also, even though the CFA talks about life insurance (for about two pages), it only discusses it as part of a person’s portfolio. It doesn’t cover the need for life insurance. It doesn’t help a person assess how much they need, whether they want whole life, term life, universal life, variable life, or variable universal life. And if they want a variable policy, how do they allocate their assets within the policy?
The same is true with annuities–there are a million different products. Is it worth the 60 bps to buy a GMWB (Guaranteed Minimum Withdrawal Benefit)? What is a GMWB? Do you have to annuitize in order to take advantage of it?
Of course, both of these are dependent on the fact that they are suitable to the client. Both also have features that allow you to participate in the market upside, but not the downside. That is, they are guaranteed against portfolio losses. (Yes, you heard that right.)
Another true story:
When I was with Ameriprise (not that I’m a fan of Ameriprise), I met with a prospective client. They were two schoolteachers, and nearing retirement. They had a combined income of about $80k. I asked them how much they needed to live on once they retired, and they told me, “Well, we’ll have the mortgage paid off then, so probably about $50k.”
Me: “So you spend $2,500 per month on your house?”
Them: “Heavens to Betsy, no. Our mortgage is $1,500.”
Me: “Is that just principal and interest, or does that include taxes and insurance?”
Them: “I don’t know.”
Me: “Well, do you write a check to an insurance company for homeowner’s insurance, and do you pay the county every year for your property taxes?”
Them: “No, I don’t think so.”
Me: (goes online, checks property tax records and sees that they pay about $2400 per year in property tax) “It looks like about $200 of it is for property tax. I’m guessing another $200 is for insurance.”
Them: “OK.”
Me: “So you think that you can live on $2,500 per month less because your house is paid off. In fact, that will really only reduce your living expenses by about $1,100 per month.”
Them: “…”
I would argue that for any meaningful estate planning, such as the scenario Greenman illustrated, that a person is better off working with an attorney than an FA. Yeah, the FA may be able to QB that relationship, but I would not rely on one vs an estate planning attorney for that type of work. This is, however, an example of where a CFA does not help a person at all…nor is it designed to, but then again it doesnt help you with home improvement skills either.
I find it funny how CFPs (on AF anyway) are quick to get so defensive of the designation and its value. I also find it humorous to even throw around other professional scenarios like surgeons, dentists, etc as anything remotely similar to managing your finances, its comical. As Ohai mentioned, I would be interested in hearing valid arguments for using a CFP when one is a CFA (noun).
Me: “When you retire, will you still be covered by health insurance?”
Them: “Yes.”
Me: “But will your premiums go up?” (I knew they would–my wife was a teacher, her mom was a teacher, and her aunt was a retired school teacher.)
Them: “I don’t know.”
Me: “You’ll probably each have to pay an additional $150 out of pocket every month. That’s another $300 per month in extra expenses that you don’t have now.”
Them: “…”
Me: “In a few years, you’ll probably also have some additional medical expenses. Have you considered that?” (For the record, I have never seen a person under the age of 50 who budgeted for medical expenses, and I have never seen anybody over the age of 60 who did NOT budget for medical expenses.)
Them: “No.”
A CFP is not a subsitute for an attorney. Every single CFP and CPA that I know will only give clients general advice, but they send them to an attorney for the details. I have never suggested, nor will I ever suggest, that a CFP is a subsitute for an attorney.
The question was, “Why don’t you list a few ways that you can add value as a CFP?” My intent was to answer the question–not debate whether it was superior to the CFA, or whether CFA’s (noun) are qualified to do their own plumbing. You’re being argumentative.
Again, I’m not suggesting that CFP is superior to, or as good as, or even remotely comparable to CFA. (And for the record, I am NOT a CFP.) And I agree that most financial advisors, CFP or not, participate in a great deal of puffery. But Ohai asked, and you’re asking why a person would use a CFP when they are a CFA. I have illustrated two points (life insurance/annuities and estate planning) where the material is not in any way covered in the CFA curriculum, but is covered by the CFP.
Yes, a person can do some research on their own and use their brain to figure out some of these answers. A lot of people know this information and have no designations whatsoever. You don’t have to take a test and get some initials to prove that you’re able to do the work. But that’s true with both CFA and CFP. In that regard, CFA is by no means inherently superior to the CFP.
First, CFA>CFP. This is not opinion, this is gravity, it just is…HBS>CFA, I accept this even though I didnt go to HBS, and CFPs should just accept it as well.
Second I think you misinterpretted some of my comments. I am not being argumentative, I am pointing out that for your estate planning example a CFP isnt really the proper resource (an attorney would be). Therefore, in that case, there is no real reason to use or benefit to use a CFP in that case. My CFA comment is in regard to the point I made earlier that CFAs can benefit from outside professionals in areas they are not experts in.
To the scenario of the schoolteachers, I would argue, and as you stated, this is something anyone with a brain can figure out…and certainly doesnt need a CFP. If the point is that FAs/CFPs are good at dealing with financially inept people, then perhaps there is validity to that…and maybe there is some social good to come from it. But I can’t imagine anyone is striving to spend their career dealing with 2 retiring teachers and $200/mo of disposable income either.
So in summary I am not arguing, just saying your 2 examples are instances where either they are not best served by an FA or a example where if a CFA finds himself in the schoolteacher scenario they really F’d it up.
Ohai, fat puke may have been coming on a little strong. I’ve read all the material in L2 but I’ve learned little. L3 seems to be highly concentrated in PM. Perhaps I speak out of turn. I would cower in the prensence of a potential CFA client. They’d likely be the biggest pain in the ars in my book. Second guessing everything I do, and regarding the investment decisions (a portion of what I do) would be right more than I. I think greenman is taking the torch up for CFP well enough. I’d only add that what I have the potential to do with my clients, some are very bright, is save them a ton of money with proper tax planning, estate planning, and quarterbacking relationships when needed. And, I’m blessed to have done that. Good FA/CFP’s have spent a career, in my case 15 years, thinking about, working with, planning around, issues about making and saving money or building wealth. The scope is broad. Years and years of grinding out the same subjects over and over again, scenario after scenario (not case studies) continues to teach me, every time.
Mr Leverage, sorry about the ‘surgeon’ analagy. I was speaking up to your level. Better to have said it’s like a Honda Mechanic working on a Volkswagen. The CFP is much more attainable, no doubt. Yet, I still worked my ass off to get it and damn it,…my mom is really proud 
How do you figure? I’ll agree that it’s a harder exam. I’ll agree that CFA’s are, on the whole, more intelligent and more well paid than CFP’s. But simply from a PERSONAL FINANCE perspective, how can you say that CFA is inherently superior to CFP?
A CFA can calculate economic pension expense. So what?
A CFA can tell you how many members on a BoD should be independent. So what?
A CFA can define heteroskadicity and state how to correct for it. So what?
A CFA can define the problem of asynchronous data with commercial real estate properties, and how it downwardly biases the standard deviation. So what?
A CFA can describe how embedded options in MBS’s make duration an inappropriate risk measure, and provide alternative ways of valuing the MBS. So what?
Here are some REAL personal finance questions that people need answered. A “basic” CFP is qualified to answer these questions. A CFA probably never will.
Can I deduct my student loan interest from my taxable income? Is this a Schedule A, or itemized deduction? Does it have to be greater than 2%, 7.5%, or 10% of AGI? (Yes, it is deductible as a page 1 deduction–not subject to AGI limitations.)
Can I deduct my mortgage interest? Property tax? Property insurance? Mortgage insurance? State sales tax? State income tax? Medical expenses? Medical insurance premiums? Life insurance premiums? Car insurance premiums? (Yes, yes, no, yes, maybe, maybe, yes–but only the portion that is greater than 7.5% of AGI, yes–if it’s not covered by your employer, no–because proceeds are also nontaxable, no.)
Can I contribute to a Roth IRA? A traditional IRA? Both? Are my contributions deductible? Are my withdrawals taxable? (The answer to these questions is beyond the scope of this forum, but it depends on how you file your taxes–Single, HoH, MFS, or MFJ. It also depends on how much your AGI is, your MAGI is, and whether you’ve covered by an employer’s plan.)
What are the contribution limits to a 401k? A 457? A 403b? What is the limit on the employer’s match? What are the differences? How can I roll the balance over into my Roth IRA? Can I borrown from my 401k? If a 401k and an IRA are essentially the same thing, why can’t I borrow from my IRA?
What is an annuity? How do you get to guarantee me agains portfolio losses? (Yes–this can be done with an annuity.) Should I buy one? Should I get a variable annuity? A fixed annuity? A single-pay annuity that is immediatly annuitized?
Should I buy life insurance? How much? What type?
Should I buy disability insurance? Short or long term? How long do I have to wait before it kicks in? Does it pay me for three years? Forever? Until I’m 65? What if I can work, but not in my current profession?
(I’ll pretend, if only for brevity’s sake, that a CFP provides no benefit for estate planning purposes.)
How much cash should I have tucked away? Should it be in a savings account or a money market mutual fund? What’s the difference? (Try explaining to somebody that a money market mutual fund is not guaranteed–and watch them flip out.)
What is a 529 plan? What is an educational IRA? What is the difference? Texas offers 4 different 529 plans. Which one is the best? Can we use the money from one of these accounts to send our kid to a private elementary school? Middle school? High school? Is tuition to a private school tax-deductible?
Can I withdraw money from my IRA to pay for my kid’s college? Can I take a second mortgage on my house to pay for my kid’s education? Is it a good idea to do either one?
Should I start drawing Social Security at 62? 65? 67? What happens if I wait? My wife is four years younger than me. What strategies do you have to help us maximize our after-tax Social Security benefits? (Social Security benefits are a really big deal for people who are close to that age.)
Going back to the annuities–are they taxable? Are they tax deductible? (Annuities have some of the weirdest taxability laws.)
Are dividends taxable? At what rate?
Are capital gains distributions from my mutual fund taxable? At what rate? Does it depend on whether they are short or long term?
What is the basis on my investments? How much is taxable and how much is a return of capital?
Are reinvested dividends taxable? Are reinvested dividends in an IRA taxable? If I buy a mutual fund for $1,000 and they pay a capital gain of $100 and a dividend of $50 and I reinvest them, but then I sell the mutual fund for $1,300, what is my basis? What is my tax liability? (The CFA curriculum covers this in only a very broad sense–too broad to be able to answer a “real” question with any certainty. When people ask you these questions, they want real numbers, not archaic textbook theory, which is what CFAI gives you with regards to taxes.)
Hopefully I’ve made my point. This was all stuff that I thought of off the top of my head.
I realize that a lot of people will say, “You don’t have to be a CFP to describe the difference between a Roth IRA and a Traditional IRA.” I agree–but you don’t have to be a CFA to calculate Beta, either.
Let me turn the question around on you, Mr. Leverage. Knowing that a person can simply buy two mutual funds–a diversified bond fund and a diversified stock fund which will earn them over 90% of the market return, what value does the CFA provide to 95% of individual investors? Is there any reason why you should think that a CFA is better than a CFP? Just because you can describe put-call parity, do you really think that you are capable of managing your own finances?
^^ Greenman, a CPA can answer all of these questions too.
CFA > CPA > MBA > GED > CFP
Happy Friday, jerks!
I’m well aware of what questions a CPA can answer.
I agree that CFA is more rigorous. I agree that most CFP’s are wolves in sheep’s clothing. I agree that most financial advisors are just peddling mutual funds and insurance products to line their own pockets. I know that CFA’s think they are Beyonce and think that CFP’s are Kelly Rowland.
Other than Ohai and Bchad, the overwhelming majority of the peanut gallery is saying, “CFA>CFP at all times, in all places, in all situations, for ever and ever and ever.” But not one single person has made any argument (much less a good argument) as to how a CFA provides any value at all (much less on a cost-benefit basis) for 95% of all investors.
Will somebody actually address the point? (instead of spewing an obviously biased platitude)