What is a Certified Financial Planner — CFP: What They Do, How to Choose, Benefits of Using, Differences from Other Financial Advisors, Fees and More…
It seems like every day Americans are reminded how ill-prepared they are for retirement — especially as numerous reports highlight the country’s lack of savings.
If this is you, you might consider working with a certified financial planner (CFP). The benefits of teaming up with a financial planner to prepare for your post-career days may seem obvious, but research has actually proven the benefits of doing so.
In fact, baby boomers working with a financial advisor are more likely to have savings for retirement and are more likely to have set a retirement savings goal, according to a 2014 Insured Retirement Institute (IRI) report.
The report also indicates that the percentage of those working with a financial advisor who are highly confident in having sufficient savings to live comfortably throughout their retirement years is more than double those who are planning for retirement on their own.
But be cautious: Not all financial planners are created, or certified, equally. Some have more qualification than others, and fees vary depending on what type of financial planner they are.
It’s important to do your homework before hiring the first financial planner you find online. Here’s what you need to know:
What is a Certified Financial Planner? What Does ‘CFP’ Mean?
Most people think all financial planners are certified, but this isn’t true — nor are all certifications the same.
The “CFP” certification is recognized in the industry as the highest standard in personal financial planning, according to the CFP Board of Standards, which awards the CFP mark.
To earn the designation, financial professionals must meet rigorous certification requirements administered by the Board, including a curriculum of courses covering, among other areas:
- Retirement planning
- Education planning
- Insurance planning
- Investment planning
- Estate planning
- Income tax planning
- Ethics and the financial planning process
Are There Other Names For a CFP?
The term “certified financial planner” and its abbreviation “CFP” are trademarks strictly governed by the CFP Board, so only those who have been awarded the credentials may use them.
While a professional may have earned more than one certification, the CFP mark is distinct and is not directly associated with any other abbreviations or credentials.
However, other certifications — unrelated to the CFP mark — are present in the financial planning world. These include:
- Certified public accountant (CPA)
- Chartered financial analyst (CFA)
- Chartered financial consultant (ChFC)
A chartered financial consultant is similar to a certified financial planner, but the designation does not require candidates to pass a comprehensive board exam as the CFP Board does.
What is the Difference Between a Certified Financial Planner (CFP) and Other Financial Advisors?
The answer to this question can be confusing. Sometimes there is no difference. There are many different terms and certifications for people who advise on financial matters that overlap. There are literally hundreds of inter related certifications and many advisors have more than one.
You might have a financial advisor who is a CFP. You might have a financial advisor who is not a CFP. They both may (or may not be) perfectly qualified to manage your finances.
The terms financial advisor, financial planner, retirement planner, etc… are all general titles that do not necessarily define the education of that advisor. To really understand the qualifications of an advisor, you must learn about the certifications they have passed.
The CFP certification is widely considered to be the gold standard, but there are others that are respected as well.
The Fee Only Financial Planner vs Commissions — How are CFP Professionals Paid?
While it makes sense to start your search by looking at CFP practitioners, savvy retirees should also pay attention to how financial planners are paid, says Cynthia Petzold, a certified financial planner with CommonWealth Financial Planning LLC in Roanoke, Va.
“There are plenty of insurance agents and financial advisors who hold the CFP designation that are paid on commission, which means that they have no fiduciary duty to put their clients’ interests before their own,” she says. “For truly objective advice, retirees should look for a fee-only financial planner — that is, a financial planner who is compensated only through the fees clients pay for his or her advice.”
Many fee-only financial planners are also members of the National Association of Personal Financial Advisors (NAPFA).
“All NAPFA members sign the NAPFA Fiduciary Oath, so that they must act in the best interest of their clients,” Petzold says. “If pre-retirees and retirees are looking for objective advice, they should be looking at CFP practitioners who charge a fee for their advice, rather than being compensated for selling products.”
How Can a Certified Financial Planner Help Me?
Hiring a fee-only CFP practitioner can help increase your retirement confidence and preparedness.
The right advisor can help you decide:
- When to retire
- How much do you need
- What are your retirement income needs and how do you meet those needs
- When should you start Social Security
- How should you be invested
- And much more…
Specifically, as you approach retirement, Petzold says a certified financial planner can help you:
- Put together retirement projections, to answer the perennial questions: Do I have enough money to retire? and Will I have enough for the entire retirement period?
- Making a plan for major retirement goals such as travel, downsizing and providing for loved ones
- Streamline and position investments for retirement spending
- Evaluating old annuities and life insurance policies to make sure they are still appropriate for your situation
- Making sure that wills, trusts and other estate-planning documents are current
- Formulate a strategy for when and how to take Social Security benefits
- Ensure that health and long-term care insurance needs are addressed
- Establish college savings for the grandkids
“Before and during retirement, a fee-only financial planner can answer client questions, educate clients about potential retirement opportunities and pitfalls, and serve as a coach and sounding board as people enter this new, exciting and sometimes scary phase of their lives,” Petzold says.