Date: May 12, 2017
Welcome back to Compliance Today! We encourage you to visit often, as Horter’s Compliance Department will be updating this blog on an ongoing basis as another way to get relevant and timely compliance information into the hands of our advisors. Today we are going to be discussing certifications, professional designations and other credentials. We know that obtaining professional certifications and designations can be a source of great pride for many advisors. It is understandable that advisors will want to let clients and prospective clients know what certifications and designations they have obtained. These not only demonstrate the advisor’s competence and professionalism, but they also help to differentiate the advisor from the competition. For these reasons, it is not surprising that in recent years the number of certifications, professional designations and other credentials has grown tremendously. This increase has sparked a debate in the financial services industry regarding the credibility of certain designations compared to others. The Securities and Exchange Commission (SEC), the primary regulator for registered investment advisers like Horter and the ultimate regulator of the securities industry, along with the Financial Industry Regulatory Authority (FINRA), the primary regulator for broker dealers, have grown increasingly concerned over what they consider the proliferation of alphabet soup designations that advisors are using to market themselves.
Although many designations have been accepted as part of the financial services industry, the new tide of credentials that have come about have clouded the legitimacy of the older certifications. Consider a scenario where an unsophisticated investor meets with two different advisors and is given business cards with the following information:
John Smith, CFP, CFA, CLU
James Miller, CBA, DFP, ALA
The alphabet soup of designations certainly look impressive. But without further research, the unsophisticated investor is likely not going to understand that John Smith worked for years and learned a great deal of specialized knowledge to obtain his designations, while James Miller maybe only had to pay a fee to a marketing company and take an online test to get his “designations”.
After reviewing many of the new designations being offered today, it quickly reveals that they only require a small fraction of the course work that is needed versus the more traditional, established designations. Of even greater concern, the Bureau of Consumer Financial Protections (CFPB or Bureau) noticed that there are now over 50 senior specific designations. While designations may be indicative of an advisor’s competence and professionalism, they can also be misleading to an unsophisticated investor. The SEC and FINRA are especially sensitive to any designation that claims to confer specialized skill or knowledge regarding senior specific issues.
The proliferation of new designations caused the CFPB to release a report to the Congress and the SEC, making special note regarding the growing use of senior specific designations in the retirement savings industry. The CFPB report indicated that, not only are financial advisors themselves confused by the number of individual designations as well as the distinctions between them, but also that some financial advisers have used this confusion to mislead consumers or to sell them inappropriate or fraudulent financial products and services.
Senior specific designations or credentials generally suggest that the financial adviser holding the designation has advanced training or expertise in the financial needs of older people that are planning for retirement or who are already retired. Regulators really began to take notice as part of their ongoing review and scrutiny of the so called “free lunch seminars” offered by many advisors. Regulators are worried that senior citizens are being sold unsuitable investments at these seminars by advisors who supposedly have special qualifications to help older investors. Regulators are also worried that an advisor claiming to hold credentials and designations conferring specialized knowledge in senior related issues influences the senior investor’s willingness to listen to and become a client of the advisor.
Although regulators worry most about senior specific designations awarded for little or no effort, regulators have always been on the lookout for questionable credentials. Advisors should be careful in how they describe all of their credentials. An improperly-used designation may be considered misleading and could result in sanctions for the investment advisor representative and the registered investment advisor. A Pennsylvania compliance examiner once said that they will review advisors’ advertisements to determine which firms to examine. If an advertisement is misleading or promises too much, the advisor may become the subject of an examination. So, the advertisement created to attract clients may also be attracting regulatory attention.
Many of our advisors hold variations of the “free lunch seminar”. We support these and recognize that they are a valuable marketing tool as advisors seek to grow their advisory businesses. But advisors should be aware that regulators are highly suspicious of these types of events, due to the misdeeds of some advisors. You should always assume that a regulator has reviewed your advertising for the event and may actually be an attendee posing as a potential client.
Designations, certifications, qualifications, and experience have always been, and will continue to be, extremely important in attracting clients to an advisory firm. Advisors should not be concerned about communicating their credentials with potential clients, as long as they represent meaningful achievement and are not misleading. Horter’s compliance department will carefully review the designations that our advisors wish to use in their advertising and marketing. As a general rule, we follow the Nebraska State Securities Department’s list of approved designations. As one of the few regulatory agencies that actively review designations, Horter has deemed this as an acceptable standard for the use of approved designations. Or to
put another way, if during an examination the SEC determines that an advisor is being misleading in their use of designations, we will have a strong rebuttal if we can illustrate that another regulatory body has reviewed and approved the designation for use in advertising.
At Horter, we only allow advisors to list certain designations on their Horter business cards and in their advertising and marketing. We do this to protect the advisor and to protect Horter against any possible claims of being misleading. On the ADV Part 2B “Brochure Supplement”, however, the advisor has much more leeway to list any designations, certifications and other credentials that they have obtained. The reason for this difference is because, on the ADV 2B, the advisor is required to provide a narrative for each designation explaining who issued the designation, and what the advisor was required to do to obtain the designation and maintain it over time. This gives potential clients the information they need to evaluate the relevance of the designation. Otherwise, on business cards or in advertisements, the potential client just sees “alphabet soup”, with no way to judge whether the credential is meaningful or not.
We hope you have enjoyed this edition of Compliance Today. Please do not hesitate to contact us with any questions or comments you may have. If you have any topics that you would like us to cover in a future edition of Compliance Today, please do not hesitate to let us know.