Also available as podcast (Episode #38)
Am I required to have a CFP designation to start my own RIA?
The Certified Financial Planner (“CFP”) designation is arguably the mostly widely recognized professional designation within the financial services industry. From a purely regulatory perspective, holding a CFP is not required in order to start/maintain your own Registered Investment Advisor (“RIA”). Depending on the state you reside in, the designation can however often be used in lieu of a Series 65 or 66, that would otherwise be required to establish your Investment Advisor Representative (“IAR”) status underneath the RIA. Likewise, while perhaps not regulatorily required, there are growing pressures within the industry that are creating an environment in which holding the CFP is increasingly becoming more of a must have, than simply a nice to have designation.
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Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition your practice into the RIA model.
Today’s video, I got asked this just the other day, so I thought I’d make a quick video about it. If you don’t currently have a CFP, a Certified Financial Planner designation, can you still transition into the RIA model, whether that’s to start your own RIA or perhaps join an existing RIA? Is that a requirement?
I wanted to give a couple of thoughts on this, both the answer from what it technically is, and give you some thoughts about what I think the future could bring with that.
The CFP, Certified Financial Planner, is arguably the most universally known, universally recognized designation in the financial services industry. So certainly it carries a lot of weight with it. The question though is are you required to have it to be an RIA?
A couple of things on this. From a purely regulatory standpoint, the answer is no. There’s no regulatory requirements that says, “Oh, to go start your own RIA, you have to have the CFP.”
To start an RIA you have to go through the process and work. I’ve done plenty of other videos on this, and working with compliance consultants of how do I functionally start up that RIA. And then underneath your RIA, you will be an Investment Advisor Representative, an IAR, of the RIA. Again, I did a whole video on the difference between an RIA and an IAR. But the idea is you can go out and you start that RIA and you can become an IAR underneath it without the CFP.
Now, there are requirements. You do have to have generally a Series 65 license depending on what state you’re in. The 66, can be used in lieu of that as well. So it’s not that there’s isn’t requirements to start your own RIA and be an Investment Advisor Rep underneath it, the CFP is simply not regulatorily required as part of those steps.
A couple of things, though, related to that. As noted, you will need by default, the 65 license or 66, or whatnot. And in some states, you can use the CFP in lieu of the 65 or 66. So perhaps you have a CFP, but not the 65 or 66. So the CFP does come in handy there, although that’s not required that you use it in that capacity. It does help you.
Now, any of you that are existing and practicing advisors that already have fee-based assets, fee-based relationships with clients, you’ve already checked that box somehow. Either you already have your 65 or 66 or your CFP. But for what it’s worth, the CFP can essentially help you in that regard if you haven’t got that 65 or 66, but it’s not a requirement that you have it to become an Investment Advisor Rep.
That’s the regulatory answer. There is plenty of opinion out there of whether you should have your CFP if you’re going to hold yourself out as a Registered Investment Advisor providing fiduciary advice. There’s certainly very strong opinions on that.
On one hand, I have heard advisors just out of principle say, “Well, I shouldn’t be forced to have a credential unless I want to have the credential,” and just almost on principle alone will disagree about such a requirement.
Then there’s other folks that feel very strongly that if you are going to, again, hold yourself out as an RIA, hold yourself out as a fiduciary, be providing that comprehensive advice to clients, that the CFP should arguably almost be a minimum amount of designation that you have to demonstrate your expertise and to certify that to your clients. There’s no shortage of opinions on that.
You kind of have three camps on this. You have the people that feel very, very passionate that you should have it if you want to be in that position. You have some folks, a much smaller number of folks that are kind of very principled, and while they might go down that path, they don’t want to be told they have to have that. And then you quite frankly have a big chunk of people that are indifferent to it and feel, “Hey, if it’s best for your practice and it’s going to help you with your clients, by all means do it. But hey, some people will, some people won’t.” And so you do have that camp as well.
I’m going to dive here into what I think the future will bring of that, that “should” camp, and I think you’re going to hear more and more about that as the years go by.
A couple of quick thoughts on a looking forward basis, some things I’ve observed. I help advisors, in some cases that’s start their own RIA, and in other cases because of their individual circumstances, perhaps it’s joining an existing RIA. So I talk to a lot of RIAs out there and try to understand, what’s your value proposition? What kind of platform have you built out? Why should an advisor consider you versus all of the other options that are out there?
I will tell you, thankfully, this is wonderful for the advisor community, that bar keeps getting set higher. There are some amazing platforms out there that provide amazing service and capacity for that advisor to utilize. It makes it very competitive, and that’s to the advisor’s benefit.
Although with that, if you are one of those platforms, you also need to differentiate and stick out in the crowd, if you will, and what’s going to attract quality advisors to your particular firm. And so, some of them are becoming more and more choosy, and maybe that’s, “Hey, we’ll only consider an opportunity with an advisor if they have X million in assets already.” So with some, there’s a size requirement. With others, there might be an asset management philosophy that they are perhaps index, passive type investors, and while they certainly still give flexibility to the advisors that are joining them to control their portfolios, they want to make sure they’re at least culturally aligned with that investment philosophy.
Then specific to this video, I have started to encounter more and more, it’s still kind of a small number, but of RIAs that have told me one of the things that they look for and sometimes require of any advisor joining them is a professional recognized designation beyond just that regulatory license of a 65 or a 66. They literally say if you don’t have, whether it be maybe a CFP, a CPA, a CFA, any of the really high level recognized, and there’s others, I don’t want to do any injustice…I certainly wasn’t attempting to name them all, but literally say if you don’t have, advisor, at least one of those, we’re not a home for you.
So just know that that bar is being raised out there. And likewise, those same firms are out there marketing their own practice, their own firm, their own advisors out there in the marketplace, and pointing that out that we only work with people that have, perhaps a CFP or whatever the designations might be. I think that voice is going to get louder and louder.
Even if you’re not required to do it from a regulatory standpoint, the competitive pressures out there because of firms that are taking that stance, I think will grow louder as time goes on.
Next, with that…along with that voice in the community is the CFP Board itself that continues to do a lot of branding out there in the marketplace of the designation and they do a lot of advocacy work. They are working to make it known out there that this CFP designation brings certain demonstrated levels of expertise or experience to the marketplace. And so, if your advisor doesn’t have a CFP, you should be asking why they don’t and you should only work with a CFP, perhaps.
Now, there are opinions on whether that’s the correct message. And again, I don’t want to put words in the CFP Board’s mouth either, they’re articulating it differently, but their message is basically, “We feel you should have a CFP if you’re going to be providing certain fiduciary services to investors.”
Their brand gets out there and their messaging gets out there and their advocacy keeps growing out there. I think you’re going to see in the marketplace, even if it’s not regulatorily required, does it become kind of de facto must have at some point if that message keeps resonating? Time will tell. I’m not putting chips on the table just yet to say how strongly that may or may not ultimately work out but there is absolutely an ongoing effort to raise that voice. And understandably so, that’s the CFP Board’s job to message that out there. I think they will only continue to do that.
Then one last one I’ll leave you with. To my knowledge no state has done this, I don’t even know if any particular state is considering it. Keep in mind, especially if you’re under $100 million in assets, you would be regulated by your state. Now the SEC…I did a whole separate question on that as well, would you be state or SEC-registered? But even then states still have some degree of oversight if you’re doing business within their state.
We are seeing that, especially with some of the frustrations over maybe a lack of a fiduciary standard across the board on all fronts, that some states are starting to take a lead and maybe putting in additional variables into that advisor-client relationship that other states are not mandating or not requiring.
It is interesting to consider, will there ever come a time that a state might raise their flag and say, “If you want to be an RIA in our state, we require a CFP, or maybe a CPA, or a CFA,” or some level of designation? Again, to my knowledge, there’s no state currently drawing that line in the sand. It’s hard to say what the future will bring. That day might eventually come.
Some people will be big cheerleaders of that potential stance, others will not. I’m sure there’d be all kinds of court challenges to it, but I think, at least directionally, that voice is getting louder. Whether it’s the CFP Board themselves, whether it’s individual states, whether it’s existing RIAs that are letting their voice be known that they demand this of any advisors that work with them.
I think that pressure is only going to grow in one direction. Whether it ever reaches a point that you will find yourself, if you don’t currently have the CFP, required to have it, but just be aware of this kind of trend line, the sort of trajectory that’s occurring out there.
So, bottom line, from a regulatory standpoint, right now, it’s not required. As for what happens in the future, to be determined, for all of the reasons I just stated.
With that, like I said, I’m Brad Wales with Transition To RIA, and this is the sort of thing I help advisors with all day long. Advisors like yourself that have an existing practice, an existing book of business, perhaps are at a wirehouse type firm, an independent broker-dealer type firm, and you’re considering transitioning into the RIA model. Whether you want to learn more about what that would look like for you, the economics, the flexibility, or how to actually go about transitioning into it, that’s what I help advisors with.
The most effective thing you can do is at the top of every page is a Contact link. Click on that and you can instantly and easily schedule a Discovery Call. We can have a one-on-one and I can start having a dialogue with you about your specific practice and what potentially a path into the RIA model would look like, again, as it relates specifically to your circumstances. Happy to have that conversation.
With that, I hope you found value in today’s question and answer, and I’ll see you on the next one.
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