What is a Certified Financial Planner™ (CFP®)?
Key Points
CFP®s are Financial Advisors who have undergone rigorous education, gathered thousands of hours of advising experience, demonstrated their commitment to high ethical standards, and passed the demanding CFP® exam
CFP®s are legally bound to adhere to the fiduciary standard, meaning they are required by law to act exclusively in their clients’ best interests
The CFP® test includes 170 multiple choice questions spanning 100+ financial topics — CFP® candidates often study for years to feel adequately prepared
The legal and ethical requirements involved in attaining CFP® distinction have become stricter and more demanding over time
There are roughly 87,000 CFP®s in the U.S.
Financial Advisors, and then Some
Certified Financial Planners™ (CFP®s) are financial advisors who have earned the CFP® distinction as a result of attaining the necessary education and experience requirements, and by passing the long, grueling, and exhaustive CFP exam, administered by the CFP Board of Standards. As financial advisors, CFP®s advise clients on any and all matters related to money, including (but not limited to) tax planning, estate planning, and retirement planning.
In advising, CFP®s will follow the same general process outlined in the Financial Advisor definition article. That is, they will have their clients fill out a financial health questionnaire, develop a plan according to clients’ financial goals and risk tolerance, they will take the tangible steps toward achieving those goals, and they will provide their clients with periodic progress reports.
The difference between a financial advisor and a CFP® is not merely nominal. To become a financial advisor, one needs to possess thorough knowledge and training, so that they are ready to advise on a range of financial circumstances. But to become a CFP®, one needs deep experience, additional education, and a demonstrated commitment to ethical standards. No eligible candidate has fewer than 4,000 hours of work experience in the financial services industry. A CFP®, by definition, is a seasoned professional.
Once a candidate qualifies for the CFP exam, they must undergo a rigorous training and studying process to prepare them for the test — a six-hour, single-day exam, with 170 multiple choice questions spanning 100+ financial topics. Candidates often study for years to become adequately prepared for the exam.
Perhaps what most distinguishes CFP®s from other financial advisors is that they are fiduciaries — meaning they have demonstrated the ability to advise clients according to the fiduciary standard. Unlike its corollary, the suitability standard, the fiduciary standard requires advisors to act fully in their clients’ best interests. The suitability standard only requires that advisors give clients advice deemed “suitable” for their situations.
While it may sound like a semantic distinction, there is a considerable gap between a fiduciary and a non-fiduciary. Their payment models often differ; fiduciaries tend to be fee-only advisors, meaning the get paid either at an hourly rate or by some percentage of their clients’ assets-under-management (AUM). Non-fiduciaries are often fee-based or commission-based advisors, meaning that they may get paid based on commissions from investment product sales. This represents a conflict of interest, albeit a legal one. So, when picking a financial advisors, it is categorically in clients’ best interests to work with a fiduciary.
Unlike a program like tenure for college professors, the CFP® title is not a lifetime appointment. CFP®s must take and retake tests on an annual basis to ensure that their knowledge and experience remain sufficiently thorough and up-to-date. Regulatory requirements often change, so to remain effective, financial advisors have to keep abreast of updates. What this means is that if an advisor has the CFP® distinction, it is definitionally current.
Because of the time it takes financial advisors to become qualified for the CFP® designation, the difficulty of the exam, and the fiduciary standard which guides CFP®s’ advice, the CFP® designation has become highly desirable among clients in search of quality financial advisors.
How Financial Advisors Become CFP®s
To become a CFP®, financial advisors must fulfill four major requirements:
1. Formal Education
2. Relevant Work Experience
3. Demonstrated Commitment to Ethical Standards
4. Passing Grade on the CFP Exam
Formal Education
Financial advisors eligible to become CFP®s must hold a bachelor’s degree or higher from an accredited university, as recognized by the U.S. Department of Education. Following that, they must complete a broad list of courses on financial planning, as determined by the CFP Board. Candidates who have completed secondary degrees (e.g.: MBAs) or who have earned separate certifications (e.g.: Chartered Financial Analyst; Certified Public Accountant) may not have to take these additional courses.
Relevant Work Experience
After completing educational requirements, CFP® candidates must have accumulated three years or 6,000 hours of work experience in the financial services industry — or two years/4,000 hours of time in an apprenticeship role (subject to additional requirements). The work experience requirement ensures that CFP® candidates have both a theoretical and practical comprehension of financial advising.
Demonstrated Commitment to Ethical Standards
Eligible CFP® candidates must disclose a wide array of personal information to the CFP Board. If customers have ever complained about a candidate, the candidate has filed for bankruptcy, the candidate has been linked to criminal activity of any kind, the candidate has ever been fired, or the candidate has ever been investigated by a government agency, they are required to tell the CFP Board, and to explain the consequences of the event(s). In addition to personal disclosures, the CFP Board then conducts its own thorough background checks. In addition to the obvious purpose of evaluating each individual candidate, the CFP Board also does this to maintain the integrity and credibility of the CFP® title.
Passing Grade on the CFP Exam
The CFP exam is widely considered to be the most the difficult CFP® qualification to achieve. With 170 questions administered over the course of two three-hour sessions in a single day (separated by a 40-minute break), the exam requires extensive preparation and focus. Test areas include risk management, professional conduct and regulations, tax planning, retirement planning, and estate planning; more complex questions test candidates’ abilities to develop healthy and ethical client-partner relationships, gather all the information necessary to provide expert guidance, and to execute the plans they have a developed.
Because the CFP® distinction is so coveted among financial advisors, and because it can have such positive consequences for advisors who achieve it, the CFP exam is set up to be a kind of crucible — a severely difficult trial that only the most qualified can pass through. As such, candidates often prepare for years before their first attempt at the exam. The exam’s pass rate tends to hover just below two-thirds, and candidates who fail the test may retake it only four additional times. It behooves them to pass the first time, as studies have shown that exam-takers are more likely to pass on their first effort than on subsequent efforts.
The exam is criterion-referenced, meaning tests are graded against an objective standard, rather than on a bell curve. This ensures that all candidates meet the same qualification standards, regardless of how their peers rank. Additionally, rather than receiving a detailed report of the percentage of questions they answered correctly, exam-takers receive only a message indicating that they have or have not passed the exam.
The Evolution of the CFP® Designation
Financial advising as a profession came about in the wake of World War II, following the Investment Advisers Act of 1940. This act represented the first set of regulations which governed the financial services industry and was the first time the concept of the fiduciary standard was set forth.
Financial advising would develop for decades, and in 1969, experienced a watershed moment. Recognizing that the realm of financial planning needed formalizing and refining, 13 financial professionals who had gathered in Chicago’s O’Hare airport planned the creation of the Association for Financial Planners (IAFP), as well as the College for Financial Planning.
By 1972, IAFP had enrolled the first 35 students in CFP courses at the College for Financial Planning. These graduates would go on to form the first group of proto-CFP®s, establishing a membership organization called the Institute of Certified Financial Planners™ the following year.
While the College had contributed heavily to the development and consolidation of financial planning training and standards, it was eventually determined that an education institution would not be the best enforcer of the profession’s ethical standards. 1985 saw the creation of the CFP Board, a nonprofit, standards-setting organization.
In 2007, the CFP Board established its Standards of Professional Conduct, which included a redefined and universally applicable fiduciary standard. Prior to the adoption of this policy, CFP®s were only required to act exclusively in clients’ best interests when they held custody of client assets. Following debates in subsequent years over whether brokerage services fell under the CFP banner, and would therefore be subject to the fiduciary standard, the CFP Board adopted the reevaluated Code and Standards on June 30, 2020.
Under this new policy, any CFP® professional must act in clients’ best interests not merely during financial planning processes, but at all times. All financial advice must therefore be evaluated according to the fiduciary standard, not only planning advice. The CFP Board hopes this will raise the integrity and credibility of CFP®s even further, making the title more desirable to potential candidates, more meaningful to those who hold it, and hold more sway in the minds of clients in search of advisors.
According to information on the CFP Board’s website, more than 87,000 professionals in the U.S. currently hold CFP® certification.
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