How Professional Credentials Connect to Financial Literacy

In their recent paper, “Assessing Retirement Income Literacy of Consumers and Financial Advisors: What Is the Value of Financial Professional Designations?,” Eric Ludwig, PhD, Certified Financial Planner® (CFP®) and Chet Bennetts CFP, Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter® (CLU®), Retirement Income Certified Professional® (RICP®), analyze the results of The College’s recent Retirement Income Literacy Study (RILS) and the impact professional designations have on financial advisors’ retirement income literacy.

Why Does Retirement Income Literacy Matter?

Ludwig and Bennetts begin their argument by explaining the need for retirement income literacy, both among Americans in general and specifically among financial advisors. They point to a shift in responsibilities, as individuals are shouldering a greater burden for planning their retirement than they have in past generations. This trend suggests that individuals who wish to retire comfortably and attain all their financial goals will need either some level of retirement income literacy themselves or advice from someone else with significant retirement income literacy.

As for financial advisors, their field covers a variety of topics. According to Ludwig and Bennetts, “Each of these areas requires specialized knowledge, similar to other professions where expertise is essential to effective practice. However, unlike fields such as medicine or law, where specific credentials are mandatory, the financial planning industry allows for more variability in professional qualifications. This situation raises important questions about the role of voluntary credentials in signaling expertise and their relationship to actual competence in critical areas such as retirement income planning.”

"...unlike fields such as medicine or law, where specific credentials are mandatory, the financial planning industry allows for more variability in professional qualifications. This situation raises important questions about the role of voluntary credentials in signaling expertise and their relationship to actual competence in critical areas such as retirement income planning.”

Ludwig and Bennetts draw upon two theoretical perspectives to formulate a hypothesis regarding the importance of designations among financial advisors. The first is Signaling Theory, which, in the context of financial planning, suggests that advisors can set themselves apart from competitors through professional designations. Ludwig and Bennets state, “designations serve as signals of an advisor's competence and commitment to their field.”

The other theory the duo draws upon is known as the Human Capital Theory. This theory contends, “that individuals can increase their productivity and earnings through investments in education, training, and other forms of knowledge acquisition.” By pairing these two theories together, Ludwig and Bennetts propose that designations not only signal a higher level of competency, they “correlate with actual increases in relevant knowledge and competence.”

Analyzing Trends

To support this assertion, Ludwig and Bennetts turn to the RILS for more information. “[The Retirement Income Literacy Scale] used in this survey consists of 38 questions covering 11 domains of retirement income planning. These domains include life expectancy, Social Security, life insurance, annuities, taxes, inflation, housing, Medicare, long-term care, investments, and retirement plans.”

In analyzing these results, several trends emerge. Consistently, Americans have answered correctly on 31% of responses. However, several demographics tend to affect these scores:

• Men tend to score higher than women
• Individuals with higher net worth tend to score higher than individuals with a lower net worth
• Individuals who work with a financial advisor tend to score higher than those who do not

As Ludwig and Bennetts suggest, “both individual characteristics and professional financial guidance may play a role in retirement income literacy.”

Financial professionals who participated in the study were found to score well. As Ludwig and Bennetts analyze the data, they also point out that, “Those with professional designations scored notably higher (87%) compared to those without designations (78%).” This marked difference between advisors with professional designations and advisors without professional designations indicates a statistically significant positive impact of professional designations, even among individuals who score several times better than the average American.
As they continue their analysis of the findings, Ludwig and Bennetts review the impact of multiple designations on a financial professional’s retirement income literacy. According to their findings, multiple designations do correlate to increased retirement income literacy, dropping off in statistical significance at the fourth designation.

As for specific designations, four emerged as significant predictors of increased RILS scores, including the CFP®, RICP®, ChFC®, and CLU®.

Based on these findings, Ludwig and Bennetts assert that, “Financial advisors with designations … demonstrated substantially higher retirement income literacy compared to those without designations.”

Impact

For financial advisors, these results point towards the importance of pursuing professional designations. These designations not only suggest increased competency to potential clients, they act as real indicators of increased competency.

Advisory firms may also consider taking action on these findings. Without a consistent standard for additional education in the industry, firms that want to establish themselves as credible sources of retirement planning advice could consider supporting advisors in their pursuit of the four designations studied:

• CFP®  Certification Education
• Chartered Financial Consultant® (ChFC®)
• Chartered Life Underwriter® (CLU®)
• Retirement Income Certified Professional® (RICP®)

As for clients, Ludwig and Bennetts state, “these findings emphasize the importance of working with designated financial professionals, particularly when seeking retirement planning advice. The higher RILS scores among designated professionals suggest that these advisors are better equipped to navigate the complexities of retirement income planning, potentially leading to more effective strategies and better retirement outcomes for clients.”

Overall, the findings as presented by Ludwig and Bennetts point to the importance of designations for clients, advisors, and firms. They close by stating that, “By investing in relevant designations and continually enhancing their knowledge, financial advisors can better serve their clients and contribute to improved retirement outcomes in an increasingly complex financial landscape.” Ultimately, all parties involved benefit from specialized financial knowledge. 
 

More From The College:

• Learn about the American College Center for Retirement Income.
• Learn about the retirement planning conference, Horizons.