Articles About The Financial Planning Profession

After years of tepid increases in the average compensation of financial advisors, the latest bi-annual industry benchmarking studies from both Investment News and FA Insight reveal that the industry’s long-forecasted talent shortage appears to be taking hold.

According to the latest data, the average Paraplanner with 4 years of experience is earning total compensation of $65,000/year (with a nearly $60,000 salary base and 10% bonus potential), an experienced financial planner responsible for client relationships is earning $94,000/year with 8 years of experience, and Lead advisors who are skilled at developing new business are earning an average of $165,000/year, with the top quartile earning more than $250,000/year, and the top practicing partners earning nearly $500,000/year in a combination of salary, bonus incentives, and partnership profit distributions!

Of course, even within those numbers, there can be substantial regional variability. But still, financial advisor compensation across the board was up nearly 6.5%/year for the past two years – from paraplanners to lead advisors – with base salaries for financial advisors growing even faster, especially amongst the largest independent advisory firms that are both winning the bulk of new clients, and the most likely to be working with affluent clients (which generate the most revenue, and therefore allow their advisors to earn above-average compensation). And the demand for talent is leading to a rise in advisory firms attempting to poach advisors from other firms, a growing focus of large firms to build talent pipelines with colleges and universities, increasing use of third-party recruiting firms to hire even young financial planning talent, and a rise in the average time to hire a financial advisor to a whopping 4-6 months.

The trends may not be entirely surprising given that the overall financial advisory industry continues to see the total headcount of financial advisors decline a mere 1% to 2% per year. Yet with the number of CFP certificants actually up by nearly 50% in the past decade, perhaps the real challenge may not merely be a shortage of financial planning talent, per se, but the industry finally discovering that as investment management is increasingly commoditized and firms seek to add value through financial planning and wealth management as the “anti-commoditizer”, that the number of true financial planners was never enough to meet consumer demand in the first place?

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While the CFP Board has done a lot to justify its certification fees over recent years – from increasing the number of CFP certificants over the past 10 years by nearly 50% (despite the fact that the number of financial advisors is down over the past 10 years), to raising the status of the marks with its ongoing successful public awareness campaign – an important but little-noticed announcement was buried half way through the CFP Board's recent monthly email update: the CFP Board will be increasing its annual certification fee from $325 per year to $355. And while this increase may seem modest, because $145 of the total certification fee is earmarked for the public awareness campaign, the reality is that this is a 17% increase on top of the $180 portion that actually goes towards operations of the CFP Board. Which raises the question: why such a large increase, and why now?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the recently announced 17% increase in CFP Board certification fees, as well as why accountability of the CFP Board to its certificants is important, and why it is concerning that the CFP Board has given no substantive explanation for why it is pushing through such a large increase – and particularly for an organization coming off of a $1.3M surplus in 2015 and with over $20M in reserves.

Of course, fee increases aren't unusual in the long run for any organization, as it's essential to keep pace with rising staffing costs due to inflation. And this is still only the first increase the CFP Board has put in place since 2011... which, even then, was just tacking on the $145 surcharge to cover the public awareness campaign. It has actually been nearly 10 years since the CFP Board raised its core certification fees, relying instead on the rising number of new CFP certificants paying those fees to fund growth instead. Additionally, both the public awareness campaign and CFP Board satisfaction ratings appear to suggest the CFP Board is making some good progress.

Nonetheless, accountability is crucial, and especially since the CFP Board has been prone in recent years to taking actions without soliciting much input or holding public comment periods. In fact, while the CFP Board did put forth a recent public comment period on proposed changes to their Code of Ethics and Standards of Conduct, the reality is that their Disciplinary Rules and Procedures require the CFP Board to do this, and it has been over 5 years now since the CFP Board put forth a public comment period on any other changes to the 3 E's (Education, Exam, and Experience) – effectively eschewing the practice ever since the CFP Board got "voted down" in negative public comments regarding increasing the number of required CFP CE credits.

Which raises the question once again of why a 17% fee increase, and why now? Especially on top of the fact that the organization is already running a substantial operating surplus of $1.3 million dollars in 2015 and has more than $20 million in net reserves available. Was there a major downturn on the CFP Board's 2016 Form 990 that we just can't see yet? Is the CFP Board trying to raise more revenue internally for its Center for Financial Planning initiative, even though the organization originally said it would be funded separately (especially in light of the fact that the CFP Board tried to put through a $25 fee increase last year in the form of a "voluntary donation" that certificants were going to be defaulted into)?

Unfortunately, the reality is that we just don't know, because the CFP Board gave no substantive explanation for why it is pushing through such a large increase beyond saying that it "supports the operations of CFP Board in fulfilling its mission and strategic priorities". And so, while it's not necessarily a negative for an organization to raise its fees over time, the question remains: why does the CFP Board now, all of the sudden, need another $2.3 million in its operating budget for 2018? And what does it take to get some transparency and basic explanations from the CFP Board on why it is pushing through a 17% fee increase?

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While the fiduciary debate has become heated in the US in recent years, from the Department of Labor's fiduciary rule, to the potential that the SEC will take up its own fiduciary rule, and the latest proposed revisions to the CFP Board's fiduciary Standards of Conduct, the reality is that the recent fiduciary proposals are not an isolated case. In fact, the movement to applying a fiduciary standard to financial advisors is a global phenomenon over the past decade, for which the fiduciary proposals in the US have actually been mild by comparison to many other countries that have outright banned commissions altogether!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the major fiduciary movement that is occurring globally, how fiduciary proposals have rolled out in other countries (including the U.K., Australia, India, and the Netherlands), as well as the industry shifts that commonly happen after a new fiduciary rule is implemented, and the role that technology has played in fueling this global movement.

First and foremost, though, it is important to acknowledge that the movement to apply a fiduciary duty to financial advisors is truly is a global movement. India was one of the first countries to take action, banning upfront commissions on open-ended mutual funds all the way back in 2009. Australia followed with their Future Of Financial Advice (FOFA) reforms in 2012, which ultimately led to a ban on investment commissions as well. Similarly, the United Kingdom in 2013 implemented their Retail Distribution Review (RDR), which similarly led to a ban on investment commissions in the U.K., and the Dutch implemented a commission-ban that year as well. And in most countries, regulators gave the financial services industry only 12-18 months to prepare for the reforms. Which makes the recent DoL fiduciary proposal in the US, and its extended transition period, seem "mild" by comparison!

The fact that fiduciary rules have been implemented in other countries also gives us the opportunity to see the likely fallout that occurs when financial advisor regulation changes. The common trend in most countries has been that, after adopting new fiduciary rules, the headcount of "financial advisors" appears to decline between 10% and 30%. Notably, though, the individuals who leave appear primarily to be not bona fide financial advisors, but simply those who wrote "Financial Advisor" on their business card, but acted solely as a salesperson... and simply decide they don't want to actually be responsible for giving financial advice, once the investment commissions are no longer available! Which ironically just leaves even more opportunity for the actual financial advisors who remain behind!

With the fiduciary trend occurring on a global basis simultaneously, one might wonder what it is that has led so many countries to implement fiduciary rules in quick succession. The answer, in a world, appears to be: technology. Because around the world, the rise of the internet has made it easier and easier for consumers to access the financial products they want and need directly, without a financial advisor to sell it to them (and earn a commission)... which makes consumers begin to ask "why am I paying a financial advisor for a product I could buy online anyway?" And forcing advisors to actually begin to give bona fide advice, and not just the "advice" necessary to sell a product. In turn, the rise of financial advisors actually focusing on giving advice makes the fiduciary rulemaking a natural outcome. Because when the majority of advisors actually focus on advice, what standard could possibly apply to advice besides one that requires the advice to be in the best interests of the consumer receiving the advice!?

Ultimately, though, the key point is simply to recognize that as technology commoditizes financial products and increasingly forces advisors to focus on truly giving advice, fiduciary rules to hold that advice accountable to an appropriate standard are inevitable... and thus, the fiduciary movement has quickly become a global phenomenon. Which means our battle over the DoL fiduciary rule is not merely some esoteric isolated debate going on here in the U.S... as the fiduciary movement is impacting consumers and advisors worldwide!

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The recent rise (and subsequent decline) of robo-advisors has generated much discussion about the threat (or lack thereof) that technology poses to human advisors. Yet, as discussed previously on this blog, the man vs. machine framing of the role that technology will play in the future of delivering financial planning advice may be too narrow. Instead, the combination of man and machine (i.e., the “cyborg advisor”) may pose the greatest opportunity to human advisors in the long run… and threat to those who lag behind.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines how the game of 'cyborg chess' provides support for the idea that human-computer teams will remain superior to either humans or computers on their own (even when the intelligence of computers vastly outweighs that of humans), as well as some of the insights cyborg chess can provide about how the skills of cyborg advisors will differ from the traditional skills of advisors today.

'Cyborg chess' (or freestyle chess) is a version of chess in which humans can use any resources they want to improve their play… including today’s increasingly-sophisticated computer chess software. One interesting fact about of cyborg chess, as was previously noted by Tyler Cowen in his book Average is Over, is that human-computer duos consistently defeat both the best humans and the best computers. What's even more interesting, though, is that the humans in some of the world's best human-computer duos aren't even all that great at chess themselves! Which means the skills that let humans most effectively assist and execute chess software may be different than the knowledge needed to be a great chess player!

In fact, it turns out that to be skilled at cyborg chess, humans have to be good at letting computers do what they do best, and then excel in areas where humans are more effective. And while there are some obvious applications to financial planning, in areas such empathy and building client relationships (where humans will certainly remain relevant in the future), the same is even true in technical areas of financial planning as well, where computers are typically thought to have an advantage over humans. Specifically, humans can play an important role in areas such as helping computers know where to look for the best solutions, examining inconsistencies generated by different computer programs, helping computers to be more efficient in their calculations and analyses, and knowing the limitations of various programs and when they may generate recommendations that don't align with the real world. And of course, as technology becomes even more prevalent in financial planning, “finology”-focused soft skills and human aspects of giving financial advice will become increasingly important.

The bottom line, though, is simply to recognize that despite the view that computers will come to dominate certain areas within financial planning, the reality is that there are still ways that computer-human duos can be more effective than computers or humans alone. Additionally, this has some profound implications for the skills and knowledge that are needed to be a great financial advisor in the future, and those skills and knowledge may not necessarily align with what we think of (and currently teach under the CFP Board’s curriculum!) as the core competencies of great financial advisors today!

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In the modern era, “money” is essential for survival, a means of converting our productive labor into a common unit of exchange that can be used to buy whatever we need. Yet at the same time, money is complex, and the incentives and motivations it stirs exerts powerful forces on us… such that, even though money is necessary for survival, many lack the basic “money competency” skills necessary to harness its power effectively.

Yet despite the essential nature of money, there is remarkably little research and understanding in how we relate to it. While economics studies how humans allocate scarce resources, and psychology studies the human mind and behavior, there is a gap at the intersection between the two – an emerging new body of knowledge, that financial planning pioneer Dick Wagner dubbed “Finology”.

The key to understanding Finology is to recognize that there are both interior and exterior aspects to our relationship with money. On the one hand, we can’t make financial recommendations without understanding what someone owns and owes, and how that fits within the current economic environment and existing tax laws. Yet that information alone isn’t enough, without also understanding someone’s personal goals and desires, their relationships with family and cultural beliefs, and their vision of what it takes to live “the good life”.

Unfortunately, though, the history of financial planning and its existing body of knowledge have focused almost entirely on the “exterior” factors of money and how it works, and relatively little regarding the individual and their relationship with money itself. Yet in a world where our ability to have a healthy relationship with money is increasingly essential to survive and thrive – or else, we succumb to a never-ending series of self-destructive money behaviors – Wagner suggests that financial planning itself is likely to emerge as a bona fide profession in the 21^st century… as financial planners themselves become Finologists in the future!

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It is widely acknowledged that there is both an ‘art’ and a ‘science’ to financial planning. Technical knowledge – the “science” – is crucial to delivering the technically accurate advice to clients. But the best advice in the world is meaningless if the financial advisor can’t master the “art” of delivering it in a skillful manner – leading a client to actually take action and improve their financial well-being. Yet despite its label as "art", the reality is that how best to deliver financial advice advice can itself be subjected to scientific scrutiny. Which is beginning to happen, with the emergence of several "financial counseling laboratories" in educational institutions across the country.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines what a financial counseling laboratory is, and how researchers are using financial counseling laboratories to subject the 'art' of financial planning to scientific investigation.

A financial counseling laboratory is an environment in which financial planning, counseling, or therapy research can be conducted. The space itself is akin to the kind of office with tables and chairs that financial advisors might use to meet with their clients. However, the key feature of a financial counseling lab is that it contains some unobtrusive means of observation, such as one-way mirrors or cameras, allowing the interactions between a financial advisor and their client to be scientifically measured and tested (and sometimes also monitored by students who may be gaining practical observational training, or even engage in the supervised practice of their financial planning skills).

The existence of financial counseling laboratories is important given how conducive they are to conducting highly relevant research for practitioners about how to actually be better financial planners, and get clients to engage their financial advice. In fact, some of this research is already beginning to emerge, delving into topics such as how the physical office environment influences client stress, how coaching techniques can help clients save more, and how measurements of brain activity suggest receiving counseling from an advisor with a CFP designation (relative to a non-credentialed advisor) may actually reduce stress during market declines! In essence, laboratory research – in a financial setting, examining questions relevant to advisors – may soon begin to shape the future of how financial planners interact with their clients!

Advisors who are interested in supporting or assistance with the research process have several options, from getting involved with organizations like the Financial Therapy Association (where many of the Financial Counseling laboratory researchers are engaged), collaborating with researchers themselves on future projects, contributing financially to organizations such as the CFP Board's Center for Financial Planning, or contributing directly to the handful of universities which already have permanent on-campus financial counseling laboratories.

But the bottom line is that, for the first time ever, the "art" of financial planning itself is beginning to be subjected to scientific scrutiny, with the potential to yield important insights into the practice of financial planning, and how advisors can better get clients to actually adopt their advice!

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From February 7^th through February 9^th, the CFP Board’s new Center for Financial Planning hosted their inaugural Academic Research Colloquium (ARC) in Washington D.C. The event brought together 215 academics from 130 colleges and universities to share and discuss research relevant to the financial planning profession, as a part of the CFP Board Center's longer-term goal of establishing itself as the “academic home” for the financial planning profession (and the research that supports it).

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – provides a recap of the 2017 CFP Academic Research Colloquium, and highlights a few of the latest research studies with particularly relevant takeaways for financial planning practitioners.

The 2017 CFP Academic Research Colloquium had a strong showing from some core financial planning academic programs, with scholars from Texas Tech, Kansas State, Georgia, and The American College serving as lead authors for nearly 50% of all research presentations and poster sessions. Additionally, the colloquium was successful in drawing in scholars from outside of the core financial planning programs, featuring lead authors from 27 other academic institutions, including Wharton School of Business, Harvard Medical School, and Yale.

The colloquium featured a wide range of topics. Some particularly relevant themes for financial planning practitioners ranged from diversity issues within financial planning (including an analysis of the experiences that increase female likelihood of pursuing a career in financial planning, as well as an examination of the predisposition of women to use the services of a financial planner), to client trust and communication (including the use of solution-focused financial therapy techniques to help clients set financial goals, and an investigation of how different types and frequencies of communication are associated with client satisfaction, trust, and commitment), and the always important topic of retirement planning (including a detailed examination of the use of QLACs in retirement income planning).

Overall, the inaugural CFP Academic Research Colloquium was an objective success. Attendance was strong from a wide range of educational institutions (including many not traditionally known for financial planning), research submissions were higher than expected, and the Center for Financial Planning was successful in recruiting a diverse group of academics and practitioners, above and beyond even what the FPA has been able to achieve in recent years with its partnership with the Academy of Financial Services. In the coming years, we will see whether the Center for Financial Planning is successful in their pursuit to become the academic home of financial planning research, but so far it's off to a very strong start.

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Acknowledging the need for and value of professional guidance in the long-term management of investment assets, the Internal Revenue Code allows investment advisory fees to be deducted as IRC Section 212 deductible expenses. Additionally, tax law also allows for Section 212 deductible expenses to be paid directly from the retirement account which accrued the expense, without fear of being treated as a taxable distribution (potentially subject to early withdrawal penalties) or a "prohibited transaction" (which could otherwise disqualify the entire account). However, while the benefits of investment advisory services are implicitly acknowledged in current tax law, the same is not true of financial planning services; unfortunately, financial planning fees cannot be paid from a retirement account without triggering the aforementioned adverse tax consequences... even though they may be equally (if not more) important in helping someone accomplish their long-term financial goals!

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – delves into why it's problematic that financial planning fees can "only" be paid from after-tax accounts, the behavioral advantages of being able to pay financial planning fees from a retirement account instead, and explores how modifying current tax rules could allow more consumers to access financial advisors (while also creating better incentives for all advisors to be able to give advice that aligns with the clients' best interests).

The reason why the source of financial planning fees matters is Shefrin and Thaler's mental accounting framework, which finds that consumption is broadly divided into three buckets: current income, current assets, and future income (or the assets that support future income). We know from behavioral research that people treat these "buckets" of money differently, where certain purchases are more or less likely to occur from one bucket versus another (depending on the nature of the expense). When it comes to financial planning services in particular, which is generally associated with "long-term" planning, mental accounting alignment suggests that consumers would be most comfortable paying such expenses from the "long-term" (i.e., future income) bucket. However, as noted earlier, paying financial planning fees from a retirement account isn't permitted... unless the financial planning services are bundled into a primarily-investment-management AUM fee, or a product commission paid with IRA dollars, which isn't always feasible or desirable.

There are alternative options that could be considered for giving consumers more control over their future income assets, though. One simple solution is to allow consumers to write checks or transfer funds to licensed financial advisors directly from their retirement accounts, and make the expense permissible (without adverse tax consequences) as long as it's paid to a (registered?) financial advisor. Other possibilities include giving consumers greater flexibility to roll money out of employer-sponsored retirement plans (similar to current HSA rules), or opening up paths for consumers to pay for services without rolling their funds out of employer-sponsored plans in the first place. Though, perhaps the simplest solution of all is to modify IRC Section 212 to recognize financial planning fees, which would both allow financial planning fees to be deductible when paid from an after-tax account, and also to be "safely" paid pre-tax from a traditional qualified account (perhaps with a complementary safe harbor under Section 4975 to make it clear that "comprehensive" financial planning fees are not prohibited transactions).

But ultimately, if the aim of tax policy is to facilitate better outcomes for consumers, it's worth acknowledging that the current framework unintentionally exhibits poor behavioral characteristics by limiting the ability of consumers to pay for long-term financial planning advice from accounts that are ear-marked for long-term goals (or forcing those financial planning fees to be bundled with AUM fees or product commissions that may not be practical or feasible in all situations)!

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When we first launched the XY Planning Network in 2014, our vision was to expand access to financial planning for Gen X and Gen Y clients by championing a new financial advisor business model: getting paid for financial advice through an ongoing monthly retainer. A topic about which my co-founder Alan Moore and I literally wrote the book last year.

When we launched, we knew we would be at the cutting edge – or even the bleeding edge – of how financial advisors will get paid for financial planning in the future. What we didn’t know, however, is that we’d also find ourselves at the bleeding edge of regulation over how financial advisors are compensated for fee-for-service advice as well.

Because what we’ve learned in the 3 years since is that the word “retainer”, while relatively straightforward as an explanation to consumers of how services will be paid for – raises significant regulatory concerns. In some cases, we think the concerns are justified; while we’re confident on the value proposition of an XY Planning Network advisor to validate their ongoing cost, there will someday come a day where financial advisors begin to charge monthly retainers but don’t actually do any real work for clients. At that point, consumers become exposed to a new form of “reverse churning”, where similar to abusive AUM fees, the advisor might charge on ongoing fee (or even try to lock clients into an ongoing fee) but not actually provide any ongoing value.

Fortunately, the reality is that with a model like monthly retainers in particular, consumer risk is largely ameliorated by the fact that substantial fees aren’t actually being prepaid in advance (unlike a traditional long-term retainer arrangement); instead, consumers generally have the ability to terminate the advisor at any time, and immediately end what is effectively an ongoing monthly subscription fee they were paying to the advisor. Which is far better than paying an annual retainer fee, and then discovering one month later that the advisor is shutting his/her doors, and that the other 11 months of fees have been forfeited.

Nonetheless, even when paying on a monthly basis, there are still valid regulatory concerns about whether consumers will be protected. Should advisors be allowed to create longer-term retainer fee agreements as well? What kinds of notifications are necessary to ensure consumers are aware of and remember what they’re paying, which in turn helps to ensure the advisor remains held accountable for service and value? What needs to be done to ensure fee billing and the potential access to bank account or credit card numbers that may entail, doesn’t trigger custody of client assets? And how should regulators (and consumers) evaluate whether a fee is “reasonable”, particularly if it is primarily for non-investment purposes and bears no relationship to the size of investment portfolios?

The added complication is that because financial-planning-centric advisors may not manage portfolios at all, they will in practice be regulated predominantly by state securities regulators, which we’ve found over the past several years have quite varying views about the safety (or not) of charging consumers non-AUM fees (and in some cases, different opinions from different regulators in the same state!). In other words, there is little uniformity regarding the above regulatory issues about fee-for-service financial planning from one state regulator to the next. Accordingly, to the extent that the monthly retainer and other fee-for-service financial planning models are gaining momentum, perhaps it’s time for NASAA to consider a Model Rule that sets forth best practices in reasonable regulation and oversight of these new financial advisor business models?

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With the total number of financial advisors continuing to decline year after year, the industry is increasingly focusing on what it takes to attract and retain new financial advisors, with a strong focus on career track opportunities and how to improve retention. However, new research from the CFP Board reveals that the real blocking point to growing the ranks of financial planners is simply that too few young people even know that financial planning exists in the first place! In other words, our struggles to grow are first and foremost a simple issue of awareness... or lack thereof!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we chat with Kevin Keller, CEO of the CFP Board, at the Center for Financial Planning's new Academic Research Colloquium, about the challenges of financial planning awareness, new initiatives from the CFP Board, and what individual financial planners can do to help.

Because despite the fact that financial planning is a very lucrative career - especially when compared to the median household income in the US - the research shows that most young people are skipping financial planning as a prospective college major because they simply don't know that the opportunity exists! As a result, even generalized public awareness campaigning, such as the CFP Board's "DJ ad", have actually been successful at attracting people to download the "Guide to Certification" and check out financial planning as a career.

Fortunately, the needle is beginning to move, as is evidenced by the 1,000 people from baccalaureate programs that sat for the exam this past year (up from 700 the years before). But there is still room for progress. Accordingly, in 2017, the CFP Board will be launching a new "I'm a CFP Pro" initiative - with the aim of increasing both gender and racial diversity by telling the stories of CFP professionals who are women and people of color - in addition to continuing to grow their Women's Initiative (WIN) and women-to-women mentoring program. Also being launched this year is a new Massive Open Online Course (MOOC) offered through Coursera in partnership with the University of Illinois, and a new certificate program with the Columbia University to help train advisors who want to be financial planning educators the necessary skillsets to actually teach the material.

The bottom line, though, is simply to recognize that the biggest problem in bringing new people into the financial planning industry is that many don't realize the profession exists in the first place. So if you want to have a role in advancing the profession, go back and speak to your alma mater or alumni association and just tell them about what you do as a successful financial planner, and help spread the word. Or alternatively, if you're connected to the TV industry at all, help us figure out how to launch a new television show that features financial planning or a central character who is a (good) financial planner!

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