Satisfying The CFP Board Experience Requirement As A Part-Time Career Changer

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone. Welcome to "Office Hours" with Michael Kitces. For today's "Office Hours," I want to talk about an issue that I hear cropping up more and more frequently these days, and that's the challenges and woes of trying to fulfill the CFP Board's requirements for experience as a part-time career changer. It's a common question I'm receiving these days and it usually goes something like this:

"Dear Michael, my name is Jane. I'm a career changer who's been trying to make the switch to become a financial advisor. I've set up my own RIA and I've managed to get a couple of clients, which is a good balance for me, as I still need to drop off young kids at school and pick them up at the end of the day. So I really don't want to grow my practice any larger right now. The problem, though, is that I've already completed the CFP education requirements, and sat for and passed the exam. And since I'm working only about 10 to 15 hours a week on my client work, it's going to take me eight years to meet the CFP Board's three-year experience requirement. And you don't even get to count the experience if it takes you more than five years after you've finished the exam. So what should I do? I don't want to grow my practice bigger at this point, but I don't know how to satisfy the experience requirement in less than five years unless I grow bigger and get more clients. Help."

So, thank you for your question, Jane. Unfortunately, as I said earlier, this is a problem I'm hearing about more and more often lately. It’s an increasingly common challenge that I find cropping up, particularly for part-time career changers.

CFP Board’s 3-Year 6,000 Hour Work Experience Requirement [1:39]

The crux of the issue here is that CFP Board takes a very literal interpretation of the three-year work experience requirement as a 6,000-hour requirement, which is 40 hours a week, 50 weeks a year. That's 2000 working hours a year. For three years, it's 6000 hours, and when you're working part-time, it can take a long time to accumulate 6000 hours of work experience.

Now, in the past – and still, actually – most future up-and-coming financial advisors enter the profession by taking on a full-time job as a financial advisor from the start, which meant it was pretty straightforward: satisfy the three-year experience requirement in three years. Of course, you have to survive in the business in the first place, which is a challenge, because the attrition rate for advisors who started from scratch historically has been as high as 70% or 80% in the first three years. Which means only 20% or 30% of the advisors who took those "advisor from day one" jobs were actually even still around at the three-year mark. But at least if they were able to survive, they – “tick” – check off that experience requirement in the process.

But because the attrition rate is still so high for starting-from-scratch [advisors], not everyone wants to take the "get clients or go bust" risky approach to becoming a financial advisor. I actually strongly encourage people to go get experience in another more stable job first, learn the industry. Then go get clients and become an advisor and ease into the situation. The good news is that there’s been a rise in growth in the number of associate planner and paraplanner kinds of jobs over the past decade. So, more and more advisors now are coming in as this entry-level, employee, full-time paraplanner career path, getting their experience that way, and then moving up the line and becoming a full financial advisor.

And the CFP Board a few years ago actually launched an expedited apprenticeship version of the experience requirement, where if you're involved in all six steps of the financial planning process under the direct supervision of a more experienced advisor, you only need two years of that kind of apprenticeship experience to satisfy the experience requirement, instead of the usual three years. The problem, though, is that those kinds of entry-level jobs may work fine for recent college graduates coming into the profession but they aren’t always feasible for career changers. The income just often isn't high enough to go back and take an entry-level job on a full-time basis when you've got an existing mortgage and kids and other family demands.

Thus, that’s why so many career changers try to ease their way into the profession on a part-time basis, whether it's the scenario of Jane, who's in the midst of a gradual process of re-entry back into the workplace as kids get older, or a lot of career changers I talk to who work on their experience process on a part-time basis, often while retaining a job in their old industry. It's like the engineer who continues to do consulting in the old industry three days a week at a higher income job to make ends meet, and then do two days a week as a part-time paraplanner to gain work experience.

The Uneven Application Of The CFP Board’s Experience Requirement For Real Experience [4:23]

Now, strictly speaking, I don't think it's a bad thing that the CFP Board is holding fast to its requirement for three years of real work experience. Personally, I've advocated in the past that I thought the three-year experience requirement may be a little bit too low, and that three years was better as the apprenticeship requirement. And that the requirement should be as much as five years of other experience or more mixed and varied experience. Because the reality is that delivering personal, comprehensive, financial-planning advice is complex stuff and it takes a lot. Not just the technical rules, but how to effectively communicate them to clients and get them to follow through and implement the recommendations you make so you're actually helping them move forward to achieve their goals.

If you're only doing that work on a part-time basis, it really does take a long time to build up that skill set. But the concern is that about four years ago now, the CFP Board changed their experience requirement and started to allow a really wide range of what they called “indirect support of the delivery of financial planning” to count towards the three-year experience requirement. Examples they specifically noted as now counting towards the experience requirement includes someone who worked in the employee benefits administration area or in compliance, or even a journalist who wrote about financial planning topics, even if they had never actually once sat across and advised another human being… ever.

In essence, all you had to have was industry experience – or even just writing about the industry – to qualify for the experience requirements. Or, as I heard one advisor put it at the time, the question was basically, "Have you ever spent three years inside of a building where there are people who were somehow involved in any way, shape, or form with the financial services industry? Great. Go ahead and check off your personal financial planning experience requirement."

Similarly, a large number of financial advisors still fulfill their experience requirement by getting hired into jobs as entry-level financial advisors who are really financial salespeople, recruited by a broker-dealer or an insurance company to sell various insurance and investment products to consumers and maybe possibly along the way, do a financial plan for a few of them… maybe. Which is concerning, because when you get hired in that kind of role, the overwhelming portion of your job is not getting financial planning advice and getting experience at it. The job is mostly prospecting and trying to get 10 or 20 or 25 prospect beings or more a week on your calendar to sell something to.

And then, only a small percent of those will become clients. And many of them will just buy a single product you have available and not necessarily engage you in comprehensive financial planning, because you're still new and you don't have much experience and you may not have much advice to give yet and get paid for. But here's the problem. It means that if you take a full-time financial advisor job, even if it's mostly about prospecting for clients and less than one day a week of actually doing anything financial planning, that counts for full-time experience.

Whereas, if you have a sales job in any other industry or any other consulting job, or just any other job where you do the exact same one day a week of financial planning stuff, that only counts as a 20% job, which means you'll have to do it for 15 years to get three years and 600 hours of experience. Even though you're doing the same financial-planning work, it's just the other non-financial planning work that differs. And that's a huge concern to me, because it means that two people with the same actual hands-on financial planning experience get very different credit towards the CFP experience requirement not based on the real planning experience they're getting, but based on what industry they happen to be doing their non-financial planning work in, in the meantime.

Which means part-time planning where the rest of your time is prospecting is okay. But part-time planning where the rest of your time is doing something else that gets money and puts food on your table, because it actually pays you more and you need to provide for your family, doesn't count. And that's, I think, created a…what is entirely unintentional but a very dramatic bias against career changers coming into the industry and creates really bizarre and not-so-healthy financial incentives for career changers who want to become financial planners. Because it means if you could take up a badly-paying job as a financial salesperson, you can get your three years of experience in three years, even if you're not very good at it and hardly get any clients.

But if you can't afford to not make money as a rookie financial salesperson and you need to career-change more slowly and earn as you go, suddenly the process stretches out to 5 to 10 years or more. And bear in mind that if you do try to get your CFP exam done first - which you ought to need to help you get that first job, even on a part-time basis - now, you only have five years to finish the experience requirement instead of the usual 10, which means if you can't do this more than three days a week, you'll run out the five-year clock before you have a chance to finish off the experience requirement. And bizarrely, that means it's actually easier to complete your experience requirement by not taking the CFP exam first, even though it's easier to get the job, if you can show that you passed the exam.

Fulfilling The CFP Experience Requirement On A Part-Time Basis As A Career Changer [8:52]

So what should a career changer do, if you're trying to fulfill the CFP experience requirement while transitioning into the industry? So I'd offer up a couple of suggestions. The first is, understand that at least as it stands today, the experience requirement has a huge bias for getting work--any kind of work--that is in the industry and can count towards that indirect support experience option, if you're doing this part-time from your old industry. And you're going to have to count the hours as you go and it may take 5 to 10 years to satisfy the experience requirement. If you're in the industry in any kind of indirect support role, the three-year experience requirement gets done in three years.

And that doesn't mean you have to take a financial advisor sales job. Virtually anything in the financial services industry counts. You can do a client service administration, you can work an investment role, you can work in a purely ops role. If you're really awesome at project management, get a project management job at an advisory firm and it's indirect support. Anything that is a job in the industry counts much more significantly. I don't think that's entirely fair or appropriate, but it is reality and you should realize that opportunity. Even if you're just trying to translate old industry skills to our industry in a non-advisor role, you can still get through that experience requirement faster.

If you're going to work your way through the industry and you're going to have that count-the-hours effect, give some consideration when you take your CFP exam, because unfortunately, as I mentioned earlier, the general rule is that you have 10 years to complete the experience requirement and you have to do the three years in a 10-year window. But that's reduced to only five years after you've finished the CFP exam once you complete it.

Now, that doesn't mean you should wait to start taking your CFP courses and learning the material. You can begin that now, but be cognizant of the timing of when you sit for your exam, if you know you're only going to be working a day or two a week toward the experience requirement for a long time to come.

Number three, be aware of the ways that you can shore up experience hours beyond just part-time work. Not only do things like internships count as experience hours along with any kind of part-time work, but pro bono financial planning, including programs like the IRS's volunteer Income Tax Assistance or VITA program and also their Tax Counselling For The Elderly or TCE program can generate hours that count towards the experience requirement. And that's good experience at really helping people. And don't forget the FPA residency program, which is a one-week intensive on-site financial planning course that counts for three full-time months, or 500 hours, towards the three-year 6000-hour CFP experience requirement.

Although again, unfortunately, that's a non-trivial cost of a couple thousand dollars to accelerate the experience requirement, so you do need some financial wherewithal for it. But it's an excellent program, great teaching and just turbo-charges your hours. Now, I know for at least some career changers, they're going to be tempted to take a financial advisor job that's really a sales job, because the people who pitch you are going to say, "You have a great earning potential and you can bring in your list of people that you might work with. And it's better than other low-level industry jobs to gain experience." The caveat, though, is that unfortunately, as lot of firms overpromise and under-deliver on how hard it is to start an advisory firm from scratch, especially when you have no experience.

There is a reason why three years of experience is a standard for the CFP marks before you get them. And if you put yourself in a position where you need to get clients and close business because you're doing your experience requirement in a pure commission job, you risk putting yourself in a position where you compromise your own integrity. And just think about it: would you use a doctor who was so anxious to get their medical experience that they skipped residency and fellowship and training and just opened up a shop to get patients with no actual supervision or training as a doctor? Would you trust the medical guidance that doctor gives you? Probably not. Don't do the same thing to yourself and your clients, to try to jump-start your career as an advisor and skip an important step.

I know it's a painfully slow path to get experience first, but it's what you'd expect from any professional. It's the standard you should hold yourself to, as well. And frankly, the reality is that advisors are drastically more likely to fail out of the industry without getting some experience and familiarity anyway. It's just too much to absorb, up front. Now, the good news is that the long-term income potential for being a successful financial advisor is very rewarding. Median advisor income is two to three times the U.S. household income. So you may have to take a step back for a few, but then, you can more than make up for it in the long run.

Suggestions To Improve The CFP Board’s 3-Year Experience Requirement [13:18]

In the meantime, though, I do hope that the CFP Board revisits some of these experience requirement policies and better considers how they impact career changers that are trying to transition in when it often has to be a part-time basis, simply to make financial ends meet for themselves. First and foremost, the requirement to complete the experience requirement in just five years after the CFP exam is actually quite punishing to those who are transitioning in on a part-time basis. It forces career changers to work at least three days a week on a job once they complete their CFP exam, which just may not be feasible for some people making a gradual change due to the financial realities of their changing careers.

There's already a 10-year window in place for those who haven't sat for the exam. We've already collectively decided 10 years is okay. When the window gets shorter for those who've have sat for the exam, it makes people not want to sit for the exam, which I don't think is what the CFP Board intended to do, because that's going to slow down the long-term growth of the marks. So a good starting point would be at least to make this a six-year or eight-year requirement after the exam, or just re-unify it to the 10-year requirement. And if necessary, we can always apply CE requirements to those who take a long time between the exam requirement and the experience requirement, just to make sure their technical knowledge is up to date.

Second, I think it's time we, collectively as an industry, get real about how not practical most industry experience actually is. The idea that a career-changing, part-time paraplanner who does plans once day a week will need 15 years to satisfy the experience requirement, but a salesperson who spend 80% of their time prospecting and one day a week actually doing plans satisfies the experience in three years. It’s just absurd. The actual planning experience is the same. And even with respect to the other 80% time, frankly, there are plenty of other non-industry, non-financial planning jobs I would view as more practical and useful experience than putting someone out there as a salesperson to prospect with 80% of the time.

You could come from a math and engineering background and have more investment and analytical knowledge than an entry-level salesperson. You could come from a psychology or social services background and have more communication experience than an entry-level salesperson. You could have a background as an accountant or a lawyer and have way more experience than most advisors. Heck, you could just have been employed for 5 or 10 years and understand how retirement plans work more than a new salesperson if you were paying attention in any of the 401k enrolment meetings. And realistically, you could be a salesperson in any industry and get similar experience being a salesperson in our industry.

So I don't know why we only account – or… so heavily count – sales and prospecting experience in our industry, when it's about the sale of a product and not necessarily about focused financial planning advice. So if the CFP Board wants to broaden the experience requirement this way without undermining it's integrity, make it a five-year requirement, but count a wider range of non-industry experience that can cross-apply into the industry. And then, perhaps attach one year of real hands-on, practical, financial planning experience, where you really count the hours of doing their real financial planning work.

So, someone's who's 80% sales and 20% planning counts for 20%, regardless of whether their 80% time is industry-indirect or not and will finish at least in five years. Because otherwise, we're stuck in this environment the CFP Board has created where the more honest you are about your limited part-time work as a career changer, the more punished you feel about actually fulfilling the experience requirement, while this broad range of industry jobs that provide not one more iota of actual real, practical experience just sail through without scrutiny.

And I worry that the CFP Board is going to continue to struggle to attract career changers, especially more diverse career changers, with its policy as it currently stands. Because when the pathway to most quickly completing the experience requirement necessitates taking a big step back to often an entry-level job or taking a sales job, it really limits your ability to become a financial advisor to those who already have a lot of affluence to be able to take the financial hit of that transition.

Now, to some extent, this is also limited by the fact that we don't have more financial services jobs themselves that develop non-sales jobs that give people training experience. But I think the CFP Board has a role to play here. And if not, continuing to create a world where doing 20% planning and 80% “something else” means that it takes 15 years to satisfy the experience requirement, but doing 20% planning and 80% prospecting for clients, you still get to blow through in three years, even if you're a terrible salesperson and use up all your savings and don't get any clients: that's not superior experience. Just a bad financial and career decision that the CFP Board has perversely incentivized.

I don't think they meant to create it. But frankly, CFP Board, this is what happens when you make major policy changes without getting stakeholder input and without a public comment period. The bottom line for career changers, though, is just to recognize that unfortunately, we don't have the best pathways for you right now and a part-time transition is going to be a long road for you. So the faster you can get both feet into the industry, at least with some full-time job that counts even as indirect support for financial planning, the faster you can fulfill your experience requirement. And even not-very-financial-planning-oriented industry experience counts entirely towards the experience requirement. So bear in mind, that is an option and a pathway and may get you to your end goal faster.

In the meantime, I do hope that CFP Board maybe considers some of its…well, reconsiders some of its own policies to make this a little bit easier and more practical for career changers – or at least, not so disadvantaged to career changers – compared to traditional industry pathways that frankly, don't necessarily provide all that much more real-world experience, anyways.

And if you have ideas about reasonable policy changes or other kinds of unintended consequences that the CFP Board's current experience requirements have created, I hope you'll share them in the comments after this "Office Hours" and we'll see if we can get the CFP Board to take notice.

This is "Office Hours" with Michael Kitces, normally 1:00 East Coast Time on Tuesdays. Well, obviously, I was a little bit off today. Thanks for joining us and have a great day.