Weekend Reading For Financial Planners (December 21–22)

CFP Board Mulls (Mostly) Tougher Certification And Increased CE-Hours Requirements

(Dan Shaw | Financial Planning)

From time to time, the CFP Board has reviewed its initial CFP certification and ongoing Continuing Education (CE) requirements to ensure they are meeting the needs of the organization, its certificants, and the broader public that relies on the CFP marks as an indicator of professional competency. The latest round kicked off in January 2023, when CFP Board formed a 15-person independent Competency Standards Commission to review and evaluate its competency requirements for Education, Examination, Experience, and CE to earn and maintain the CFP marks, addressing topics such as the amount of CE credits that CFP professionals should need to earn on an ongoing basis (and what content should qualify), current education requirements to get the CFP marks in the first place, and the efficacy of the Experience requirement.

This week, the CFP Board unveiled proposed revisions to the competency standards resulting from the Commission's work. For current CFP professionals, the most impactful measure would be a proposed increase in required CE to 40 hours every two years (up from the current 30 hours), though certificants would be able to carry over up to 10 hours of excess CE hours to the next two-year certification period, and would also be able to earn up to 10 CE hours through pro bono service at a ratio of three hours of pro bono service to one hour of CE (though CE hours earned through pro bono service wouldn't be eligible for the new carryover option. An additional proposal would allow CFP Board (as determined by its board of directors) to require CE on specific topics when new laws, taxes, or regulations impact the profession (to provide the option for CFP Board to require current certificants have knowledge of key issues after completing the initial Education and Examination requirements).

Candidates for CFP certification would be subject to new standards as well. Perhaps most impactful would be a modification to the 6,000-hour "Standard Pathway" to fulfill the Experience requirement that would require experience to address at least three (of the seven) primary elements of the financial planning process (up from the current requirement that experience might only address just one of the seven planning steps), which would seemingly address some criticisms that the current requirement could be fulfilled through activities that do not require candidates to have much of any actual experience with financial planning or serving clients as long as it was at least tangentially related to one part of financial planning (e.g., employee benefits administration). Other potential changes to the Experience requirement include allowing up to 500 hours of pro bono experience to count towards the Standard Pathway option, and allowing 15 years of qualifying experience prior to applying for CFP certification to count toward the Experience requirement (up from the current 10-year limit).

Separately, a proposed change regarding the Education requirement would allow those with the CIMA certification to access the Accelerated Path to fulfilling the requirement (also known as the "Challenge" path, where candidates where candidates can bypass the required educational courses and move straight to the exam, although the Capstone course is still required).

Also notable in the CFP Board's proposals, though, is what is not included. One potential change that had previously been floated but did not make it into the final proposals would have eliminated or adjusted the requirement that CFP certificants have a bachelor's degree or higher in any discipline from an accredited college or university (with some critics of this requirement suggesting that it unnecessarily limits the pool of potential candidates, who are still required to fulfill the financial planning-specific education requirements). Another possible proposal that didn't make the final cut might have allowed a portion of an advisor's CE credits to be satisfied with practice management programs (though notably, the proposal didn't get approved when it was previously proposed a decade ago, either).

Altogether, CFP Board's proposed changes (which are available for public comment through February 28, 2025) appear to represent moderate adjustments of its requirements to earn and maintain the CFP certification, specifically seeking to ensure candidates have incrementally deeper experience in the planning process before becoming certified, and increasing the amount of CE required of current CE professionals (while reserving the right to require education on certain topics), as well as incentivizing pro bono planning, as the financial planning industry continues its path towards becoming a recognized and bona fide profession!

Schwab Study Reveals How Much Financial Planners Took Home In 2023

(Lilly Riddle | Citywire RIA)

One of the primary themes in the financial planning industry over the past few years has been the demand for talent as firms grow amidst increasing interest among consumers in financial planning services. Which can create the potential for firms to compete in part based on compensation and benefits packages to both attract and retain advisors and other staff members.

According to Charles Schwab's 2024 Compensation Report and Benchmarking Study, which surveyed more than 1,000 RIAs, financial planners earned a median annual salary of $97,000 in 2023, with total compensation (including owner profit distributions) of $118,000. Notably, those in the 80th percentile had salaries of $152,000 and total compensation of $216,000, while those in the 20th percentile earned salaries of $69,000 and total compensation of $80,000, signaling a fairly wide range of compensation, likely influenced by experience, geography, and other factors. For instance, Kitces Research on Advisor Productivity found that as of 2022, senior advisors earned a median total compensation of approximately $229,000, while service advisors earned $140,000 and associate advisors made $85,000 (indicating significant compensation gains as advisors move from a second-chair role to leading client relationships independently). The Schwab study found that compensation packages on average across all roles were made up of 79% base salary, 10% performance-based incentive pay, 7% owner profit distributions, and 4% based on revenue generation. From the firm side, employee compensation accounted for approximately 70% of the average RIA's expenses. In addition, the study found that RIAs offering performance-based pay incentives saw stronger long-term business performance in terms of net asset flows, revenue, and number of client accounts.

In the end, while Schwab's benchmarking study can serve as a baseline for firms when considering employee compensation (both in terms of the total amount and its components), many firms will likely look to design their compensation model to fit its unique culture and needs (and could also incorporate employee benefits and perks [some of which don't involve direct cash outlays] that can help them attract and retain talent!).

Senate Advances Bill That Would End WEP/GPO Limitations On Social Security Benefits

(Xavier Martinez and Richard Rubin | The Wall Street Journal)

Social Security planning (e.g., deciding when to claim benefits) is an important way financial advisors can add value for their clients, particularly those that depend on these benefits for a significant portion of their retirement income. However, while most clients will likely have paid into the Social Security system throughout their lives (through payroll taxes), clients who worked in "non-covered" positions (most commonly state and local government employees, as well as certain Federal employees who began service before 1984) and are eligible for pensions from these employers might not have paid into Social Security during portions (or all) of their careers. Which means that they might not be eligible to receive Social Security benefits, or, if they also worked in other "covered" jobs that did withhold taxes for Social Security, might receive a lower benefit around than typical clients might.

Nonetheless, those who worked both "covered" and "non-covered" jobs over the course of their careers in the past could benefit from Social Security's progressive benefit formula (which provides a higher income replacement rate for lower incomes) as years of "non-covered" work (but not the earnings in those years) would count towards their benefits, leading to Average Indexed Monthly Earnings (AIME) that would appear lower than their actual earnings in years in "covered" jobs (meaning that more of their earnings would be subject to the higher replacement factors when calculating their Primary Insurance Amount [PIA]). With this in mind (and given that these individuals were also receiving public-sector pensions meant to stand in for Social Security benefits), the U.S. government enacted two provisions, the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), which reduce these individuals' own Social Security benefits (in the case of WEP) or the spousal or survivor benefits received by individuals who worked in "non-covered" jobs (in the case of GPO). While these measures have saved the government billions of dollars since they were enacted more than 40 years ago, they have come under criticism from those whose benefits have been reduced (and the unions that represent these public sector workers).

Amidst this criticism, a bipartisan group of legislators (coming from states with a large number of affected workers) introduced the Social Security Fairness Act" last year, which would eliminate both the WEP and GPO provisions. After moving through the House of Representatives last month on a 327-75 vote, the measure advanced through a procedural vote in the Senate this week by a vote of 73-27, setting it up for a final vote in the chamber and likely passage (given that it appears to have enough supporters to overcome a potential filibuster). If passed and signed by the president, the legislation is expected to lead to an average increase in Social Security benefits of $460 for Social Security beneficiaries and more than $1,000 for some spouses of affected workers, by 2033. These beneficiaries would see an increase in 2025, with retroactive benefits applying for 2024 as well.

In the end, passage of the "Social Security Fairness Act" would represent a boon to financial planning clients currently (or in the future) subject to the WEP or GPO provisions, though given its estimated cost of $196 billion over 10 years, this legislation could move up the exhaustion date of the Social Security trust funds (from the current estimate of 2035). It's also worth noting that President-elect Trump and other Republicans have proposed making Social Security benefits tax-free, which combined with the elimination of WEP and GPO (which would create even more benefits that would go untaxed under the Republican proposals) would put even more strain on the Social Security system going forward. So while these proposals around Social Security may be good for current retirees in the short term, in the long term they raise the possibility that Congress could be forced to enact policies that would raise additional revenue or cut benefits to prevent even bigger benefit cuts for Social Security beneficiaries in the future.

Index Funds Are Popular, But They're Not All Alike

(Ben Mattlin | Financial Advisor)

While investment management represented the primary value many financial advisors provided for many decades, financial advicers today typically provide a comprehensive planning experience, of which investment planning is 'just' one component. The need to spend more time on other planning areas (along with the challenge of 'beating the market') has led many advisors to take a lighter touch when it comes to investment management, often creating an appropriate asset allocation for clients and rebalancing when appropriate.

For many advisors, index funds make up the bedrock of clients' asset allocations. Rather than selecting individual stocks (or actively managed funds), these vehicles allow clients to track broader market (or market segment) performance at a relatively low cost (both in terms of fees and their advisor's time). Nevertheless, because index funds come in many different styles, it can be valuable for advisors to be aware of what a given index represents and how it fits into a client's portfolio.

To start, while many of the best-known index funds track broad-market indexes (e.g., a large-cap S&P 500 index fund), other indexes track smaller portions of the market (e.g., based on investment factors like value or momentum) and could have substantially different returns than a broader-market index (which might come to a surprise to some clients, who might associate index funds with broad market exposure). And while index funds are often considered to be "passive" investments, they can differ significantly in how they are constructed. For instance, one index fund tracking the S&P 500 might use market capitalization weighting (i.e., the fund invests a larger percentage of assets in the largest stocks within the index) while another might invest equally across its components (which could lead to very different returns, particularly if the largest stocks perform significantly differently than the others in the index). In addition, index creators can use different criteria for inclusion in the index. For example, companies in the S&P 500 index must have positive earnings for the preceding four consecutive quarters and their inclusion is re-evaluated monthly by a committee (raising questions about how "passive" it truly is?), whereas indexes from Russell (e.g., the broader Russell 3000 index) are constructed based on a set of rules without the input of a subjective committee.

Ultimately, the key point is that while index funds are often used as a core component of client portfolios, because these funds (even those tracking the same asset class) can differ significantly, advisors can add value for clients by ensuring that the selected index (and specific fund) chosen meet the client's specific needs (and are complimentary to the other funds and individual stocks in the client's overall portfolio!).

Should Advisors Ignore Past Stock Market Returns?

(John Rekenthaler | Morningstar)

"Past performance is not indicative of future results" is a commonly heard refrain in investment circles and suggests that top-performing funds and stocks will not necessarily continue to outperform in the future. Nevertheless, investors and researchers have long explored whether there are pricing anomalies that can prove to be profitable across various time periods.

For instance, in 1965 Eugene Fama published "The Behavior of Stock-Market Prices", finding that "the series of price changes [among individual stocks] has no memory, that is, the past cannot be used to predict the future in any meaningful way." Which seemed to throw cold water on the idea that previous prices could be used to predict future ones until Werner De Bondt's and Richard Thaler's 1985 paper "Does the Stock Market Overreact?" showed that when extending the analysis from one day (as Fama did) to three years, past performance was meaningful, with portfolios consisting of the previous three years' 'losers' outgaining the overall stock market by almost 20 percentage points (with portfolios consisting of winners trailing the averages, suggesting a form of mean reversion). Nonetheless, when looking at a shorter three- to 12-month timeframes, Narasimhan Jegadeesh and Sheridan Titman in their 1993 paper "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency" found the opposite effect, with a strategy that owned the biggest winners in the past six months and sold the biggest losers earning an annualized 12% return when held over the next six months (a "relative strength" effect). Since that time, various research papers have found other investment "anomalies" that could be leveraged for gains, with the debate over which are durable still going on today.

In sum, research into the relationship between past and future stock prices suggests that market movements aren't necessarily a "random walk". Nonetheless, given the challenges in identifying profitable anomalies (and implementing a long-term investment strategy based on them across a client base), many advisors might instead prefer to target achieving market returns for their clients (though demonstrated success at taking advantage of market anomalies could serve as a differentiator for advisors who are willing to put in the time to do so!).

Assessing The Returns Of Model Portfolios

(Robert Huebscher | Robert's Substack)

While a financial advisor might choose to craft unique, customized portfolios for each client, doing so can be time intensive, both at the outset and to maintain. Which has led many advisors to use "model" portfolios (whether internal, from the advisor's home office, or from a commercial provider), which can cut down significantly on the time needed for implementation while still matching clients with a portfolio that meets their needs.

While convenient, a key question is whether these models track (or, even better, beat) the performance of a simple portfolio consisting of 60% stocks and 40% bonds. Using data from Morningstar, Huebscher compared the performance of 2,882 U.S.-domiciled models (that had an equity allocation of at least 60%) to the performance of the Vanguard mutual fund VBIAX (which maintains a 60/40 equity/fixed income allocation), finding that only 36.4% of the models outperformed the mutual fund over the 5-year period ending in October 2024 and a mere 11.9% of the models showing greater returns over a 10-year period. Overall, the models returned an average of 7.93% over the 5-year period (compared to 8.72% for the benchmark) and 6.80% over 10 years (with the benchmark returning 8.16%). Notably, these figures might actually understate the models' underperformance as they do not include funds that were taken off the market or that didn't report results to Morningstar (possibly due to underperformance in both cases). Further, the data suggest that it could be hard to infer skilled model managers from prior performance, as 74% of the models in the top quintile of performance between 2014 and 2019 were either in the bottom two quintiles or were discontinued in the subsequent 5-year period.

In the end, while there are many potential reasons to use off-the-shelf investment models (from time savings to pursuing certain thematic goals), Huebscher's analysis suggest that achieving return outperformance (or perhaps even matching a basic 60/40 portfolio) might prove difficult. Which could help advisors (and their clients) maintain appropriate expectations when using models to construct portfolios!

12 Months Of Marketing Goals For Independent Financial Advisors

(Sierra Fredricksen | XY Planning Network Blog)

For advisory firm owners, December can be a time to reflect on the ups and downs of the previous 12 months as well as an opportunity to look forward to the coming year. And given that advisor marketing is often a year-round (and sometimes time-consuming) endeavor, starting the new year with an organized marketing calendar could help ensure necessary tasks are completed without overwhelming the advisor in a given month.

For instance, January could serve as an opportunity to review the results from the previous years' marketing efforts (e.g., in terms of new leads and/or clients, as well as the hard-dollar and time cost that went into these marketing activities), perhaps comparing them to industry benchmarking studies (e.g., Kitces Research on Advisor Marketing) for reference, and then setting goals for the new year. Advisors could then focus on a specific task in each of the coming months. Such activities could include reviewing the firm's branding and online profiles to ensure information is up to date and consistent across platforms, create content (e.g., "lead magnets" or client newsletters), schedule social media posts out several months ahead, sending out a client survey in June (to better understand how they perceive and experience the value the firm is providing), and/or re-evaluating the firm's automatic email drip campaigns (to assess whether the current content and cadence are effective or could benefit from a refresh).

Ultimately, the key point is that while each firm will likely have its own blend of marketing tactics and timing, scheduling out key tasks (particularly review tasks that might be forgotten!) during the year could lead to a more efficient, and effective, marketing program!

Three Marketing Ideas For The New Year

(Sara Grillo | Advisor Perspectives)

While many advisors have tried-and-true marketing techniques that have worked for them in the past (or perhaps are just starting out with marketing), the new year provides an opportunity to explore additional tactics that could boost their marketing efforts further.

For instance, an advisor could interview a few of their current clients (preferably ones that match the firm's ideal client persona) to better understand what makes them unique. For instance, clients who work in a particular field could give insights into the particular pain points they and their peers face. The advisor could then use this information as inspiration for blog posts or marketing email content to demonstrate how they can meet these individuals' needs. Another option is to start a regular client newsletter, perhaps peppering it with answers to common questions that arose during recent client meetings (notably, these answers can be repurposed for content aimed at prospects who face the same issues as well!). Finally, advisors could consider a more direct marketing approach and engage in cold outreach to individuals who might make good clients. While this might be intimidating to those without significant cold-calling experience, advisors can feel better prepared by researching potential targets (e.g., via LinkedIn) to craft a pitch that shows how the advisor can meet their specific needs.

In sum, while an advisor might be hesitant to try out a new marketing opportunity, doing so does not necessarily have to come with a high time and/or money cost, whether it is in exploring the 'communities' clients belong to, repurposing client conversations for marketing content, or directly reaching out to individuals who could benefit from the advisor's services!

How Advisory Firms Can Align Their Websites To Their Target Audience

(Mikel Bruce | Advisor Perspectives)

An advisory firm's website is often the first place prospects go to learn more about the firm (and whether it might be a good fit), whether they were referred by a friend or found the firm thanks to other marketing tactics. Which means that having an effective website can allow firms to make a good first impression on these visitors as well as help guide them on the path towards becoming a client.

A first step to designing (or refreshing) a firm's website is to consider its ideal target client (which might have changed since the last time the website was updated?) and their specific needs. For instance, a firm's website could include common questions asked by clients in this group and show how the firm can solve these pain points for clients. In addition, firms can consider "speaking the language" of their ideal target client on their website, for instance by using terminology and imagery common to those in this group (and avoiding intimidating financial jargon, unless the target clients are financial professionals themselves!). Finally, having well-defined Calls To Action (CTAs) can encourage website visitors to take the next step towards becoming a client. Though notably, the next step could look different depending on an individual's readiness to engage with the firm. For example, some website visitors might be willing to provide their email in exchange for a valuable lead magnet (e.g., e-book or whitepaper), while others might be willing to go ahead and schedule a discovery call (suggesting that having both options available could lead to greater engagement!).

Altogether, the start of the new year could represent a good time for advisory firms to take a fresh look at their websites to determine whether it is aligned with the personalities and planning needs of their ideal target clients and ensure that it acts as a differentiator in a sea of firm websites!

Financial Literacy Lessons For Each Stage Of Childhood

(Rick Nott | WealthManagement)

While 45 states now require some form of personal finance education, many children get some (if not all) financial literacy education from their parents. And while a financial advisor might be able to explain to clients the potential benefits of Roth conversions, they might consider other (perhaps timelier) lessons when talking about money with their kids (or giving recommendations to clients for conversations with their kids!).

To start, parents can help their children better understand the role of money by leading by example. For instance, a parent could discuss the concept of 'needs versus wants' with a younger child (e.g., at the grocery store), demonstrate ownership of financial decisions with teenagers (e.g., by working with them on budgeting), and show young adult children how they can achieve financial independence (e.g., by explaining compound interest and the benefits of saving and investing early).

Another key life lesson when it comes to finances is helping children understand the perils of comparing their situation to that of others. For instance, a parent with younger children might encourage them to think about all of the fun they had on their own summer vacation rather than comparing it to the experiences of their friends. For teenagers, addressing the (non) reality of social media could help them understand that the images (and money messages) they see there don't necessarily reflect the full picture of their friends' (and influencers') lives. Finally, working with young adult children to create short-, medium-, and long-term goals can help them focus on their own dreams rather than trying to live someone else's life.

Parents or other loved ones can also help children understand that money doesn't have value in itself, but rather can be a tool to achieve other aims. For example, showing younger children the concept of bartering (and how money can better facilitate transactions), teaching adolescents about the importance of saving for larger purchases, or young adults about how building human capital (e.g., through education) can help them earn (and save) more well into the future.

Ultimately, the key point is that while some financial literacy lessons are technical, many are more qualitative, and parents (or other trusted adults) are well-positioned to demonstrate these on a regular basis and help steer the kids in their lives towards better financial habits.

How Much Should You Tell Your Kids About Your Finances?

(Cameron Huddleston)

As children become more aware of money and its uses, they might become increasingly curious about their family's financial situation. And while parents might have no problem teaching their children about budgeting and saving when it comes to their allowance or earnings from a part-time job, getting into the details of their family's finances might be a more sensitive subject.

Nonetheless, parents can consider different ways to be open with their children about their financial situation based on the kids' age and development. For instance, parents could explain to children in elementary school that they work to earn money, which is then used for savings and to meet household needs (perhaps allowing them to participate in family budgeting as well). Pre-teens might start to compare their family's financial situation with those of their friends, which can present an opportunity to discuss the idea that some families have more money than others and that different families prioritize different types of spending when it comes to money (e.g., our family might prioritize spending on travel, while another might prefer to spend on a larger house).

For students entering high school, college conversations (for those considering that path) can be an opportunity to discuss how (and whether) parents are able to support them financially with college costs (which can help them better understand their family's financial capabilities as well as the types of colleges they might target). Finally, adult children are often more ready for a robust conversation about their parents' financial situation, both to (hopefully) assure them that they are well-prepared for retirement, but also to prepare them (if that is the parents' choice) to step in and handle their finances in case they become incapacitated or pass away (a conversation that could be encouraged by the parents' financial advisor?).

In the end, while parents might not feel comfortable fully opening up their books the first time a child asks about their family's financial situation, there are still opportunities to be forthright, whether in terms of the tradeoffs involved in budgeting or the assurance that they have money saved for both their children's and their own future goals.

The Gifts We Give Our Kids

(Joy Lere | Finding Joy)

Many parents look forward to the holiday season as a time to get their kids gifts they've been eyeing all year (and hopefully don't require too many batteries!). Nonetheless, many of the best 'gifts' parents can provide their children (particularly when it comes to imparting financial lessons) can't be wrapped with a bow on top.

For instance, kids will sometimes have a (seemingly never-ending) list of things they "need" to have. Which can provide the opportunity to impart lessons regarding the differences between "needs" and "wants" as well as the need to sometimes delay gratification. Relatedly, parents can explain the difference between "having" and "affording" something and how living beyond one's means can create financial stress. In addition, parents can instill the value of stewardship in their children, for instance by encouraging them to donate to causes that are important to them during the holiday season (and throughout the year). More broadly, parents can help their children develop better relationships with money by being honest about it (rather than treating it as something to be feared), helping them understand where money comes from (work, not trees), and educating them about age-appropriate financial concepts (without burdening them with their parents' money problems).

In sum, while a child might think that a new bike or video game system might be the best gift they could possibly receive, teaching kids to have a healthy relationship with money could be much more valuable over the long term (though if your kids' eyes do light up when you discuss the benefits of saving in a Roth IRA, you might be lucky enough to have a future financial planner on your hands!).

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.