Notwithstanding their commission-based roots as a product distribution intermediary, this year's Financial Planning magazine survey of the top 50 independent broker-dealers showed that in the past year they generated more revenue from fees than from commissions. Yet even as broker-dealers transition from their commission-based roots to the fee-based model and provide more and more advice, the challenge remains that when historically broker-dealers went out of their way to not provide advice (to avoid the RIA registration requirements and advice liability that may result), too many broker-dealers still treat the growing volume of advice from their advisors as a liability to control and minimize, rather than a value-add to enhance... which will make it increasingly difficult for them to compete, even as they transition to the fee-based model.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we explore the roots of why broker-dealers historically have tried to prevent their representatives from providing advice, the ways that broker-dealers have tried to limit the scope of their representatives giving advice (from centralized planning departments to tech-delivered financial plans), and why the future of broker-dealers managing the liability exposure of providing advice is not about limiting the ability of their representatives to give advice but rather about investing in the training and education of their advisors to ensure they have the knowledge to give the right in the first place!

The trend of broker-dealers towards fee-based advice has been incredibly strong over the past decade, as the top-50 independent broker-dealers have risen from having fee-based revenue that is just 1/3rd of commissions, to surpassing it in the past year. And the trend appears to only be accelerating, due to both the simple realization that recurring AUM fees is just a much more stable and sustainable (and higher-valuation) business model, and the emerging trend of both US-based and global fiduciary regulation that threatens to curtail commission-based compensation and its conflicts of interest anyway.

The caveat, however, is that too many broker-dealers still don't treat advice itself as a valuable service to amplify, but instead manage it as a liability exposure to be minimize. In order to mitigate that risk, some broker-dealers have created centralized planning departments, which often aren't just about leveraging advisor efficiency, but instead are built to produce standardized “financial plans in a box” with formulaic advice that the “advisor” then (just like a pre-packaged product that they’d sell) “presents” to the client customer (removing the actual advisor from the advice equation!). And more are now looking to adopt technology that can further "standardize" the advice their advisors provide, eliminating the ability of the advisors to actually create more value-add with client-specific advice!

Which means broker-dealers risk unwittingly amplifying the breakaway broker trend to RIAs, even as they adopt their own fee-based models, not because their advisors want to transition to fee-based advice, but simply because their advisors want the freedom to actually give advice, customized to their individual clients. Especially as competition increasingly pressures advisors to move towards niches and specializations beyond mere "cookie-cutter" comprehensive financial plans.

Ultimately, though, the key point is simply to recognize that for firms that actually want to build value in an advice-centric future, advice should be treated as a value-add, rather than a liability. Which means the path to minimizing liability exposure is not to limit the ability of advisors to give advice, but to invest into their training and education with CFP certification and advanced post-CFP designations to ensure that they give the right advice in the first place, and form specializations (from student loan planning to retirement distribution planning) that further enhances their domain expertise and thereby reduces the risk of giving the "wrong" advice that creates liability for the firm!

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Historically, the competency standards to become a “financial advisor” have been very low. After all, technically in order for someone to hold themselves out as offering “comprehensive financial advice” and get paid for it, all they really need to do is pass a 3-hour regulatory exam that takes just a week or few of preparation. In the meantime, though, salespeople who are “only” licensed to sell insurance or investment products and technically can’t be paid for their advice itself can also still publicly call themselves financial advisors as well. Which is why it’s so difficult for consumers to tell which is which, and for comprehensive financial planners themselves to differentiate their services from the army of other “advisors” out there who say they do the same thing… even though they don’t, and can’t actually be paid for it in the first place. That challenge, in turn, has led many to wonder if there’s a path for regulators to enact (and enforce) rules requiring anyone who says they provide comprehensive financial advice to actually be trained and educated to do so, and whether it might make sense to someday require a minimum standard like CFP certification as a licensing requirement to provide financial advice.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the CFP marks are not a license to practice now, the differences between the CFP certification and a bona fide license like the CPA, possible avenues to transition the CFP certification from a trademark into an actual license, a few of the many hurdles such a potential transition would encounter… and why it still might be a worthy goal to pursue anyway.

It’s important to understand that, unlike a CPA license – which is granted by a state certifying body and grants accountants legal authority to perform certain tasks (e.g., attesting an audit) that they wouldn’t be able to do otherwise – the CFP certification does not fall under any state or federal regulatory body, and instead is a trademark that the CFP Board allows advisors to use if and only if they agree to honor the Board’s Terms and Conditions (which happen to include following the Four E’s of the CFP education, exam, experience, and ethics requirements). But that also means that financial advisors aren’t required to obtain CFP certification, or any substantive education or experience, in order to hold out as providing (and get paid for) financial advice, and instead need only to pass some very basic licensing exams.

In the past, this wasn’t a big deal, as the industry was focused primarily on selling investment and insurance products in the first place, for which financial planning was an effective sales strategy. However, in a world where products are increasingly accessible through technology itself, the value that advisors must bring to the table has less and less to do with financial products that are sold, and more and more to do with the quality of advice itself. Yet without the proper education, examination, experience, and ethics requirements that could be prescribed (and then overseen) by a regulatory body, financial advisors aren’t being held to the sort of standards common to professionals in other industries where the advice provided often makes such a significant impact on clients’ lives (and where the depth of expertise of the professional makes it difficult for consumers to vet who is “good” or “bad” in advance).

Unfortunately, the pathway towards turning the CFP certification into a required license to provide financial advice is difficult, as it must fall under the purview of either state or Federal regulators, and both have their own unique challenges. State regulation is often easier to implement – at least something – but rarely ends out being uniform, in a world where advisors are increasingly likely to work with clients across state lines. Federal regulation allows for uniformity across all 50 states, but can be difficult to prevail against concentrated industry lobbying forces, and ironically existing regulators themselves may not want to see their existing regulatory purview entrenched upon!

Nonetheless, the transition to higher competency standards for financial advisors might become inevitable, given the accelerating rate of adoption of the CFP certification itself amongst advisors. Because at some point, the CFP marks will become so ubiquitous that it will be “easy” for the industry to demand that anyone getting paid for providing financial advice should be required to have CFP certification to do so… simply because most advisors already will have it at that point (and the majority will then require the rest to conform).

Ultimately, though, the key point is simply to recognize that CFP certification is not a license today, and realistically can’t become one while it’s still only held by a minority (about 30%) of all financial advisors. But ironically, the best path to enshrining a minimum competency standard like CFP certification into licensing regulation may simply be to support its continued and ever-broadening adoption – which appears poised to accelerate further as it becomes a “mainstream” certification – because at the point most advisors have voluntarily adopted the standard anyway, it’s not a big leap to make it official… and set a formal competency standard akin to other recognized and true professions!

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