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  • Steven Lee

The Professional Status of Financial Services, Part II

Updated: Dec 26, 2019

In Part I of this mini-series of blog posts, I argued that financial services, broadly construed, fails to meet the definition of professionhood as evinced in the academic literature. In this post, I analyze whether efforts by the CFP Board and FPA are enough to pull financial planners into that label. While planners set themselves apart from advisors, there are compelling reasons why the public should think of FPs as an industry and not a profession.


Financial Planning as Profession?

At the Academy of Financial Services conference this year, I voiced my opinion that financial services--and by extension, financial planning--was not a profession. This was met, particularly by practitioners (as opposed to academics) with resistance. The practitioner's view was that financial planners are held to higher standards, specifically if they hold the CFP (Certified Financial Planner) designation. "Forget about all those other people," my interlocutor insisted, "We are a profession." Unfortunately, just because one believes x and verbally affirms x does not mean x is true. There are three main arguments why financial planning fails to live-up to the professional label: client confusion; designations; and compensation structures.


Client Confusion

Three distinct bodies interact with financial planners, and the nature of these relationships are not always clear-cut. First, there are regulators such as the Securities and Exchange Commission (SEC) as well as its self-regulatory organization, the Financial Industry Regulatory Authority or FINRA. Regulators establish industry-wide rules and require most everyone who is in the business of selling securities or offering investment (product) related advice for a fee to register (SEC) or become a member (FINRA) depending on which products one wishes to sell or advise. The regulatory landscape surrounding investments and retirement is extremely slippery because not even financial planners know about (much less fully comprehend) all the rules. For instance, it is uncertain whether an advisor who takes his or her fee from a client via credit card is said to have custody (rather than discretion) over the client's account. Custody requires much more paperwork and involves a lot more liability than simply having discretion over the investment decisions on the account. For instance, advisors with custody privileges may be able to withdraw money from the client's account personally or direct funds to separate accounts while planners with only discretionary privileges usually cannot do those things. Most often, financial planners who manage client money will invest in pooled vehicles such as mutual funds, exchange-traded funds, hedge funds, etc. There is usually a separate custodian who liaises with the IRS in the event a retirement account is involved, handle the bookkeeping end of things, and perform other non-investment services. Just from this brief explanation, you can see how things become very complex rather quickly. Remember that the SEC/FINRA only cover the investment portion of financial planner oversight. If the financial planner is an attorney who drafts estate planning documents or a CPA who files tax returns, other regulatory bodies will oversee those activities.


The next body for financial planners is the Certified Financial Planner Board of Standards (CFP Board for short), which handles the attainment and maintenance of practitioners' CFP(r) marks. The CFP realm (which is strictly voluntary) is a microcosm profession in which all practitioners must learn roughly the same knowledge base, pass an examination, satisfy the experience requirement, and swear to abide by the practice standards and ethical code of the CFP Board. Yet, there are many financial advisors--and even financial planners--who fall outside the bounds of the CFP Board. There are other practitioners who once held the marks but decided it was no longer in their best interest to affiliate with the organization and have since moved on.


The third organization is the Financial Planning Association. This is the trade organization for FPs and offers conferences, continuing education, and other resources for its members. There are national, regional, and local meetings of the FPA, and its annual conference often coordinates with the Academy of Financial Services. One issue that arises is the overlap between the CFP Board and the FPA. Both of them offer CE to and conferences for marks holders and members, respectively. They also both advocate and lobby for planners, specifically more stringent regulation and oversight to the SEC and FINRA. The demarcation between these three bodies is less than clear.


Designations

Many financial planning practitioners post letters behind their names. Of course, there are the familiar academic degree letters such as "PhD" or "JD" or "MBA," but those really aren't designations. Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) are professional designations that advisors use to signal their areas of specialty and, in some cases notable accomplishments, to the public. For instance, an Accredit Estate Planner or "AEP" signals to prospects that the advisor possesses deep knowledge of estate planning matters. Another example is the Chartered Mutual Fund Counselor (CMFC), which is earned by those who wish to work with clients to invest in mutual funds. There are a few issues with designations when it comes to clients.


First, there are just so many designations out there that fall within financial services or even the "financial planning" umbrella. A couple of years ago, I compiled a list of financial services designations (in alphabetical order): ABA; ABV; AEP; AFA; AMA; AMLP; ATA; ATP; AVA; CAM; CAPA; CAPA; CAPP; CB; CBA; CBA; CBF; CCE; CCFMA; CCIP; CCMFMA; CCSA; CFA; CFE; CFFA; CFP; CFS; CFSA; ChFC; CIA; CIC; CIMA; CIRM; CISA; CISM; CITP; CLU; CMA; CMA; CMFC; CMFMP; CMT; CPA; CPM; CPP; CPWA; CRA; CRP; CTEP; CTFA; CTP; CVA; CWM; EA; FPC; FSCP; MFM; PFA; PFS; REBC; RFA; RFP; RFS; RICP; RWM; and WMCP. That is only 66 designations--FINRA lists 208 separate professional designations on its website! Some designations can stand for different things, so merely glancing at the letters following an advisor's name hardly conveys any real information. Another issue associated with these is that they are far from equal in terms of importance and difficulty to obtain. For instance, the CFA requires a minimum of two years because it is comprised of three exams, which must be passed in sequential order. The CFP requires hundreds of hands-on, practical experience hours under another financial planner or similar mentor. Other designations can be obtained with only a weekend worth of work. Investor Watchdog breaks down all (then 205) designations into low-quality, mediocre, and high-quality categories.

Another issue is that some advisors use faulty designations that do not even exist. The Consumer Financial Protection Bureau (CFPB) published a document identifying 50 different "senior specialist designations" that advisors have begun using, probably to meet the growing demand of advice by the retiring baby boomer population. There is promising work forthcoming by Patrick Lach and Michael Breazeale that investigates whether fake credentials mislead investors. The notion that some advisors conjure illusory certifications to inflate their expertise is troubling. It is possible largely because there is a lack of a single body of oversight regarding financial planners. Moreover, the alphabet soup puzzle continues to mislead customers.


Compensation

Structure of compensation is perhaps the most confusing of the three issues surrounding professionhood. Many clients have no idea how much or even how their advisors are compensated. The two traditional modes of compensation, at least with respect to investments, are commissions and fees. Commission normally occur with registered representatives, who are members of FINRA. These are the traditional "brokers" or stockbrokers of the industry. In exchange for investing your money with a third party, these people receive commissions from that third party, whether it is a private money manager, annuity company, or mutual fund. By contrast, investment advisors usually charge asset-under-management (AUM) fees, typically on a quarterly basis. They often bill the fees directly from the account.


There has been a long-standing feud between commission and AUM fees. The current climate favors fees over commissions; For a time, the CFP Board would only list advisors who were "fee only" on its website, "Let's Make a Plan." Today, however, the CFP Board has narrowly defined "fee only" and other terminology, and those key words appear next to the compensation structure of each advisor on the site. Commissions initially earned their surly reputation from what were called bucket shops, which were wirehouses that kept reasonably up-to-date stock prices and received/initiated buy and sell orders from local customers. Within the past month or two, there has been a race to zero commissions for certain asset classes and trades among the big brokerage firms. Nevertheless, the impact of fees on investor performance is also coming to light.


While less common, other pay structures for financial planners are entering the fray. Today, you can find advisors who bill hourly like attorneys or set firm prices for completed projects such as writing a financial plan. There are other payment arrangements as well. The reason why AUM is so common is because it makes the most money for the advisor in most situations. The exception is when an advisor rolls-over a retirement account, such as a 401k or IRA that has been invested in mutual funds (for which the advisor has been earning trail commissions for a long time), into an annuity product, where the commissions can be as high as 13%! Except in roll-over scenarios, advisors make the most from AUM fees. Proponents of this structure point out that it aligns the client's and the advisor's interests: the better off the client's portfolio performs, the more money (s)he has and the more money the advisor earns in compensation. However, AUM fees can chip away at savings and mute investment performance (or exacerbate losses due to market volatility).


Concluding Remarks

In Part 3, I will consider recent events that throw negative light on all three sets of bodies regarding the financial planning industry--regulators, marks distributors, and the member organization. Nobody escapes unscathed. In order for financial planning to become a true profession, it must take dramatic steps towards revolutionizing not only how practitioners and administrators act but also the structure and function of all stakeholders in the equation.





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