EFFICIENT PLANNER
Two Legends Share Their Thoughts: Where We’ve Been, Where We Are, Where We’re Going
By Linda Leitz, CFP®
The founding of NAPFA in 1982 was a turning point in the development of financial planning as a profession. The goal was to give a home to trusted advisors, and support those who had stepped away from having the sale of products as the foundation of their career and wanted to be held to higher standards of competency and responsibility to their clients. NAPFA members are part of the larger financial advisory industry. While NAPFA members have their standards as a distinguishing factor when prospecting for clients, those standards also serve to raise standards throughout financial advisors and give better choices for all consumers.
Two thought leaders, Michael Kitces, chief financial planning nerd at Kitces.com, and Bob Veres, founder of Inside Information, have shared their thoughts about the progress of the profession and where it’s going.
Are We a Profession?
Not just anyone can say they are an attorney. Lawyers are part of a recognized profession. However, anyone can say they are a financial planner; Bob points out there are no standard credentials, experience, or standards required. He recognizes there are people who act as professionals. He believes Fee-Only is the start—being paid by clients, not a company to sell their products. The “product” provided by professionals is advice. The CFP Board has made strides in raising standards and educating the public about CFP® professionals—what is required in experience, education, testing, and ethics. Michael posits that we’re in the midst of a transition from our roots in providing products to a future that looks more like a bone fide profession that provides advice. The financial services industry at large is figuring that out, even though it’s a challenge.
Where Have We Come From?
Michael sees the increase in the number of CFP® professionals as elevating the profession as a whole. Regulation, in his view, has increased standards, and regulatory requirements have never been the highest standards of those acting as professionals. He believes regulatory fiduciary standards for all financial advisors probably won’t be a standard until the majority are already fiduciaries.
Bob feels not much developed in the last decade until COVID hit. As financial advisors, we had to work remotely and completely adjust how we operate. Staff people realized they had new options, set off by this remote work, which has increased competition for talent. As part of this, advisors tend to get impatient and feel they don’t have control if they’re not owners in their firm. All staff members feel they have to have career growth.
Enhanced technology has moved the value proposition for advisors to facilitating a better relationship with clients, not just saving advisor time and money. Bob sees many back office staff being repurposed to have client-facing responsibilities.
Where Are We Heading?
Bob doesn’t see artificial intelligence (AI) playing the role some folks do. He believes the profession will continue to be based around relationships, and AI will play a role to the extent it can enhance the relationships with information.
Bob anticipates a backlash from consolidations and believes they will be more difficult in the future. Younger advisors are realizing these consolidations are not necessarily a good deal for them. The succession plans in these firms are questionable and involving younger advisors provides complications. Both they and the founders must give up the dream of building the firms they want. The valuations on firms are large enough that some younger advisors don’t see buying into firms as a viable investment for them. Private equity firms and consolidation firms that are buying financial planning firms want to make money. And the way they’ll do that is from what they ultimately charge clients. Bob sees this as similar to leveraged buyouts that plagued the national economy in prior decades.
A side effect of the merger and acquisition trend can also be changes to business models. Some acquiring firms allow the acquired firms to continue with their same processes, tech stack, and staff. Some require standardization of some or all of these elements. And an impact all NAPFA members can consider is the fact that the acquiring firm might, at some point, not qualify as a Fee-Only firm if they acquire insurance or other commission-based subsidiaries. Since the ability to qualify as Fee-Only isn’t limited to a person or office, a small change in the larger firm would have far-reaching impacts. Even though you might not receive commissions, the optics to clients may impact relationships.
Michael sees continued movement away from transaction fees. While he doesn’t think AUM as a revenue source is dead, he sees continued growth of subscription fees. Younger clients want to pay for advice, while some older clients feel like they got advice for free—since they don’t realize they were paying charges they didn’t see or understand. Clients of the future will be more willing to pay for advice. Bob believes moving away from AUM as a business model is one evolution toward true professionalism.
What Are The Challenges?
Bob doesn’t see crypto as the potential threat some do but it certainly holds the dangers that advisors could get in over their head. If there are advisory firms that fail because of crypto, it could have ripple effects on all advisors. He also believes if the economy has a downturn that impacts the private equity firms that have purchased advisory practices, client service will be negatively impacted. Bob sees the biggest threat that an economic downturn could cause the failure of firms that aren’t highly profitable—and there are many of them.
Michael notes there is much emphasis on the duty of loyalty without the same focus on competency, which can be considered part of the duty of care required by the CFP Board’s Code of Ethics and Standards. He also sees that as firms move more toward service orientation, they will become more restrictive in employment agreements. There must be career tracks that entice advisors to stay where they are. Bob sees that not all advisors want the hassle of running a firm. While the early days of financial planning were driven largely by entrepreneurs, going forward there will be a mix of advisors who only want to work with clients and those who also want to run a firm.
It’s Up To Us
It’s easy for each of us to get caught up in the day-to-day work of advising clients—and for some, the additional daily duties of running a practice. We would all do well to remember we are part of a larger picture. Each client we help has ripple effects for the larger economy. And our standards provide support to the financial advisory profession by way of our example. We can also have a bigger impact by encouraging our colleagues to have high ethical practices, supporting legislation that increases standards, and offering career paths to the newer advisors in our practices.
Linda Leitz is a NAPFA-Registered Financial Advisor in Colorado Springs, CO.
image credit: Adobe Stock Images