PRACTICAL OBSERVATIONS

Phase Four of NAPFA’s Impact on the Profession

By Bob Veres

I guess I should come right out and say it: No community in the financial planning profession’s 50-year history has brought about more change, and more beneficial change, than NAPFA. In my experience, going back to the very first NAPFA conference (a bunch of advisors sitting in folding chairs taking turns at the podium), the transformation proceeded in distinct stages.

First Stage: I believe the founders of NAPFA were all a little bit crazy, in that they put aside their own business interests and very nearly starved as a result. Back in 1982, virtually every single person calling themself a financial planner was making tons of money selling high-commission tax shelters. The marketing approach was dead simple: They would ask people if they liked to pay taxes. If the answer was “no” (and it usually was), they would sell a 3-1 to 7-1 tax write-off at a time when the top tax rate was 70% and pocket a 10% commission; nobody ever asked about the underlying investment.

It was basically a license to print money, and the early NAPFA community walked away from it and insisted on charging fees directly from their clients for their professional advice and counsel. At the time, I asked them why they were doing this to themselves, and the answer was simply: This is how other professionals charge for their services, ALL other professions, and this is what our clients want.

Doing what your clients prefer, against your own interests, was an entirely new concept in the financial services world. And this was at a time when most consumers had no idea about the transformative value of financial planning advice.

Second Stage: the revolution. There’s a long story about how the custodial marketplace opened up to advisors but the gist of it is that suddenly planners could charge their professional compensation directly out of client portfolios, creating a more viable revenue model for Fee-Only planning. NAPFA became a small candle of idealism in a largely predatory financial services marketplace, and NAPFA members (and the organization) took the client-first, Fee-Only, no-commission conflicts of interest story to the press.

During this time period, which extended through the 1990s and into the early 2000s, the NAPFA membership waged an effective war against the sales model, and managed the incredible feat of convincing a large percentage of the population to avoid the conflicts inherent in commission sales. Many of the “crazies” who nearly starved to death wound up running some of the larger financial planning firms in the advisor landscape.

Third Stage: where we are today. That original war has largely been won, in the sense that even the brokerage firms now say they charge fees (percentages of client portfolios), and the broker-dealer reps say they are “fee-based,” many of them with low commission revenues compared with their AUM fees. Fee-Only is a weak differentiator, if it is a differentiator at all, because it has gone mainstream among financial advisors and been co-opted by the sales organizations whose reps are “asset gatherers”—salespeople who are compensated in a similar way to NAPFA members.

The question in my mind is whether there is a fourth stage to this journey. If so, what would it look like? The essential question that defines the fourth stage is whether there is a way to recapture that revolutionary energy and help consumers see the professional idealism that characterizes most NAPFA members, in effective contrast with the predatory, sales-focused (asset-gathering) brokerage world.

It might help to go back to the founding of NAPFA, and recognize that the essential distinction at that time was not Fee-Only, per se but professionalism. Fee-Only was an essential aspect of professionalism but the focus was really on how to engage clients professionally in a sea of sales activities.

Now that Fee-Only has been copied and co-opted, it might be helpful to draw other distinctions in service to professionalism. The fiduciary standard is one obvious differentiator; brokerage firms and most sales organizations refuse to be held to that standard in writing or in a client agreement.

Education and training is another aspect, and the CFP® mark covers some of that. NAPFA’s enhanced CE requirements complete the picture.

It might be possible to add peer review and advice standards, which would be controversial in the NAPFA community because (I might be being too blunt here) some members have gravitated toward managing assets as their primary focus. (Providing comprehensive advice is time-consuming and profit-eroding—and also a mark of professionalism.)

More controversial still, I think a strong argument can be made for gravitating away from the AUM revenue model toward more direct fee-for-service arrangements. I don’t know of any other profession where, when the prospect asks how much they will be charged, the answer is: I’m not sure. How much have you got?

These are only suggestions. I’m sure the membership and leadership can come up with broad standards of professionalism (and membership) that would make a compelling distinction. My point here is if there is going to be a fourth stage of NAPFA’s transformation of the profession, it will be a return to the original idea of professionalism, and creating new, tough standards around who should and should not be considered a professional. Many readers are wincing at the potential (personal) sacrifices this might entail. If you’re one of the wincers, to you I would make two points:

Any sacrifice you would be required to make in enduring peer review and potentially changing your revenue model is literally nothing in comparison with the financial sacrifices the NAPFA founders made in the organization’s early years.
History tells us that whenever a group of advisors manages to make a clear delineation between their level of professionalism and the (much lesser) level in the sales and non-fiduciary rest of the landscape, they eventually prosper and attract clients. That is precisely the NAPFA story, and there is no reason why its most successful phase cannot be replicated.

And perhaps more importantly, these idealistic initiatives, which raise standards in the profession, have in the past changed the entire financial services landscape in favor of greater professional service overall and better advice for consumers.

NAPFA did it once. I actually believe NAPFA can do it again.

Note to readers: Some of you know that I publish four or five articles a month in my Inside Information service on issues I believe are important to the profession as a whole. As I write shorter articles for NAPFA Advisor magazine, I’m open to your suggestions on what to contribute here. The profession is currently undergoing multiple rapid evolutions all at once: being able to work with clients anywhere in the country through Zoom meetings (and all the implications thereof), advisory firms having to create internal career enhancement initiatives if they want to recruit and retain talent, a virtual revolution in marketing that now involves high-tech solutions and specialization, and the many competitive and industry-changing implications of large PE-backed aggregators building giant advisory firms.

There’s no shortage of things to write about, and learn about. I’m curious what’s on your mind and what you think I should explore.

Bob Veres is a 40-year commentator on the advisor profession who publishes a monthly consulting/information service called Inside Information (www.bobveres.com). If you think he’s totally full of the stuff that hits the fan, give him a piece of your mind at: bob@bobveres.com.

This article was prepared by the author in his personal capacity. The opinions expressed within are his own and do not reflect the view of NAPFA.

image credit: Adobe Stock Images