John Lefferts' Blog

Wednesday, September 2, 2009

5 steps forward without #5

In his recent blog post "failure to resonate" Investment Advisor Magazine writer Bob Clark correctly identifies a sad reality...Financial Planning is a very fragmented industry and not very well defined. This fact is clearly an obstacle in evolving the practice of financial planning into a legitimate profession. And it is the high-jacking of financial planning by the investment and asset management industry that will continue to prevent it from ever happening. This leads me to ask, "When did Financial Planning become synonymous with Investment Advice?" Perhaps it's because financial planning and investment advice are both regulated by the SEC under investment advisory laws written in a different era for different reasons than today. Somehow they have evolved to be viewed by most in the profession as inseparable and one in the same. And why is this?...follow the money. It is estimated that 90% of compensation for SEC regulated investment advisory practitioners which include financial planners, are derived from asset management fees, not billings from financial planning services. If you can cloak what you do (Investment management) under the moniker of financial planning to avoid the more stringent regulations placed on FINRA regulated registered reps essentially doing the same thing as you, why not. It's worked for nearly 70 years, right? In efforts to retain their turf as fiduciaries, separate and away from FINRA oversight, the Financial Planning Coalition, as well meaning as they may be, are dooming the profession of financial planning to be little more than a sales process.

Out of the CFP web site, the defined "process" of financial planning includes 6 steps:

1. Establishing and defining the client-planner relationship.
2. Gathering client data, including goals.
3. Analyzing and evaluating your financial status.
4. Developing and presenting financial planning recommendations and/or alternatives.
5. Implementing the financial planning recommendations.
6. Monitoring the financial planning recommendations.

There is one step in the process that is keeping the practice from becoming legit and I bet you know which it is....that's right...#5. Personally, I believe that no plan is complete until it is acted on. Just as no trust is complete without titling assets under the trust, no financial plan is complete without implementing its recommendations. But financial plans must be funded with the recommendation of insurance and investment products and services, all of which have multiple regulators. The CFP Board is very misguided if it thinks it can regulate the investment advisory business and I'm fairly sure the ultimate decision makers on this issue of re-regulation think the same. The industry has given up a golden opportunity to redefine and legitimize financial planning on par with the legal and accounting professions. Current industry leadership is so blinded by their investment fee turf protecting that they can't see the proverbial forest through the trees. This financial crisis has forced the change argued for by the industry for years, yet leadership is intent on fumbling it all. What, be called a salesman? Oh, the horror!

It's probably too late and the CFP Board is so invested in preserving their investment advisory constituents interests that little is likely to change the current course. But in my view, here is what should happen. I readily admit, there is little chance it will come about, but here it is anyway, in 5 steps:

1. Get the CFP board out of investment regulation debate: The CFP board and all others wanting to legitimize financial planning should step out of the fiduciary argument with the SEC and FINRA. This war has already been won. Regulations to "harmonize" the fiduciary standard are all but a done deal, and for good reason. And no regulatory body is in a better position to oversee this better than FINRA. Done deal. Move on and fight a battle that can be won.

2. Eliminate "implementation" from the planning process: The CFP Board should eliminate #5 from the financial planning process, clearly focus on the practice of financial planning and get out of the investment/asset management business. While we can all agree that plans must be implemented, it confuses the public and invites multiple regulators into the planning process by combining the two. If a practitioner derives most of his/her compensation from investment advisory fees, guess what, you're an investment advisor, not a financial planner. Trying to tie together investment/asset management with planning process waters down and compromises the profession of financial planning.

3. Separate Financial Planning from Investment Advice. Let's face it, whether you're a FINRA regulated broker or an SEC regulated advisor, too much of financial planning currently being done is as a means to an end. And that end is a product sale. I don't care if it is a broker selling a loaded mutual fund/variable annuity, or an investment advisor selling an managed account, it's a sale. How one is paid for the sale whether it is an ongoing fee, commission or combination of both, should not drive how it is regulated. It's about what one does that should drive regulations, not what they call themselves or how they chose to be compensated for what they do. Investment management is not financial planning. The advisory community should be applauding the regulators for getting it right holding everyone recommending investment products to a fiduciary standard and stop defending their sacrosanct advisory turf in a giant game of keep away. Again, separate implementation from the rest of the planning process and regulate it accordingly.

4. Consolidate, simplify and streamline investment product regulations and regulators. Regulation should be simplified and streamlined rather than retain the current patchwork that creates unmanageable administration and leaves gaping holes large enough for Credit Default Swaps and Ponzi schemes to drive through. It'll never happen this way because of politics, but if there were one regulator that oversees all investment products and services, including non-casualty cash accumulation insurance products (life and annuity), everyone including the investing public would be better served. Answering to state securities, the SEC, FINRA and multiple state insurance regulators is ineffective and a waste of time and money.

5. Allow financial planners to become licensed to sell and be compensated for recommending investment products and services. Once the CFP board has placed a focus on the practice of financial planning much like the AICPA does for the accounting profession and the State Bars do for the legal profession, a new profession of financial planning can emerge and become legitimate. I know the word "sell" is foul to many in the business, but let's call it what it is. If a planner wants to recommend and sell investment products and services, they must do the same as CPA's and attorneys do when they want to recommend and be compensated on the sale of financial products-they must become licensed and disclose it.

Arguing to preserve investment and asset management as being one in the same as the financial planning process risks a lose-lose scenario. Not only will the industry lose credibility and risk becoming legitimate as a profession, but the inevitable oversight by FINRA or a like kind organization is going to happen anyway. Unfortunately, the status quo typically wins out when politics and money are involved. And in the financial planning business, there's a great deal of both to go around.

1 comment:

Darrell Amsden, CLU, ChFC said...

John - you're spot on with your comments. When I explain "what I do" to prospective clients, I make clear that the planning process is only about planning and recommendations - many of which may have nothing to do with investing money or securing insurance. I further explain that if the client chooses to implement one or more of the investment or insurance recommendations, I would like to compete fairly for that 'product sale' and be compensated accordingly. Most clients like the feeling of some separation between the planning (and the possible planning fee) and the implementation.