In honor of National Financial Planning Month, it seemed fitting to look at this relatively young profession’s history from my perspective and where we are today. Having worked in the financial services industry since 1981 and practiced as a Certified Financial Planner (CFP) since 1993, I have seen this profession’s growth spurts and struggles. At its core, financial planning is using your resources to live the best life you can envision.
Financial Planning as a Profession
Until a few years ago, schools didn’t require financial literacy courses to teach kids how to manage their future finances. Some states have finally adopted this requirement in their high school curriculum, which can only be a plus as this generation graduates. This is such a basic skill everyone needs. For the rest of us, many have picked up what they know from parents, friends, programs they’ve attended, bankers, insurance agents, advisors they work with, or the school of hard knocks. Today, as a consumer, finding solid financial advice is still hard to navigate, with many different players, designations, and fee structures. It is no wonder you can feel overwhelmed. So, let’s gain some history, understanding, and perspective.
The need for a more comprehensive view of an individual or family’s financial picture emerged on December 12, 1969, when 13 financial services industry leaders gathered in Chicago under Loren Dunton’s leadership to develop the concept of personal financial planning. Each of these leaders worked in silo industries of insurance, securities or stock brokerage, banking (to name a few), and many were compensated through commissions. Looking back on his own money mistakes, Loren envisioned a profession where people could get comprehensive, objective advice on their total financial picture. What grew out of this meeting was a membership and education track. Each of these was renamed the International Association for Financial Planning (IAFP) and the College for Financial Planning (CFP® designation). In 1973, the first 35 graduates of a five-course curriculum became the first Certified Financial Planners. They created a second organization, the Institute for Certified Financial Planners (ICFP), open only to CFP® practitioners. In 2000, both of these industry organizations merged into the Financial Planning Association (FPA), which exists today. As the president of our local ICFP chapter, I was involved in this merger. I also helped draft the language smaller registered investment advisory firms must follow in Ohio and testified before the State of Ohio House of Representatives on behalf of all CFP®s in Ohio regarding regulatory oversight.
If we look at other professions. such as legal and medical, financial planning is still relatively young and has been evolving since its inception. During the 1970s, people started gravitating toward this new concept. Many of those attracted to this new profession worked in sales at big companies (a stock brokerage firm, an insurance company, a bank). Financial planning was considered radical, a departure from selling products to sitting down and talking with people about their concerns, goals, needs, and desires. It was about putting the clients first, not the company they worked for. The fiduciary idea grew out of this concept. It was about planning for a client’s future, not making a one-off sale. Because these large firms weren’t structured to provide this type of service, salespeople left to start their own small, independent financial planning firms. Many of our industry’s pioneers were part of this movement, and their firms were at the forefront of many of today’s Registered Investment Advisory (fiduciary) financial planning firms.
Along with this entrepreneurial movement, the securities industry, financial securities regulation, and laws governing retirement accounts were also evolving. Until around 1976, people could buy only individual stocks and bonds at a brokerage firm, and they were charged a high commission that varied with the number of shares or bonds they purchased. Mutual funds (a basket of securities) emerged around 1976 and exploded when IRAs were created by legislation passed in 1974. When I entered this business in 1981, mutual funds would charge up to 8.5% or more on a Class A share (front-end load). People would purchase these at a brokerage firm or directly from the investment management company (mutual fund). Mutual funds then began to expand their share offerings. They introduced Class B shares (a back-end load of up to 5% if the funds were sold within the first 5 to 8 years) and Class C shares (a level load of around 2% to 3% each year). Most Class A share loads have come down to 4% to 5% due to pricing pressure.
As we moved into the 1980s, regulations were relaxed so banks and insurance companies could also sell mutual funds. Annuity sales expanded, allowing banks and brokerage firms, not just insurance companies, to offer these products. The siloed businesses of large brokerage firms, insurance companies, and banks had now blurred, allowing these institutions the opportunity to offer competing products to their customers. Commissions for these products were typically very high and often not disclosed clearly to consumers. When Dean Witter, a brokerage firm, bought Sears, their slogan was “buy your stocks where you buy your socks”. Today, many banks, insurance companies, and brokerage firms are still selling mutual funds and annuities using this commission model. Their focus still seems to be on selling products rather than what is in their customers’ best interest.
These newly formed financial planning firms were also experiencing their own growing pains during the 1980s. They developed different compensation models, and some are still in effect today. A smaller, yet growing, subset of financial planning firms began using no-load mutual funds that, by the name, did not charge a commission on the securities. These firms receive compensation solely and directly from clients for their services. This fee structure is known as Fee-Only. It has become the gold standard in our industry, as many of these firms are also Fiduciaries, legally and ethically bound to always put the client’s best interest first at all times. A larger group of firms charge a fee for advice and also receive commissions. This fee structure has come to be known as Fee-Based (Fee + Commission). They are not held to a Fiduciary standard. This can be confusing for those seeking financial advice, and I often believe this group of financial providers created the term Fee-Based to confuse people, since it is so close to the term Fee-Only.
Fee-Only firms may charge their fees based on an hourly rate, a project, or an ongoing retainer. A common fee structure for an ongoing engagement is Assets Under Management, or AUM. This is based on a tiered fee structure that typically starts at 1%, and the fee changes based on the value of the investments. Many still use this fee model today. A more recent fee model is a flat or fixed fee. This is a fee model we have adopted where the fee is based more on the client’s situation and less on the amount of assets clients have to invest.
By the late 1980s, this alternative form of personal financial advice had evolved, and financial planning firms were growing faster than the brokerage, insurance, and banking industry. This shift caught the attention of many brokerage firms, as they began losing business to these growing financial planning firms. Many brokers, or account executives as they were called at the time, jumped ship as well and joined financial planning firms or started their own firms. I experienced this too and remember the disruption it caused in the brokerage industry. As a result, regional independent organizations emerged, such as Raymond James, Edward Jones, etc. Some of these firms still charge commissions, and others have adopted the AUM model. The emphasis for these firms has mainly been on investing with some financial planning sprinkled in. They have only recently started to adjust the depth and level of financial planning they provide.
As the fee-only independent financial planning industry continued to forge a new path of putting the client first vs. putting the firm first, such as __________ (you can fill in the blank), the financial services industry began to draw a line in the sand. Separating the wheat from the chaff depends on where an advisor is employed and how these organizations are governed. An investment advisor at a fee-only financial planning firm is bound by a fiduciary standard that puts clients’ interests ahead of their own. Brokers at a brokerage firm, investment representatives at a bank, and insurance agents at an insurance company follow a different standard, called a suitability standard. This means transactions must be suitable for clients’ needs. Most brokers’ compensation model is based on meeting a monthly quota, selling commission products, or meeting an AUM level for the firm’s benefit, not the client’s. Financial advisors at most financial planning firms are paid a salary. This smaller sub-group of financial planning firms has continued to push the industry to change and adapt based on the needs being identified within their client base. Brokerage firms have reluctantly adjusted as the landscape in the financial services industry has shifted from sales to advice.
Another force driving this change came around 2008 from some investment management firms when exchange traded funds (ETF) came on the scene in a big way. Many of these were passive investment options that follow an index and their fees were dirt cheap. This forced many actively managed mutual funds and investment management firms (many providing these services at brokerage firms) to cut the internal expense ratios and fees they were charging to better compete with these new pooled security options. This has, in many ways, revolutionized the investment playing field as ETFs are no-load.
The big players still have the advertising dollars to boast about how wonderful they are. I always get a laugh when I listen to the large brokerage or money management firm boast in their advertisements about their “unique” fee structure or providing financial planning, as if it’s a new thing. They have been dragging their feet the whole way as change presents itself, but their advertisements sure sound very different. In reality, we know who is really moving the dial and it isn’t them.
In the sea of financial services, this small subgroup of fee-only financial planning firms, of which we are one, has been the rebels and the tree shakers. This collective group continues to chart new courses as change is always upon us. The story continues, and we are proud to be part of an elite group of financial planners who push the envelope and strive to improve our profession for you and our clients.
AUTHOR:
Teri R. Alexander, CFP®, MSFP, CeFT®, AIF®
Founder & Senior Advisor – Alexander Financial Planning, Inc.
This material is distributed by Alexander Financial Planning, Inc. (AFPI) and is for information purposes only. Although information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy. AFPI assumes no liability for the interpretation or use of this information. No portion of this writing should be construed as legal or accounting advice. All rights reserved.
