How Financial Planning Can Become a True Profession
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Nearly 50 years ago, at a meeting near Chicago’s O’Hare Airport, 13 individuals met to discuss the creation of a new profession. Five decades have passed. We can lament that a “true profession” was not achieved during this time. However, we should applaud the work of many individuals, both within and outside various organizations. Without the foundations they laid, the achieving the goal of the title of this article would be premature.
Do we now desire to move toward becoming a regulated, true profession? In asking this question, I am inquiring whether we, as financial planners, either individually or collectively through our voluntary industry associations, have convinced the greater public (and the policymakers who represent them) that we should be afforded licensure privileges. In other words, have we laid a sufficient foundation to earn a form of monopoly, in which the use of certain titles is restricted, as well as limiting the ability to practice as a personal financial planner to those who possess that licensure?
There are many prerequisites to becoming a true profession. Have we satisfied those requirements? And if so – do we desire to take the next step – seeking true status as a profession through legislation?
In the sections that follow, I will examine our progress toward each of those steps.
A unique body of knowledge
The first requirement for a profession is the delineation of a unique body of knowledge.
Some of the knowledge required of personal financial planners exists in several other realms. For example, personal and business income tax planning is provided by certified public accountants. Investment advice and portfolio management is provided by registered investment advisors and (albeit with controversy) by many brokers and their registered representatives. The provision of insurance advice is largely regulated by the states. Estate planning is provided primarily by attorneys, but certain advice relating to it is provided by CPAs and life insurance brokers/agents. Advice in other areas of financial planning is already be subject to government regulation and oversight.
Yet, financial planning brings all of the foregoing areas, and many more, together for a client at different stages of their life. It focuses planning on the delineation and accomplishment of a client’s lifetime goals. The advice provided by personal financial planners extends well beyond budgeting, cash flows, insurance, employee benefits, and investments. “Life planning” or “life coaching” can involve changes to behaviors regarding money, career advice, and – ultimately – the pursuit of happiness.
The integration of those advice areas results “connects the dots” between discrete areas of planning and provides value by ensuring gaps and conflicting advice in planning are avoided.
The uniqueness of the body of knowledge is now reflected in various university degree programs that offer undergraduate and graduate degrees in personal financial planning, and in certain certificate programs that provide a specialized course of study that supplements a four-year college degree. The profession’s unique body of knowledge is also reflected in the “principal knowledge topics” that serve as a blueprint for the CFP® certification exam, as well as by the AICPA’s CPA/PFS body of knowledge or the Chartered Financial Consultant® course requirements. Other designations come close to providing the necessary depth and breadth of knowledge for financial planning. For example, the CFA Institute’s CFA® candidate body of knowledge (CBOK) provides breadth of coverage of financial planning areas, though its CBOK remains dominated by economic, investment and portfolio analysis topics.
Financial planning is a unique body of knowledge. It is not wholly distinct from other, discrete areas of knowledge that are subject to regulation. But, through the breadth and depth of the knowledge required of a financial planner, and the skills required to be an empathetic listener, a financial counselor and a life coach, financial planning possesses the requisite “uniqueness” to qualify as a profession.
Required course of study
In order to gain the body of knowledge required to be a personal financial planner, as per the above, specialized schooling is required. The majority of those who practice personal financial planning would agree that entrants to the profession should possess a four-year degree from an accredited college or university to acquire a broad set of skills, as well as completion of specialized study in order to acquire the foundational knowledge of the broad and deep body of knowledge.
More could be required in the required course of study. For example, many CFP® certificate programs require only six college-level courses to cover the personal financial planning body of knowledge. Greater education could be required in counseling and communication techniques, coaching to effect changes in client behaviors or their proper management, the application of technologies to personal financial planning and the delivery methods of financial and investment advice, and compliance with a wide range of securities and non-securities laws and regulations. More time might be devoted to income, tax and de-accumulation planning during retirement. Greater attention could be paid to due diligence on investment and risk management strategies and products, including techniques for undertaking comparative cost-benefit analyses.
Others might argue that the breadth and depth of our body of knowledge is largely sufficient as a foundational body of knowledge. And some will state that other certifications or designations signify the acquisition of specialized knowledge, beyond the foundational knowledge that should be required of all entrants to the profession.
I prefer that the six-course requirement set forth by the Certified Financial Planner Board of Standards, Inc. for CFP Board-registered programs be expanded, and that additions to it be undertaken. But the requirement of specialized schooling is robust enough to meet the requirements for potential regulation as a profession.
A strong code of ethics
Nearly three decades ago, the late Dick Wagner wrote: “A true profession and its standards are important enough that its principles generally will prevail – often at the expense of apparent self-interest. Certain types of employment will be refused, certain procedures will be unacceptable under any circumstances.”1
There is a strong consensus that a true profession requires a bona fide fiduciary standard of conduct. What do I mean by this? A true fiduciary standard mandates a high degree of professional-level due care, and it imposes restrictions on actions that might otherwise be undertaken in an arms-length relationship between a salesperson and his or her customer. A bona fide fiduciary standard requires that the client’s best interests remain paramount to those of the professional at all times, save the need for adequate compensation for the professional services delivered.
In other words, there must exist a strong fiduciary duty of loyalty. It must be clearly understood that acting in the “best interests” of the client does not merely mean disclosing away any conflicts of interest and securing the client’s consent. Rather, it requires that clients be affirmatively and robustly advised of any material conflict of interest in order to secure the client’s understanding of the conflict and its ramifications. Only then can the informed consent be secured.
Under a true fiduciary standard, no client would ever provide informed consent to being harmed. Even long-time clients cannot be presumed to be so loyal to their personal financial advisors that they would be gratuitous in awarding a greater portion of their wealth to their advisor, beyond any previously agreed-to reasonable compensation.
Professionals possess clients, not customers. As professionals, our clients are not in arms-length relationships with us. Rather, they trust us with their financial futures. And we cannot, and should never seek to, betray that trust by conveying recommendations to our clients that benefit us to the detriment of the client.
The fiduciary duty of loyalty is tough. It is judged harshly, with a presumption of breach of fiduciary duty whenever a material conflict of interest is not avoided. The burden lies with the financial planner to justify her or his actions … not only by examining whether the requirements of full and frank disclosure are observed and are followed by the client’s informed consent. Also, any transaction in which a material conflict of interest is present must be substantively fair to the client.
There is a writ as old as time – no man can serve two masters. One cannot represent a product manufacturer and act loyally as a client’s (purchaser’s) representative. The two roles are incompatible.
If we are to become a true profession, we must continue to forcefully advocate in support of a true fiduciary standard for all providers of financial and investment advice. Such advocacy must be proactively and consistently undertaken in the halls of the U.S. Congress, before the U.S. Securities and Exchange Commission and the U.S. Department of Labor, in various state legislatures, and before other federal and state agencies.
We have made great progress. Fifteen years ago, not much detail was known about the fiduciary standard by practitioners, as applied to the delivery of investment and financial advice. Beyond the phrase “act in the best interest of the client,” when I asked practitioners back then to further define the requirements of the fiduciary standard, most of my inquiries were met with a blank stare.
But over the past decade, academic articles about the fiduciary standard have become far more numerous. Various organizations (and coalitions of organizations, including consumer groups) have advocated in support of the fiduciary standard.
The Certified Financial Planner Board of Standards, Inc. recently adopted what may well be a strong fiduciary standard, effective October 1, 2019 (though not enforced until after June 30, 2020). Other organizations of personal financial and investment advisors have adopted fiduciary principles in their own standards of conduct, albeit with varying degrees of clarity, robustness and enforcement.
While certain setbacks have occurred at the federal level (both in recent judicial decisions and in agency rulemaking), a change in presidential administrations may well usher in a strong, robust and broadly applied fiduciary standard for the delivery of investment advice – both at the U.S. Securities and Exchange Commission and at the U.S. Department of Labor. Several states (Massachusetts, New Jersey and Nevada) are also considering the adoption of legislation and/or regulations in which a bona fide fiduciary standard would be adopted.
The need for a fiduciary standard of conduct has become well-known by many policymakers. The words written by the late Ernest Greenwood, whose 1957 article, “Attributes of a Profession,” still serve to guide us as to this necessity: “In a professional relationship … the professional dictates what is good or evil for the client, who has no choice but to accede to professional judgment. Here the premise is that, because he lacks the requisite theoretical background, the client cannot diagnose his own needs or discriminate among the range of possibilities for meeting them. Nor is the client considered able to evaluate the caliber of the professional service he receives.”2
There exist other fiduciary duties, such as obedience to the client and acting with utmost good faith. And there are other aspects which would be found in a code of ethics or standards of professional conduct, such as delineating responsibilities to the firm, colleagues, and to the profession or professional body.
Have we earned the right to be a profession via the adoption of a bona fide fiduciary standard and ethical code? While a difficult road is ahead, and opposition from moneyed interests to the adoption of a true fiduciary standard remains high, it is only a matter of time before legislative and/or regulatory successes deliver a bona fide fiduciary standard.
A subset of practitioners has adopted the prerequisite code of ethics through voluntary adherence to strong standards of conduct. The numbers of financial and investment advisors who practice as trusted advisors and fiduciaries has grown significantly over the past decade, while the numbers of salespersons in arms-length relationships with their customers continues to decline. A tipping point may be reached soon, if it has not occurred already. From 2015 to 2019, the number of SEC-registered RIA firms grew from 11,473 to 12,993, while the number of FINRA-registered BDs dropped from 3,943 to 3,607.3
In addition to existing laws and regulations, and changes thereto, other actions could be taken. While universal assent to a strong, robust code of ethics founded in a bona fide fiduciary standard of conduct has not yet occurred, any future legislation that empowers a financial planning profession can require a bona fide fiduciary standard of conduct be included in the profession’s code.
Service to the profession
Another prerequisite to legislative award of true professional status is a robust commitment by its members to the service of the profession itself. Fortunately, evidence of meeting this requirement is all around us.
Hundreds, if not thousands, of volunteers serve on the boards, committees and task forces of our professional organizations. Many serve in volunteer roles for the administration of professional organizations. Often financial planners devote countless hours and part of their personal fortunes for the advancement of the profession, largely through the support of our professional organizations and consumer foundations, and more directly through personal service to the public as well as via personal advocacy efforts.
Many more professionals lend their advice to other members at professional symposia, conferences and meetings and serve as mentors to young professionals and to students. Others engage in the publication of their ideas and wisdom. Lessons learned from their experience are shared freely with others, thereby contributing to the acquisition and development of a shared body of knowledge.
A sanctioning professional regulatory organization
A profession should have a sanctioning organization that investigates and disciplines its members, with authority that includes revocation of the right to practice, fines, public or private censure, and certain other remedies.
Any professional organization we seek to legislatively form must be comprised of individual members, not firms. As individuals we will uphold and strengthen our standards of conduct, and professionalism, over time. In contrast, firms instruct their representatives to seek lower standards of conduct, and/or less restrictions upon their profit-making abilities. Evidence of this structural failure is most apparent in FINRA, formerly NASD, where the evolution of securities brokers and dealers toward ever-higher standards of conduct stalled from its inception, due to overpowering commercial interests.
This is what makes a professional regulatory organization (PRO) distinct from a self-regulatory organization (SRO). It is through individuals, serving on the boards of a PRO, where service to the greater good – i.e., the public interest – remains paramount. The tenacity of individual members of the PRO drives the maintenance of high professional standards of conduct.
The individual professional’s commitment and loyalty to the client and service of the public interest, is not subservient to the commercial interests or instructions of his or her employer. Departure from their employment with their firm may be required, should the firm require that the client’s interests or profession’s high ethical standards be subordinated to the will of the commercial enterprise.
Often a profession is formed only after an existing voluntary organization has experience with investigations and disciplinary processes. Fortunately, the Certified Financial Planner Board of Standards, Inc. has developed such experience, and the robustness of its investigative and disciplinary procedures is likely to be further enhanced soon. Other voluntary organizations have levels of experience in enforcing their own standards of conduct.
Other models exist for professional oversight, such as via government agencies (federal and state securities regulators), although if this model is utilized, peer review from professionals should be added to the oversight and enforcement process.
A professional regulatory organization should be formed and empowered. Such a PRO would, by necessity, be subject to some form of governmental oversight of its functions and rule-making activities. Given the great breadth and depth of knowledge required to practice, the proper oversight of our professional activities would best occur if undertaken by our fellow professionals.
A membership organization
While the sanctioning organization may also serve as a membership organization, in some professions an independent membership organization represents its members and advocates for oversight by the sanctioning organization. Whether integrated or separate, membership organizations may advocate not just to the sanctioning body, but also before other federal or state policymakers, on a wide range of issues either directly affecting the members or affecting the clients or the public at large.
Membership organizations serve to promote the exchange of ideas, encourage the academic research that contributes to the profession’s body of knowledge, sponsors and accredits educational programming, and develops and administers certifications (including advanced specialized designations).
We need greater coordination between our existing organizations, and perhaps commonality in some aspects of their governance. United, either in terms of structure or commitment to common path forward, we would possess a much stronger foundation for advocating for a true profession.
A commitment to serve the interests of the public
Integral to the profession is altruism, or acknowledging that service to the community fosters the greater public welfare. Altruism involves a sense of service to the greater good of a society, and requires a measure of self-sacrifice. Closely related to altruistic behavior is a shared set of values – compassion for the needs of others, the maintenance of integrity in the performance of professional service, and the need to ensure and maintain trust in the profession and the members’ delivery of professional services.
The profession should ensure that the public is adequately served. For example, pro bono activities may be required or strongly encouraged of members. Such activities might be financially supported by the membership organization (or an associated foundation) to ensure that the financial planning needs of the public are well served. The profession may seek other resources to assist in serving the needs of those who may be unable to afford financial planning, such as through government subsidies or encouraging contributions to charitable foundations.
To properly serve the needs of the public who require basic, but important, financial planning services, the profession might also examine whether the foundational body of knowledge is required for those who provide those services. For example, financial counseling might be provided for consumer debt, budgeting, student loans, home purchases, mortgage financing, and other common financial decisions. The profession may empower non-professionals to render such services, either by providing exemptions to its licensure requirements, or by adopting a different (and less intensive) licensure process to ensure access to, and the affordability of, such basic financial counseling services.
The necessity of moving ahead with licensure as a profession
We have a problem in America. The world is far more complex for individual investors than it was a generation ago. There is a broader variety of investment products, including many types pooled and/or hybrid products, employing a broad range of strategies. New investment portfolio strategies emerge often, with varying degrees of critical scrutiny and academic testing. This explosion of products and strategies has hampered the ability of individual investors to sort through the maze to find those very few that best fit within the investor’s portfolios. Furthermore, as such investment vehicles have proliferated and structures have emerged for revenue sharing through various means, individual investors are challenged to discern an investment product’s total fees and costs, investment characteristics, tax consequences, and risks. Additionally, U.S. tax laws have increasingly become more complex, presenting both opportunities for the wise through proper planning, but also traps for the unwary.
Proper financial planning is essential to encourage an increase in household savings and to invest those funds more effectively. If people do not make careful, rational decisions about how to provide for their financial security over the course of their lifetimes, then the government will have to step in to save them from the consequences of their poor planning.
As the sophistication of our capital markets had increased, so has the knowledge gap between consumers and advisors. Regulations that rely upon the disclosures are wholly insufficient –compelling academic evidence proves that disparities in the availability of information, its quality or its understanding lead to advantages by those endowed with the ability to decipher, discern and apply the information correctly.
Consumers’ ability to achieve the desired level of understanding to successfully bargain with financial and investment advisors in arms-length relationships is extremely difficult due to the enormous knowledge base required to undertake decisions in dealing with a highly complex financial world. Our behavior is limited by the extent to which we effectively pursue utility maximization. Individuals possess substantial barriers, resulting from behavioral biases, to the provision of informed consent, even after full disclosure.4. Moreover, “not only can marketers who are familiar with behavioral research manipulate consumers by taking advantage of weaknesses in human cognition, but ... competitive pressures almost guarantee that they will do so.”5
Efforts to enhance financial literacy, while always worthwhile and important, will never transform the ordinary American into a knowledgeable consumer of financial products and services. Moreover, given the sophisticated nature of modern financial markets and complex array of investment products and strategies, it is not just the uneducated who are placed at a substantial disadvantage.
Other means are necessary to negate advantages to providers of financial and investment advice that are brought on by such vast information asymmetry. These means involve the next step in regulation – including the universal application of a bona fide fiduciary standard of conduct.
As study after study has proved, citizens place trust and confidence in their personal financial and investment advisors, and this trust cannot be allowed to be betrayed by the absence of a legally enforceable fiduciary standard of conduct. Otherwise, participation in the capital markets falls. As Professor Tamar Frankel, long the leading authority in fiduciary law as applied to financial services, stated: “I doubt whether investors will commit their valuable attention and time to judge the difference between honest and dishonest … financial intermediaries. I doubt whether investors will rely on advisors to make the distinction, once investors lose their trust in the market intermediaries. From the investor’s point of view, it is more efficient to withdraw their savings from the market.”6 Indeed, I have too often observed investors permanently depart the capital markets after they endured betrayals of the trust placed in someone who professed to be a qualified “financial consultant” or “wealth manager.”
The preservation of investors’ trust is paramount to ensure the proper functioning of our capital markets. Yet, investor distrust in financial intermediaries has grown in recent decades. Many consumers never seek out financial planning advice, due to this distrust. Not only are these consumers’ financial futures placed at risk, the capital markets are deprived of the capital that fuels American business and economic expansion, and the cost of capital to American business rises. Indeed, as high levels of distrust of financial services continue, and as excessive intermediation continues, the future growth of the U.S. economy is unnecessarily constrained.
Furthermore, the absence of appropriately high educational and ethical standards for all providers of personal financial advice is a glaring gap in the financial services regulatory structure. Much of the financial advice provided – by those who lack the proper educational foundations to provide such advice – leads to great harm among consumers. Tax penalties to consumers result. Risks fail to be addressed and properly mitigated. Pressing financial planning needs are inadequately addressed, if at all. Aberrant behaviors toward money and its utilization are not effectively modified.
Some will argue that “consumer choice” must be preserved, and that capitalism must be unrestrained. As Adam Smith pointed out, capitalism has its positive effects, and actions based upon self-interest often lead to positive forces which benefit others or society at large. Yet, the forces of capitalism must, by necessity, be subject to proper, efficient regulation – including appropriate standards of conduct – when necessary to constrain greed. Taken to excess, the self-interest which is so essential to capitalism can lead to opportunism – actions in which opportunities or circumstances are taken advantage of, but with little regard for principles or consequences to others or the society at large. Hence, prudent regulation imposes a constraint upon the actions of persons and firms. Sound regulation prohibits actions that materially jeopardize the welfare of our fellow citizens.
When prospective clients see me, or when I am asked to review an individual’s portfolio or financial planning advice by a consumer group, I far too often see the great harm that has been inflicted. More often, the standards for the delivery of the prior financial advice were so low that no effective remedy exists for the consumer. As many of those who aspire to a true profession have experienced, as such tragedies are uncovered our personal anger arises. My disappointment festers again, in that our fellow Americans continue to be harmed by the provision of financial planning advice that is delivered with either a lack of professional care, or an absence of professional loyalty, or both.
Have we earned the right to become a profession?
Have we earned the right to have federal and/or state legislatures create a license for personal financial planners? Should we be granted the right to screen individuals for admission to the profession? Have we done enough to convince the community to restrict the use of titles to those who have met all of the standards for entry to the profession? Have we made the case that those who seek to practice without meeting professional requirements should be subject to sanctions?
Have we made the case that financial planning must be delivered competently and loyally, by those who have acquired the body of knowledge and who subscribe to the profession’s ethical code? Have we established the justification that, absent professional regulation, great harm will be inflicted on many, many of our fellow citizens, and perhaps to the economic future of our country?
While we must continue to work to solidify the foundations of the financial planning profession, we have accomplished a great deal in the past five decades. We can convey to policymakers these foundations for the profession. We can move forward to request legislatures to endow our profession with licensure constraints, including educational requirements, high ethical standards, and a strong commitment to serve the public interest.
I look forward to the day when I am proud to call myself a professional financial planner. I await the day when all personal financial planners are accorded the respect and dignity as members of a profession.
Yet, this vision of a better future is threatened. FINRA, in particular, has long sought to oversee investment advisors. If that happens, financial planning will become a means for selling products, rather than for the delivery of independent, objective advice under a bona fide fiduciary standard of care.
I urge our professional organizations to band together to take the next step – seeking true status as a profession through legislation. I urge my fellow professionals to call upon our professional organizations to move forward together with all deliberate speed, to fashion model legislation and regulations, and to advocate for a professional regulatory organization.
Let us as professionals move forward, together, without delay, to secure better financial futures for our neighbors and friends through the universal delivery of professional financial planning. Let’s secure a brighter economic future for all Americans.
Ron A. Rhoades, JD, CFP® is director of the personal financial planning program at Western Kentucky University, and a frequent writer and speaker on the fiduciary duties of personal financial advisors and their due diligence requirements. This article represents his own views and are not necessarily those of any institution, organization or firm with whom he is associated.
1 Richard B. Wagner, J.D., CFP®, “To Think … Like a C.F.P.” FPA Journal (Jan. 1990).
2 Ernest Greenwood, Ph.D.; “Attributes of a Profession,” Social Work, Volume 2, Issue 3, 1 July 1957, Pages 45–55.
3 IAA Report, “2019 Evolution Revolution: A Profile of the Investment Advisor Profession.”
4 See, e.g., Prentice, “Whither Securities Regulation? Some Behavioral Observations Regarding Proposals for Its Future,” 51 Duke L. J. 1397 (2002)
5 Prentice, “Contract-Based Defenses in Securities Fraud Litigation: A Behavioral Analysis, 2003 U.Ill.L.Rev. 337, 343-4 (2003).
6 Tamar Frankel, “Regulation and Investors’ Trust in the Securities Markets,” 68 Brook. L. Rev. 439, 448 (2002).