Drop by an FPA or NAPFA conference, and you’ll be sure to find Bob Veres, surrounded by a crowd of advisors who want to ask him about a business problem–or to tell him how they solved theirs. A former IA columnist, Veres publishes a monthly newsletter, Inside Information, available at www.bobveres.com. His dialogues with advisors provide much of the source material for The Cutting Edge in Financial Services, his new book on the future of the financial planning profession (National Underwriter). He shared his thoughts on the industry recently with IA Editorial Director Bill Glasgall.
You’ve said the financial planning profession is entering a new phase. There are two things to understand about the evolution of the planning profession. The profession goes through what I call professional cycles, which are like normal economic cycles, but are specific to the profession. Just like economic cycles, you have a period of prosperity, which gives way to a period of excess, and then there’s a major shift of some sort, which suddenly changes the nature of the game. The profession goes into recession, it sheds the excesses, and a lot of people who seemed to be doing quite well are suddenly out of business. The second thing to understand is that the profession changes dramatically during recessionary periods. All of the evolution seems to be compressed into a very short time. We are in one of those periods now.
How has this happened in the past? Look back to the 1980s, when the highest marginal tax rates were 90%. The cycle began in an awful, terrible investment climate, 10 years or more of zero returns from stocks. People weren’t interested in investment advice; they wanted to know how to deal with the confiscatory tax scheme, and it happened that the tax laws at the time favored investment in tangible items. So the profession turned to tax planning. Eventually, it became easier to specialize in that and abandon full-service financial planning. That’s how you know a cycle has turned; when it suddenly becomes much more profitable to specialize in the most visible element of the service, and stop doing the hard work of full-service planning.
Then the Tax Reform Act of 1986 came along. Tax shelters were no longer economically viable, you had the stock market crash, and all those people who were specialists were suddenly being sued out of business. I estimate that 25% of all planners left the profession between 1988 and 1991. And that brief period gave birth to a whole new dynamic.
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Which was assets under management? Notice how fast the change was. After that very brief recessionary period, suddenly the service that had been paying for the entire financial planning engagement–tax shelters–was no longer contributing a nickel to anybody. Professional leaders were suddenly behind the curve, while new faces emerged as leaders of the profession. In the blink of an eye, the profession moved to modern portfolio theory, from commissions and junket trips for producers to fees and fiduciary conduct.
You think we are in a comparable period today? The next two years are going to see a compression of change, very rapid shifts in the service menu, in how planners are paid. It will be difficult to keep up. The stakes will be enormous.