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Financial Planning > Tax Planning

The History of Financial Planning

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Who would have guessed that when Loren Dunton set up the Society for Financial Counselling Ethics in 1969 that it would evolve into the financial planning profession we know and love today? According to the Certified Financial Planner Board of Standards in Denver, there are more than 94,000 CFP certificants worldwide, including over 48,000 in the U.S. The revolution that Dutton started with a meeting of 13 individuals at Chicago’s O’Hare Airport in 1969 continues to gain momentum, and to serve more investors who need complex advice than ever before. With all that has happened in the economic and financial markets since those prescient first steps, IA thought it would be interesting to take a look at the history of financial planning on the occasion of the magazine’s 25th anniversary.

There is such a strong interest in the various disciplines and means of financial planning that a number of organizations have developed to support those interests, including the Financial Planning Association (FPA), with 29,000 members; the National Association of Personal Financial Advisors, (NAPFA), with 1,300 members; the Personal Financial Planning division of the American Institute of Certified Public Accountants with 7,400 members; and the independent broker/dealer group, the Financial Services Institute (FSI), with 2,000 individual and more than 100 firm members.

Some advisors will remember the years leading up to the first graduating class of the College of Financial Planning in 1973 as relatively placid ones for the financial markets in the U.S. compared to the chaotic years that followed. Political and economic pressures converged in the early 1970s to deeply affect the markets. The decade opened in recession, while the grinding bear market continued its 15-year reign, lasting from 1967 to 1982. The formation of OPEC led to oil price shocks starting in 1973, which in turn led to double-digit inflation in 1974, and another recession in 1973-1975. The wind-up to the Watergate hearings, a wage and price freeze, the resignations of President Nixon and Vice President Agnew, and the wind-down of the Vietnam War did not help economic matters. ERISA, the Employee Retirement Income Security Act, was signed into law. We added a new word, “stagflation,” that defined a time of stagnant wages and continued inflation that curtailed buying power. By 1980, in economic and markets terms, U.S. investors were reeling from the bear market, an inflation rate of 13.5%, and interest rates at their highest levels ever. The country was suffering through a double-dip recession that would last until 1982. This was the turbulent environment into which the first group of Certified Financial Planners was born and cut its teeth.

“The first graduating class year, 1973, was the beginning of the first energy problems,” says Colin “Ben” Coombs, a member of that inaugural class, and an elder statesman of the profession. Coombs has been a governor of the CFP Board and chairman of the Institute of Certified Financial Planners (ICFP), the industry group that merged with the International Association for Financial Planning (IAFP) in 2000 to form the FPA. More recently, he was the recipient of the FPA’s 2005

P. Kemp Fain, Jr. Award, selected for his “outstanding contributions to the financial planning profession,” according to the FPA.

“In 1973, ’74, and ’75, I was trying to distribute tax shelters, annuities, and real estate limited partnerships. It was a particularly good time for those things because of runaway inflation and very high taxation and interest rates,” says Coombs. Investors were looking for tax shelters and inflation protection. Coombs set up his business, Petra Financial Advisors, Inc., in Colorado Springs in early 1976, and registered as an investment advisor in 1979. The stock market in the U.S. was emerging from a particularly sharp ’73 to’74 drop. “Nobody paid any attention to the stock market because it had been so bearish–you could hardly talk to anybody unless you talked taxes.”

“Financial planning, in its infancy, seemed to be hooked to limited partnerships,” says Richard Averitt III, chairman and CEO of Raymond James Financial Services in St. Petersburg, Florida. Averitt became a CFP in 1979. “Many people who did financial planning did tax planning, which meant they sold limited partnerships, which came to an ill end after the Tax Reform Act of 1986 made tax deductions for the business illegal, retroactively. Financial planning stumbled.”

“When Reagan changed the tax code, they talked about leveling the playing field, but they forgot to take all the players off the field,” says Coombs, “and the IAFP dropped from 25,000 members to 10,000.” Those were dark days for the nascent planning profession. “Volcker and Reagan breaking the back of inflation, and changing the tax code environment,” notes Coombs, was pivotal in the changes in financial planning that followed. Retirement plan rules were changing as well. Between the adoption of individual retirement accounts in 1974 and the 401(k) in 1981, the way people planned and invested for retirement began to change. Faced with selecting investments for retirement accounts, the changes caused by the Tax Reform Act in 1986, and a stock market that began to take off in 1982, more people realized they needed help with their financial lives.

A Turning Point

The way people looked at investing, estate planning, retirement planning, and tax planning was turned on its head. The investment business started to change, too. Early in his career, Richard Averitt III learned about investing at a wirehouse where the focus was on “investment-opportunity-driven” sales–when a new bond or other product came to market, representatives made a list of clients and other prospective buyers and called to talk to them about the product. On the flip side of this is the financial planning movement that Averitt describes as “oriented around a methodology that asks, ‘Who is my client and what are his or her needs?’ Financial planning began to develop a new image, not associated with a failed investment, but with a valid methodology.” Averitt credits Tony Greene, former president, CEO, and chairman of Raymond James Financial Services, with leading the IAFP out of that dark time, and into financial planning as we know it today, and says Greene was instrumental in combining the ICFP and IAFP into one organization which became the FPA in 2000.

“Financial planning today has become less associated with any product or investment type at all and far more associated–as it should be–with individual investor planning and investor needs,” notes Averitt. While Raymond James is a large firm, it is unique in the way in which advisors can work with the firm. They can be full-time employees or affiliate as independent professionals, as financial planners or as brokers, and there are several degrees of affiliation they can choose.

Through the bull market that started in 1982, Alan Greenspan’s appointment as Chairman of the Federal Reserve, the “Black Monday” market crash in 1987, Gulf War I, the ’90 to ’91 recession, a drop in real estate prices, the tech bubble, and record heights for the DJIA, Nasdaq, and the S&P 500, financial planning moved ahead. In 1985, the CFP Board was founded. In 1987, the CFP Board recognized 20 universities that offered registered programs for financial planners. Today, the CFP Board reports that there are more than 190 colleges and universities offering 300 registered programs for planners. In 2007, CFP certificants will need a bachelor’s degree.

The Road Ahead

“I’ve been impressed with the singular dedication of the FPA to build and support the mark and particularly their dedication to creating the next generation of financial planners,” says Coombs. What investors want most, he says, is a “trusted relationship with an individual, not a Web site or a big presence on the television screen. If they can find that trusted relationship, they hold onto that, tightly. The clients we’ve lost over the years–which haven’t been many–are those that we accepted without having done a financial plan for, they had just hired us to be asset managers. We just don’t lose clients that we have this trusted relationship with, and we’re not unique in that, it’s system-wide.” Coombs adds, “that’s what you ought to focus all of your time and attention on–building and maintaining that trusted relationship. We spend 90% of our time focusing on minutiae–asset management and taxes–which obviously we’ve got to know something about, but the thing our clients are looking for is that trusted relationship.”

Coombs has long been an enthusiastic proponent of mentoring new planners to bring them along in the profession. “Just as I believe that our practices are strengthened by one-on-one relationships with our clients, the profession is strengthened by one-on-one relationships with new people coming into the profession. It’s a lonely world out there [for those] trying to get started. It’s hard to find a comfortable environment [in which] to try your wings.” Coombs was also responsible for a group called the “Rat Pack.” During an FPA Retreat, a young planner, Paul Fain, talked about all the help he got from his father’s friends while he was taking over his father’s practice after his dad, P. Kemp Fain, Jr., had died. “He referred to us as the rats in the barn–if you follow the rats in the barn, they’ll always lead you to where the food is. I thought ‘Why not create a Rat Pack?’ to help all the Paul Fains that are coming up,” says Coombs. They created an “ad-hoc, amorphous group” in which, to qualify as a mentor, your age and years of CFP practice must add up to 65 or higher, and you must be willing to commit five acts of mentorship each year. “In response to that, Aaron Coates created the NextGen group; he originally called them ‘the Mouseketeers’ but he caught a lot of flak for that. [It's] for those under 35 with less than three years of experience–so it’s the mirror image of the Rat Pack. We’re trying to get the FPA to develop a database of the group so that when somebody wants a mentor they can search the database of those Rat Pack-ers.” He says the FPA Residency program is a great program, and Bridge the Gap also is very successful.

As for financial planning in the future, Coombs believes it will be driven by both “individual people who develop a love and affection” for planning, as well as a trend toward larger firms. “To the extent that they don’t lose their trusted relationship ties with their clients, I think they will be successful.” Coombs feels that there will be an ebb and flow of planning at the wirehouses, and “each flow will create a larger client base for those of us who operate the old-fashioned way.”

From Averitt’s point of view, one area that has completely changed financial planning is technology. “When I started doing financial planning, we were sitting with calculators and it could take months to do a financial plan. It was an arduous, lengthy process, fraught with opportunity for human error, and very difficult to update.” That is very different from how planning is done today, he notes, and as technology continues to evolve, it will enable planners to be efficient, able to serve more clients, in a more timely and thoughtful way, even as the margins of the business may decline.

For Averitt, the bottom line, is that no matter how well you make an investment plan, no investment plan is certain to work, “but the financial planning process always works, so if you engage in a financial planning process, you’ll get back on track. If you focus your investing based around investor objectives and goals, that is a better process to achieve investors’ goals than to chase market averages. Goal-directed investing will deliver the results to the investor.”

Sources: European Central Bank; Federal Reserve; Federal Home Mortgage Corp.; Financial Planning History White Paper; Certified Financial Planner Board of Standards; Lipper, Inc.; National Bureau of Economic Research; State Street; Texas Tech University;; U.S. Dept. of Commerce/BEA; U.S. Dept. of Labor; U.S. Treasury.

Staff Editor Kate McBride can be reached at [email protected].


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