It’s taken longer than I’d like, but circumstances have conspired to prevent me from responding to PPotts’ comment on my Aug. 27 blog: Can CFPs Really Be Fiduciaries? Still, her comment raises two interesting and important issues. Are the economics of being a broker better than those of an independent RIA? If so, how does that impact the CFP Board’s actions? 

To bring you up to speed on how the discussion went down, it started with PPotts comment to my Aug. 20 blog (Fiduciary-Only Advisors: Of Attorneys, ‘Agents’ and Schmucks), in which she wrote: ‘I don’t see where the confusion lies [in solving the issue of ‘part-time’ fiduciaries]. Ask Mary Jo [White; chairman of the SEC] to simply require that a firm be either an RIA or a BD, and [state] that no individual can be a member of both.’” 

I found her solution so dead on that I quoted it in my Aug. 27 blog, adding: “It’s certainly possible that this is the ultimate endgame to the discussion that Dodd-Frank started about making retail financial advice as client-centered as possible. What PPotts is describing is a kind of Glass-Steagall Act [which separated lending banks from investment banks] for financial advisors that would create a clear distinction between fiduciary advisors and retail brokers. Then retail investors could decide for themselves whether they want ‘advice’ or help purchasing financial products they’ve already decided upon. Under the Board’s current standards, that would seem to put CFPs on the RIA side of the fence. Problem solved.” 

Curiously, despite the fact that I’d praised the brilliance of her solution, PPotts seemingly took issue with my “problem solved” conclusion, and posted another comment to say so: “You were doing so well, until the last sentence, Bob. The CFP Board of Standards would undoubtedly shrink as those who entered into the licensing arrangement with the CFPBOS would find that it would no longer be economical to give up the commissions from the BD. Can I make more on full service or advice? That is the question many [CFPs and brokers] need to answer.”

Seems to me that this is a question that has been asked and answered for quite some time now. The economics from an advisor’s perspective seem quite clear.

Ten years ago, or so, I was on a fight out of Dallas to somewhere, and learned that the gentleman I was sitting next to was stock broker at one of the big wirehouses. After some basic info exchanging, I learned he had converted his clients almost entirely to managed assets, which had recently hit $50 million, and on which his clients paid 2%. So I asked him if he minded telling me what his payout was. “Oh, I’m one of our top producers in Texas,” he drawled. “so I get the max: a 50% payout.” 

I couldn’t stop myself from asking: “What could you possibly get from your firm that’s worth $500,000 a year?” His silence lasted for the rest of the flight.

For the past 25 years, advisors have been moving toward the assets under management model because it’s just a better business model.

It’s recurring, it’s cumulative (you don’t start each year at zero income) and it’s not labor intensive (you can manage $1 billion with virtually the same staff it takes to manage $100 million). Then there’s the fact that an AUM-model firm has a resale value of about 2X annual revenues. That’s not to say there aren’t other non-economic reasons that some brokers don’t want to give up their commission business: a sense of obligation to legacy clients and an inability to attract AUM clients come to mind. 

Fee vs. commission economics is much more of a sticky issue for two other parties: brokerage firms and the CFP Board. While the biggest financial services companies are built on AUM fees, the Wall Street wirehouses are big enough; they’ve gotten that way on heavily loaded commission-sold products. They are gradually making the transition to fees, but giving up those big annual margins on each sale is hard on their immediate bottom lines. 

The economics of the CFP Board, on the other hand, are very clear. Its revenues come almost exclusively from its CFPs: the more CFPs, the bigger its budget. While that might not mean much to its volunteer board members, it certainly does to its staff, from the CEO on down. To grow revenues, they need more CFPs. And there are a lot more brokers than there are RIAs. What’s more, brokerage firms help with marketing, by encouraging brokers to become CFPs. Some firms even pay for their training and licensing, making them even more likely to become financial planners. 

The CFP Board figured this out some time ago, and has been focusing on Wall Street’s prospects at least since the late 1990s, when it proposed the ill-fated “CFP Lite” designation, to give brokers a faster way to earn a financial planning designation.

So the CFP Board made PPott’s choice between focusing on RIAs or on brokers a long time ago. That’s been evidenced in its acceptance of CFPs as “part-time” fiduciaries and, recently, in its heavy-handed disciplining of RIAs over “fee-only” representations while turning a blind eye toward brokers.

Which, to my mind, puts the CFP mark into the category of an educational credential—like a PhD, an LLM or a CFA—rather than a professional designation. That’s because professions are not about making more money, or attracting more members.

Sure, some doctors and lawyers and CPAs make pretty good money: but you don’t find any doctors or practicing lawyers or accountants on the Forbes 400 list. In fact, professionals restrict their ability to make money by agreeing to put the interests of their clients/patients first, at all times.

But, as PPotts points out, that’s not the direction in which the CFP is headed. Which I find ironic, as it is where Wall Street is going—albeit, slowly.