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Practice Management > Building Your Business

A Category Is Born: CFP Professional Practices

By Bob Clark

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Do certified financial planners make more money than other financial advisors? It’s an interesting question, isn’t it? Perhaps not as interesting as whether the clients of CFPs attain more of their financial goals than those of non-CFPs. Clients don’t seem to be top of mind at the CFP Board these days, though, so those good folks commissioned Boston-based Aite Group to look into the matter of CFPs’ relative success. (See “Are CFPs More Successful Than Non-CFPs?” ThinkAdvisor.com, Feb. 16.)

The results of Aite’s research were published in February in a report titled “Building a Wealth Management Practice: Measuring CFP Professionals’ Contribution” by Alois Pirker and Sophie Louvel Schmitt. Now, if you or I were trying to find out how much CFPs take in compared to other advisors, we’d probably ask a statistically significant number of CFP and non-CFP advisors how much they took home in the last few years and compare the results. But, as you may have inferred from the title of the study, that’s not what Pirker and Schmitt did.

Instead, the study “identifies and quantifies differences between registered representatives and investment advisor representatives […] who hold a CFP certification, and financial advisors who are not CFP professionals. Furthermore, the study compares practices with CFP professionals (CFP professional practices) to those without CFP professionals.” That’s rather a different set of questions, isn’t it? Collectively they raise the question of whom the CFP Board thinks might be interested in the answers.

To find out, let’s look at the study itself. Last October, Aite conducted an “online survey of 403 U.S. financial advisors that includes 146 CFP professionals, [and] 306 advisors representing practices that have at least one CFP professional (called CFP professional practices). Almost all CFP professional practices are led by at least one CFP professional.”

I know — where to start, right? Perhaps those 146 CFPs would be a good place. A click to the CFP Board’s website reveals that there are currently about 74,000 CFPs. So, 146 CFPs would represent 0.2% of them. I think we can safely conclude that this study isn’t going to tell us much about CFPs and their world.

Now, I’ve been covering the CFP world for more than 30 years, but if you were to tell me that I’m out of touch, I probably wouldn’t argue. Still, I do read the industry pubs, visit the sites and talk to a lot of people in the industry, and I don’t recall ever coming across the term “CFP professional practice.” CFPs own practices. CFPs work in practices; usually owned by other CFPs, but sometimes by accountants or even law firms. But what could a “CFP professional practice” possibly be?

To answer that question, we have to look at what kind of advisors Pirker and Schmitt surveyed. “The [survey] includes advisors from six types of firms,” they wrote. Advisors from wirehouses and other self-clearing firms represent 40% of the sample; midsize and small traditional BDs represent 29%; independent RIAs represent 15%; and advisors with online brokerage firms like Schwab, Fidelity, etc., represent 14%.

Now, considering that 44% of the CFPs surveyed were in either independent RIA firms or independent BDs — the traditional homes of CFPs — it’s a bit surprising that the authors adopted the language of the 40% of Wall Street CFPs when explaining these firms: “A CFP professional practice could be solo advisor practices or team practices […]. In this report, we discuss two types of practices: team-based practices, with more than one client-facing advisor; and solo practices, with one lead client-facing advisor (and may also have junior advisors).”

Perhaps I’m just old-school, but to my mind, advisors who are employed by brokerage firms don’t have “practices,” they have jobs, regardless of their designations. CFPs who do have “practices” don’t work in “teams,” they work in independent firms. This may sound like semantic nitpicking, but, as with much in the financial advisory world these days, the blurring of concepts and definitions is often part of a strategy to erode investor protections.

In this case, for instance, the application of brokerage terms to independent advisors ignores two significant investor benefits that are provided by independent advisors: economic independence (which eliminates many financial conflicts of interest); and a full-time fiduciary duty (which requires the elimination of most other conflicts). Despite what the CFP Board or the Aite Group might suggest, a CFP is not a CFP is not a CFP.

This fact becomes abundantly clear in the report’s section titled “Financial Planning Characteristics,” which examined a practice’s ability to “deliver financial planning under a fiduciary standard of care,” the authors wrote. “CFP professional practices are more likely to deliver financial planning services under a fiduciary agreement specifying that advisors are preparing a financial plan that aligns with their clients’ best interests. This analysis focused only on advisors at brokerage firms and did not include advisors with RIAs, who are legally required to follow a fiduciary standard of care at all times. [Emphasis added.]”

Then, in a following section titled “The Legal Impact of CFP Certification,” Pirker and Schmitt talk about how brokers and their firms can manage the CFP Board’s fiduciary standard: “CFP professionals are held to a fiduciary standard of care when providing financial planning. […] Clients may believe they are receiving a financial planning service that meets CFP Board’s definition when they are instead receiving a service that is narrow in scope and incidental to the transaction. For this reason, some brokerage firms believe CFP professionals present more legal risk to a firm compared to other registered representatives at their firm. [Emphasis added.]”

Notice what the report’s authors (and through them the CFP Board) are saying in the three emphasized sentences. Brokerage executives might be concerned that a CFP’s fiduciary client duty would require brokers to act in the best interest of their clients at all times, but:

  1. Unlike RIAs, CFPs are not held by the CFP Board (or anyone else) to be client fiduciaries at all times.

  2. The only time that CFPs are held to the Board’s fiduciary standard is when they are doing “financial planning.”

  3. CFP brokers are certainly not held to the Board’s fiduciary standard when they are acting in the “narrow and incidental” capacity of “selling” investments that might be suggested by a financial plan.

Once the authors put BD execs at ease about that sticky “fiduciary duty” thing, they pointed out other advantages to brokers of CFP certification, which mostly targeted the old bottom line:

  • “Both solo and team CFP professional practices generate at least 40% more in revenue compared to other solo and team practices.”

  • “The share of HNW and UHNW clients at CFP professional practices is 53% higher than at other practices.”

  • “CFP professional practices manage 40% more of their clients’ investment assets on a fee basis compared to other practices (45% of investment assets versus 32%).”

  • “This orientation toward financial planning translates into […] a stronger adoption of fee-based financial planning; 80% of CFP professionals charge for financial planning.”

  • “CFP professionals continue to grow their compensation throughout their careers. On average, CFP professionals earn 26% more in compensation than non-CFP professionals, adjusted for advisors’ years of experience. Late-career CFP professionals earn 33% more compared to other late-career advisors.”

Altogether, this is one heck of a selling job for CFPs in brokerage firms. Yet it does seem to raise one financial question: If financial planning is so great for business, why does the CFP Board feel the need to sell it so hard?

Perhaps surprisingly, Pirker and Schmitt provide the best answer in their whole report: “Wealth management firms have been undergoing tremendous change since the financial crisis of 2008. In the U.S., these changes have been largely driven by profitability pressures and changing investor preferences. Given this profitability squeeze, firms may see a need to cut back on advisor training and CFP certification initiatives. Aite Group believes that firms should avoid cutting back on these budgets and should even consider expanding these initiatives to maintain their competitiveness.”

And there you have it, BD execs: New DOL fiduciary rules got you down? Not to worry. With its tight and tidy fiduciary standard, the CFP Board’s got your back.

— Read “CFP Board’s Mandatory Arb Plan: Significantly Better Than FINRA’s” on ThinkAdvisor.

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