What You Need to Know
- Until the 1970s, Americans primarily used broker-dealers, insurance or annuity agents, and RIAs to meet their financial needs.
- BDs and RIAs were created as a result of the Securities Acts of 1933 and 1934 and the Investment Advisers Act of 1940.
- The birth of the Financial Planning Association was a milestone for the profession, combining the strengths of the IAFP and the ICFP.
Two of the oldest professions known to man are taxation and estate planning. In fact, many historians can trace the professions back to ancient Mesopotamia and the 12th century, respectively. So what about financial planning?
The field has come a long way in its short history. Let’s take a look at how the profession has evolved so we can better understand where it’s going.
It began in the 1960s when Loren Dunton, a savvy and successful salesman, had an epiphany during a family sabbatical trip. When asked by foreigners why Americans were so dependent on Social Security despite their economic prosperity, Dunton admitted that most Americans were not planning for retirement.
He also realized that financial professionals had a large impact on millions of families worldwide, but there was no actual profession that specifically addressed the financial needs of consumers.
Until Dunton’s realization, Americans primarily used broker-dealers, insurance or annuity agents, and registered investment advisors (RIAs) to satisfy their financial needs, with financial planning offered only occasionally by advisors as a “value-add” for their most profitable clients.
For historical context, broker-dealers and RIAs were created as a result of three acts of Congress in response to the Wall Street Crash of 1929 and the ensuing Great Depression. These are the Securities Act of 1933, the Securities Act of 1934 and the Investment Advisers Act of 1940.
The 1933 Act regulated the primary securities markets, while the 1934 Act regulated the secondary market and created the Securities and Exchange Commission. Meanwhile, the 1940 Act established fiduciary standards for RIAs who were providing investment advice to clients and created a clear distinction between broker-dealers and investment advisors.
Notably, these groups are different in that broker-dealers are in the business of selling investment securities and earning commissions from those sales, while RIAs are paid for independent advice related to investments.
In addition, broker-dealers and their agents are regulated by the state(s) in which they do business and the Financial Industry Regulatory Authority (FINRA), a private, member-based and self-regulatory organization created in 2007, with nearly 700,000 current members, and falls under the federal jurisdiction of the SEC.
RIAs, however, are regulated by the SEC (or state(s) in which they do business) if they have greater (or less) than $100 million in assets under management. Last, insurance and annuity salespersons are similar to broker-dealers in that they also earn money through commissions from product sales, but they are primarily regulated at the state level as a result of the 1945 McCarran-Ferguson Act.
While these legislative acts continue to play a major role in the financial services profession, Dunton recognized that there was no profession that holistically addressed a consumer’s financial needs, nor integrated the knowledge and practices of various disciplines across the industry. As such, he advocated a new profession dedicated strictly to personal financial planning.
Furthermore, he called a meeting of 13 leading financial services professionals across the United States on Dec. 12, 1969, at the O’Hare Hotel in Chicago. The purpose of the meeting was to discuss how to help Americans with their financial lives and outline the initial steps and practices needed to create a new profession called financial planning.
Dunton was successful, and this historic moment marked the birth of the financial planning profession. More specifically, this meeting created the Society for Financial Counseling, a financial planning membership organization that was later renamed the International Association for Financial Planners (IAFP).
In addition, it created the College for Financial Planners (CFFP), which in 1972 enrolled its first students into its newly created certified financial planner certification. This five-course program was designed to ensure a minimum of technical and ethical competence among financial advisors in areas such as insurance, investments, taxation, employee benefits and retirement, and estate planning.
It was a success. Its first class of 35 students graduated in October 1973 and subsequently formed an alumni organization called the Institute of Certified Financial Planners ICFP).
By the mid-1970s, there were now three financial planning organizations — the IAFP, ICFP and CFFP. They would be joined, however, by another key player in 1983: the National Association of Personal Financial Advisors (NAPFA), which had a strict goal of supporting, promoting and increasing consumer awareness of the delivery of fee-only financial planning advice.
These organizations paved the way for the profession, but the IAFP and ICFP drifted apart in the late 1970s and early 1980s. A key reason was that the IAFP broadly focused on both CFP and non-CFP members across the industry, while the ICFP narrowed its focus to CFP professionals and promoted the certification to advisors, the public and governmental authorities.
In 2000, the organizations settled their differences and merged into the Financial Planning Association (FPA).
The FPA was a milestone for the profession because it combined the strengths and viewpoints of both groups, with the IAFP specializing in financial planning and the ICFP promoting competent and ethical advisors through the CFP marks.
With increased power, the FPA held the primary goal of fostering financial planning, advancing the profession among the public, and supporting the CFP certification. Today, it is based in Denver, has more than 22,000 members worldwide, and is the largest nonprofit association for financial advisors and CFP certificants. They also produce the long-standing and popular Journal of Financial Planning.