Welcome back to the nineteenth episode of the Financial Advisor Success podcast!
This week’s guest is Bob Veres, the publisher of the Inside Information newsletter on practice management for financial advisors, and a long-time industry commentator on the world of financial planning. In fact, Bob has been covering financial planning as a journalist for more than three decades now, going all the way back to when he first became editor of “The Financial Planner” (now Financial Planning magazine) in 1982!
In this podcast, Bob shares his perspective on how financial planning has evolved over the decades, from “Needs-Oriented Selling” in the 1980s – when financial advisors largely sold life insurance, mutual funds, and real estate limited partnership tax shelters – to the 1990s when the availability of personal computers gave advisors superior access to investment information and stoked the growth of the mutual fund model, to the rise of the AUM model in the 2000s, and where Bob thinks it will go from here: a world where financial planners simply get paid a fee for financial planning services.
In addition, we also look at how marketing for financial planning has shifted (from cold calling scripts, to seminars, to client appreciation events, and now digital marketing), the evolution of the membership associations that support financial planners, and why – as he details in his new book, The New Profession, the coming decade may finally be the one that leads to the emergence of a bona fide financial planning profession, on par with medicine and law.
And be certain to listen to how Bob helped me get my own start in publishing The Kitces Report, and why this Nerd’s Eye View blog wouldn’t be in existence today without his early help and support!
So if you’ve ever been curious about why the IAFP merged with the ICFP to form the FPA, how what financial planners do really has shifted over the years, and want some perspective on where it may all be going from here… I hope you enjoy this latest episode of the Financial Advisor Success podcast!
What You’ll Learn In This Podcast Episode
- Bob’s ambitions for the financial planning industry to be a service to humanity. [4:15]
- How he got his start in the financial services world as a freelance writer and later editor of the IAFP magazine “The Financial Planner”. [11:15]
- Why the term “needs-based selling” encapsulates the sales-oriented culture of financial planning in the 1980s. [25:12]
- Why Bob predicted that the fee-only AUM model would overtake the industry in the ‘90s. [27:07]
- How Bob’s legendary Inside Information newsletter for financial advisors got its start in 1991. [40:03]
- Why financial planning in the ‘90s was obsessed with asset management, yet was still an improvement upon the product-focused culture of the ‘80s. [41:52]
- Bob’s thoughts on the merger that created the FPA and its idealistic roots. [47:21]
- How the 2008 market crash brought on a crisis of confidence for financial planners, and why that may ultimately spur the emergence of a bona fide financial planning profession. [50:28]
- What it will take for financial planning to become a bona fide profession from here. [1:00:16]
- Why Bob believes we’re closer now to the original intent of financial planning as a means for helping people reach their full potential. [1:03:51]
- Why helping clients define fulfillment for themselves is an integral part of good financial planning. [1:03:51]
- Bob’s predictions for the future of planners, practice models, and advice for new financial advisors. [1:18:19]
Resources Featured In This Episode:
- Bob Veres – Inside Information
- Bob’s Columns for Financial Planning Magazine | Advisor Perspectives
- Bob Veres’ “The New Profession“
- Bob Veres’ “2017 Planning Profession Fee Survey“
- College for Financial Planning
- Hugo Quackenbush
- Alliance of Comprehensive Planners
- XY Planning Network
- Garrett Planning Network
- eMoney Advisor
- Vanguard Financial Advisor Services
- Schwab Advisor Services
- Profiling the Winners of the Future by Mark Hurley
- Not so fast big boy: Small RIAs will survive M&A trend by Bob Veres
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Full Transcript: The Evolution And Emergence Of A True Financial Planning Profession
Michael: Welcome, everyone. Welcome to the 19th episode of the Financial Advisor Success podcast. My guest on today’s podcast is Bob Veres. Bob is the publisher of Inside Information, the leading newsletter publication on practice management for financial advisors, and also runs the Insider’s Forum conference on practice management. What’s fascinating about Bob is his 35-year perspective on the evolution of financial planning. Starting all the way back in 1982, when he became editor of The Financial Planner, the first trade publication for financial planners, produced by the IAFP. That ultimately became what is now known today as Financial Planning Magazine.
And in this episode, Bob shares his perspective on how financial planning has changed over the decades. From the rise of needs-oriented selling in the 1980s, when most financial planners got paid to sell real estate limited partnerships and life insurance, to the 1990s, when the availability of personal computers gave advisors superior access to investment information and stalked to the growth of the mutual fund model. To the rise of the AUM model in the 2000s, and how the financial crisis may ultimately be the catalyst that started the transition away from an AUM model, and towards a world where financial planners simply get paid a fee for financial planning services. And be certain to listen to the end when Bob talks about how he thinks the focus of financial planning and what we do as financial planners will shift again in the coming decade as we complete the transition to becoming a bona fide profession. And his advice to advisors on what they need to do today to navigate this time of change. And so with that introduction, I hope you enjoy this episode of the Financial Advisor Success podcast with Bob Veres.
Welcome, Bob Veres to the Financial Advisor Success podcast.
Bob: Hello. Thank you. Hi, Michael.
Michael: Hello. I’ve been looking forward to this episode because I actually owe you a tremendous set of gratitude. And, you know, I suspect most of our listeners don’t know but it was actually you that first encouraged me to launch The Kitces Report newsletter, which then ultimately expanded to become the Nerd’s Eye View blog and now years later this podcast. You’re going all the way back to, I think, one of the early NexGen conferences out in the mountains of Colorado when we did the first one. And I was kind of griping about the column length and industry publications and not liking the restrictions at the time, and you had said, “You know, you can just make a newsletter, I’ll help you.” And you did. And I don’t think I would be here doing what I’m doing today if you hadn’t encouraged me. Or even that’s kind of an understatement because you would connect me to someone to get the website set up, and your recommendation to your Inside Information newsletter that gave me the jumpstart and the subscriber so I could actually afford to make a shift and focus more of my time on writing and speaking back in 2008. So I feel the need to start out by just saying thank you for the role that you played in making it happen. I feel like I’ll spend the rest of my career trying to pay for an appreciation for what you did helping me get this far.
Bob: Yeah. Well, you’ve paid it for it really nicely so far, I’d say. But, you know, well, here’s what I remember about that. I remember here was this annoyingly smart person that I found myself talking to and I realized that you should have a wider audience. And then we got talking and you seemed to have an interest in having a wider audience and sharing some of the thoughts you were sharing with me. And you know, everything I do is about making the profession better. And you were a classic example of here’s a resource that is, at this very moment, not being maximized that could be. You know, I think you kind of earned the opportunity by just being who you are, and certainly that’s been played out in your career so far. You were a resource for the profession, and it was easy to see that at the time. I guess that’s what I’m trying to say.
Bob’s Ambitions For Financial Planning To Be A Service To Humanity [4:15]
Michael: Well, I appreciate that. I mean, I think…You know, and part of the reasons why I was excited to have you on the podcast is just you have, I think, an interesting perspective and an interesting ability to see things, to see people, to see trends, to see opportunities in a way that not a lot of other people do, which certainly can…drives, you know, your readership, and your platform, and your speaking and what you’ve done over the years that you just seem to see these things as they’re evolving and changing. And so, actually I really I want to spend most of the time on the podcast today just talking about what you’ve seen over the years about how financial planning has grown and evolved. But I think to start, you know, I kind of assume that all of our listeners are familiar with your work but I don’t know that necessarily quite all of them are, so maybe you can just start by talking a little bit about what you do today. Like, I know some people call you a journalist, some people call you an industry commentator, some people call you a futurist. So in your words, like, what do you do, Bob?
Bob: You know, you forgot the word, which I’m called on regular occasions also. So, I guess, you know, we should, in the interest of fairness. I can kind of weave it in to my history. I was editor of Financial Planning Magazine when I was 30 years old.
Michael: When you were 30 years old.
Bob: When I was 30 years old, back in 1982. And I was enchanted by the promise of the financial planning service. And I was somewhat appalled that everybody in the profession at that time was basically in sales, and not in making people’s lives better. And they would boast, not about how much better people’s lives were, but about how much…what their production levels were, what their gross dealer concessions were. And there was such a disconnect between the idea of financial planning and how it was being practiced. And if you could sum up my career in just one sentence, it would be trying to close that disconnect. That we are, as a profession, I say “we” even though I don’t practice financial planning, I feel like I’m part of the profession, we are an enormous resource potentially for the human species to make…to usher in what I call “the world of fulfillment,” or an age of fulfillment in human society. Where people actually reach their potential, they have ways of navigating this complicated system we’ve created. They get advice and become more effective and happier and more productive as a result.
And so, what I try and do is find examples of people who are doing things that are interesting and potentially helpful for other advisors, and ask every question I can think of, and try and get as much information as I can about it so that it becomes a useful resource. Unlike you, I’m not short…I don’t write short, little snackable content, I usually try and get as deep as I can in the subject. And people can skip through whatever they’re not interested in, but I want to make sure that I capture it as much alive as possible. So I’m a commentator but not a commentator who imposes my own views on things. The only view I have is that financial planning should be a profession and people who practice financial planning should enhance the lives of their clients. And I think most people would agree with that.
The service that I provide is to try and help…I call it giving people the unfair advantage, but it’s just try and help people understand what the best practices are out there, what people are doing, what innovations have come along, and what the best ideas are now as opposed to best ideas yesterday. Trying to help people stay in that cutting edge.
Michael: And so your focus throughout has been the practice management side of things, the business side of things. Is that a fair label, practice management?
Bob: Well, there’s all the aspects to it. Marketing, if somebody’s got a really great idea for marketing, and then just writing something now about how marketing is changing. That what used to be cold calling became cheesy seminars, and then that evolved into client appreciation events where people would bring their friends, and now client appreciation events are kind of going outdated, and we’re having to move to higher ground again, which is basically all these online services where you…I don’t know. I just wrote something about how you create an e-book freemium of some sort, put on your website, capture people’s email addresses and return for it, and then try and enhance their lives before you even work with them, is the new thing.
So marketing is in there, you’ve got investment ideas. You know, I think I happen to think we’re in an indexing mania right now. I think that this whole indexing thing, it’s not nearly as harmful as limited partnerships were or the non-traded REITs, but I think it is in some ways harmful because there are some great active managers out there who are basically being ignored right now just simply because people are having trouble telling who they are. So it gets into investments, it gets into marketing, it gets into really anything I think would enhance a financial planner’s life and career. It gets into service models, it gets deeply into service models.
Michael: And so, how do advisors access that information if they’re not already following you and what you do?
Bob: Yeah. Well, I write a column for Financial Planning Magazine, I write occasionally for Advisor Perspectives, when I can think of something to add to them, and I publish a newsletter called “Inside Information,” which is really the unfair advantage. That’s where I put all my best ideas. The book I just came out with called “The New Profession,” which includes pretty much everything I was able to think about about where the profession is going. And I have no conflicts of interest in highly recommending any and all of that.
Michael: Of course, not really. And I recommend as well. And not just because I, you know, clearly have no conflict of interest for our prior relationship but also…I mean, just truly, like it’s fantastic information. I think it was the quality of your Inside Information newsletter service that, I think, for me helped kind of reinforce the point, or the belief, or the confidence that yeah, there really is room to just create long, valuable content for advisors and make it out…and make it available to them, and get paid to do that. And it wasn’t just putting out content for the sake of content, it’s, you know, you have to still create something that’s valuable. But, if you create something that’s valuable, like, lo and behold, people actually do pay for value, shockingly enough.
Bob: Yeah. Well, what can we do to stop them from doing that?
Michael: I don’t know.
Bob: How can we prevent this from…Right, go ahead.
How Bob Got His Start In Financial Services [11:15]
Michael: So for folks who’re listening, you want to actually check out some of Bob’s internals, we’ll also make sure it’s available on the show notes. So if you go to kitces.com/19, for episode 19 here, we’ll make sure we’ve got links out to Bob’s newsletter service and his book and the rest so that you can check out more of what he does. But I want to kind of dial back to this start that you had in the world of financial advising, where you were editing Financial Planning Magazine, which is still today one of our, kind of, our major pillar trade publications for our world of financial planning. So you were doing this in 1982. And I don’t even know, I’m kind of ignorant at the history, like, was that the start of Financial Planning Magazine? Was it already in place and you came in to take over as an editor? Like, what did that look like in 1982?
Bob: Well, it was funny. The IAFP, which was a precursor to the FPA, of course, was the owner of…They called it The Financial Planner. And the magazine had actually been sold to a group in Chicago and then bought back. And it was considered the crown jewel of the IAFP at that time.
Michael: So like, this would be the IAFP’s equivalent of our Journal of Financial Planning under FPA today. Like, here’s the publication the association puts out?
Bob: Yeah. But it was the publication period. It was the only trade publication out there at that time. We had no competition. But, you know, when they first interviewed me, they showed me copies of the magazine, and I don’t know how to say this delicately, the magazine sucked, it was horrible. And so I’m looking at the magazine…
Michael: Because it was badly designed or just like the editorial quality was bad?
Bob: Well, it looked bad and yeah, the editorial quality was horrendous, it was…it was all sales. And there were articles like “The 15 Best Life Insurance Salespeople of All Time.”
Michael: Because this would be the heyday of life insurance sales activity?
Bob: Well, that and limited partnerships, and oddly enough rare gems and diamonds. There was an article that I think the title of the article…So we’re talking about content but it was also sloppily done. I think the title of the article was “If You’re Not Investing in Diamonds, You Have Your Head in the Sand About Inflation.” You know, and I’m looking at this. I’m thumbing through it and, you know…and the ads are, you know, they only talk about is how much bonus commission you can make if you sell this and that. And the articles are bad, the artwork was horrendous. And they’re talking about how great this magazine is going to be. And I’m looking at what they’ve got and I’m thinking, “I don’t want to have anything to do with this. You know, I’m a classy guy, you know.” And the other problem was that I had never balanced my own checkbook and had no idea how to do that. Even though I was a math major in college, I still…I had never balanced my own checkbook. I knew nothing about investments.
Michael: And what were you doing previously when you came to the table for this job? Like, were you straight out of school and said, “Hey, I want to do magazine stuff,” or were you already in a world of journalism?
Bob: I was a freelance writer for a few years in Atlanta, and I had the reputation for being the guy you would go to if the editor would come up with an idea and no sane writer would write about that because it was such a complicated, god-awful mess, and so he called Veres. So I wrote about everything…
Michael: Because you were the journalist with the math major, so you could do some number things.
Bob: Yeah. I had physics background, I had…You know, yeah. And I was willing to lose money if it was an interesting subject. And so that was my wife at the time, and I had a few conversations about that. So then I took a job with a air freight magazine called Air Cargo World, just to see what it was like…what it would be like to be an editor. And I kind of liked being an editor. I was pretty good at it. I liked being a writer better, I have to say, but I kind of enjoyed being an editor. And I did that for seven months and the magazine was getting all sorts of…in seven months, it was getting all sorts of awards. And at the same time, I wrote a five-part series, one of my journalist like activities for a magazine called Atlanta Magazine, which was in our market, obviously. And the editor of Atlanta Magazine left to become the communication director for the IFP. And so he told me to come on over, and he talked to me, and he wanted me to be the editor of his medicine and they just fired the other editor. So they were kind of in a little bit of a buy-in. And, as I said, I wasn’t sure I wanted to take job, but I was enchanted by the concept of financial planning. I thought it was…it looked to me like it might someday be as important to the world as medicine or legal advice.
Michael: Which was very aspirational for the actual state of financial planning at the time, when it was the best life insurance salespeople, and limited partnerships, and…
Bob: Yeah. I think preposterous is the one word we’re searching for here.
Michael: Preposterous. All right. And, I guess…and we should put it in context of the timing as well, right? We’re in 1982, so the first CFP class was not even 10 years old at that point because they got started in 1973. And I guess really at the time there were kind of two hotbeds of financial planning. One was out in Denver, where the College for Financial Planning was, which had the CFP marks at the time and was teaching, and the ICFP, which is kind of the other…Financial Planning Association was out there. And then the second anchor was in Atlanta where the IAFP was, which is where you were and where Financial Planner magazine was.
Bob: Yeah, that’s right. And the IFP and the ICFP had this rivalry going that I just flat didn’t understand and wouldn’t have anything to do with. You know, I felt like the ICFP, they were…many of the best planners were ICFP members. There was no reason for the IFP to have any kind of a rivalry with them. In my view they should work together. And so, the magazine supported both, which was not, of course, always the wishes of the board of the IFP, but by that time I had decided, you know, I was going to follow the promise, the profession not what the salespeople told me to do.
Michael: So you showed up as editor for Financial Planning Magazine in 1982. So how did that go? Like, how long were you leading Financial Planning Magazine?
Bob: The second time the IFP board voted down a merger with the ICFP was in 1990, and I tendered my resignation right after that. So I left. And I think the last cover article that I helped edit, that we secured, talked about the possibility that the entire Japanese market was this huge bubble. And I left, and the bubble burst literally about two months later.
Michal: Wow. And so, what was it like through that time period? I mean, there was a lot of change going on in our financial planning world through the ’80s, from 1980 to the 1990 because we had Tax Reform Act of 1986 under Reagan, which just drastically kind of overnight changed the limited partnership, lots of real estate investing. So can you like help paint a picture for us? I mean, for people who maybe are mere veterans in the industry, who’ve been doing this for 15 or 20 years, who were not around to see it in the 1980s? I mean, what did the financial planning world really look like at the time?
Bob: Well, it’s funny because it was actually more complicated than that. Ronald Reagan came into office and the first thing he did was pass this huge tax cut. ERTA is what it was known. I’m not sure what ERTA stands for anymore. And then he passed a huge tax increase the next year, TEFRA. And incidentally, rewrote a whole bunch of different things twice. And they opened up opportunities that sleazy people could take advantage of and some that were procedural, and then closed some of them back up again and opened up others. And then there was the Tax Reform Act of ’86. Our cover article then, we showed a picture of the congressional building, and the headline was “What Have Congress Wrote?” You know, this was the year of tax shelter sales, and there were several things to say about that. One of them was, though, that there were absurd incentives built into the tax code that allowed you to take significant…allowed you to create vehicles that would give you 7 to 1 deductions. You would put $1,000 into a program…actually you’d put 100,000 or 50,000 in, the private limited partnerships, and you could get a seven-fold immediate deduction.
Michael: So now…I mean, you get to a world if you’re a decently high tax pairing, if you’ve got, just a rough amount, like if you’ve got a 30% tax bracket, like you put in $50,000, you immediately get a $350,000 tax deduction, that your tax rates actually saves you 100 grand instantly in taxes for a $50,000 investment.
Bob: Right. And the tax rates were actually 70% back then, and had come down from 90 recently, for the highest bracket people. So the typical financial planner of that era would prospect by saying, “Do you like to pay taxes?” And often the answer was, “No, I’m not really that crazy about paying taxes, especially not at 70%.” And the person would say, “Well, I’ve got a deal here for you.” And they’d open up their briefcase, and they would show them a limited partnership program, which would pay commissions that could go as high as 10%, plus a due diligence fee, plus…for the broker-dealer, plus incentive trips that were outrageous.
Michael: And the math worked because when you get a 7 to 1 tax deduction at 70% tax rates, like there’s more than enough money on the table for everybody actually to make out well on that. I guess with the exception of Uncle Sam, who eventually decided that he didn’t feel like subsidizing. Everybody else is getting out well, which was why we got the tax law changed.
Bob: Well, that was the 1986 law. But the thing that we started investigating was what happens later on in those programs? We started writing about this, and, of course, all of our big advertisers were tax shelter guys. And so, here we are writing about, “You know, when you get to the liquidation, you have to recapture all those write-offs. And the recapture is higher than the dollars you’re getting…significantly higher than the dollars you’re getting back. In addition to that, if the program is shown to have no substance, then you recapture immediately and you lose all your money.” And a lot of these didn’t have any of substance. That was the problem with the tax shelter guys. So I don’t want to get too deeply into this but there was an awful lot of built-in lawsuits that were being sold as investments back then. And we exposed a lot of that, and that, of course, well, didn’t lie really well with the arm of the IFP.
Michael: That doesn’t go so well when you’re doing exposés on products that also happen to be the leading advertisers of the magazine for…in which you’re doing the exposés.
Bob: And some of them were board members of the IFP, you know.
Bob: There were some touchy moments there.
Michael: So are you just a particularly smooth talker that you managed to not get fired at some point along that…along that pathway of writing exposés about the companies of advertisers and board members?
Bob: I think I might have had uncommon courage, I’m not sure, because, you know, it was clear that this was true and right, and it was something that needed to be exposed. And I thought of myself as a true journalist who worked on behalf of the members and readers, and this was clearly what they needed to know because here they were creating the distraction of their own business when these things finally came to light, and it would be better not to recommend them than to have the consequences following your head five years down the road, right?
Michael: So where did financial planning of the day fit in? Like, a financial plan was like, “I’m going to do a projection that basically shows you how good this tax deduction is.” Like, it was that sort of a context? Like, plans were product illustrations or what…
Bob: Well, sometimes they would recommend the whole life insurance. You know, I don’t want to, you know, state it too much. The funny thing about that era was that everybody talked about needs-oriented selling. And what that meant was the financial plan was the upfront due diligence we do on the client in order to understand what it is we want to recommend. Recommendations were made before that era purely as, “What do I need to sell?” The needs-oriented selling was this huge benefit to the sales agents because now they could show the client, “Here’s how you will benefit from this particular product as opposed to that one.”
Michael: And, of course…I mean, there’s a part of me a little that’s like half laughing and half crying at the idea. Like, we’ve had a major breakthrough in selling, that’s what people need.
Bob: Yeah, right. That’s what it was. And it was terribly ironic and it was funny, but it was better than what was being done before on the sales side. And then, of course, you know, the Tax Reform Act of 1986, all of a sudden the top marginal rate was 28% and tax shelters went by the board, and everybody had to figure out something else.
Why The Term “Needs-Based Selling” Encapsulates The Sales-Oriented Culture Of Financial Planning In The ’80s [25:12]
Michael: So, financial planning in that context was, “Let’s determine people’s needs because that was kind of the anchor around needs-oriented selling,” right? I mean, I’m connecting dots in my head. It’s like, “So this is why when I started in the industry I was taught to do a capital needs analysis for life insurance because that was the needs-based selling approach?”
Bob: Yeah. We’ve talked about limited partnerships but in the life insurance world, this changed everything, because it used to be people would talk to their customers and they’d say, “You need to buy as much life insurance as you can afford. And based on your income, this is how much you can afford.” All of a sudden, these calculations were saying, “All right, you want your family to be able to retire on this lifestyle, this amount of money that will provide this lifestyle for them, and so how much do we need to put into a life insurance policy in order to make that happen so that if and when you die, if you die early, they’ll still be able to have the same amount as if you retired?” And so, with the first capital needs analysis, it was really the first wave of core ethical selling of life insurance. Basically, it was life insurance that tried to capture what the person’s future lifetime income was likely to be and how to protect that. And that changed everything because life insurance agents before that, you know, they were just basically people who had the ability to make friends quickly and…
Michael: And you did. I mean, just literally, you pitched your product to everybody that you met, and the more people you can meet, the more you can pitch to, and the more you can pitch to eventually the more sales you got, and just it was the good old numbers game.
Bob: “Do you love your life…wife? Do you love your children?” And if they didn’t, you know, then you had to move on to somebody else. But if they did, you had a sale, just exactly like the, “You know, do you like to pay taxes?”
Why Bob Predicted That The Fee-Only AUM Model Would Overtake The Industry In The ’90s [27:07]
Michael: So how did it change once the limited partnership world vanished? Like, was it just, “Did we just move from one product to another product?” Like, do you view that as a transition point for the financial planning world, when tax partnerships kind of moved out of the picture?
Bob: Well, it’s funny because people were really slow to move out of partnerships. And I thought that was interesting because the handwriting was clearly on the wall. But you still…people were still hanging onto these things through the early 1990s. I made a couple of predictions, and, again, who am I to make predictions? You know, I’m editor of the magazine, and actually this was right after I left the magazine. And I have to tell you, nobody keeps track of your predictions, okay? I’ve made good ones, I’ve made bad ones but nobody has ever come back and said, “Boy, that was a good prediction,” or “Boy, that was a horrible prediction.” You know, you just get away with predicting. And as long as it’s interesting, people will take it to heart and then later on they’ll forget that you ever made that prediction.
Michael: Many economists have built their entire career around that.
Bob: That’s right, you know, and I’m a beneficiary of it myself. Well, some of my best predictions, one of them was…People were selling the commissionable mutual funds back then, and I ran into people at NAPFA meetings who were doing this fee-only AUM model. And I asked them, “You know, what’s your model? I mean, how are you making money?” And they said, “We’re not sure.” And I said, “Well, what do you do?” And they said, “Well, we tell clients how to invest no-load mutual funds,” which had been around since Fidelity broke ranks with everybody back in the ’70s. And I said, “Well, how do you get paid?” “Well, we’re not sure but, you know, we’ll figure it out.” And what platform do you…there was no platform at that time. But they were doing it and their clients liked it. And so I predicted this is going to take over the profession. This fee-only AUM model, it’s going to be big, just wait.
And I have to tell you, you know I go to Schwab conferences. The executives in there would get up and they say, “We had this vision for how financial planners would manage assets for a fee.” And I remember when Hugo Quackenbush, who was their…this is back in 1992, I think, he was their spokesperson and kind of their ambassador, was at a Schwab meeting…not at a Schwab meeting, at a NAPFA meeting and the NAPFA planners were circling him saying, “Can you please give us duplicate statements for our clients who were using the Schwab platform for?”
Michael: Who were just like the clients were just directly on Schwab. The advisor was just advising them and saying, “Can you send me a copy of the statement because I’m giving them advice about what to buy on the Schwab platform.”
Bob: Correct. And they had to beg their clients to send them a copy of the statement because they had no way to otherwise keep track of how their investments were doing. And Hugo was besieged by these people, and he was saying, “I don’t know. Our lawyers don’t really want us to be, you know, sending out duplicate statements to just any Tom, Dick and Harry.” And they said, “We’ll get…you know what? Have our clients sign something. Just show us what they want to sign.” “I don’t know guys. I don’t…Schwab doesn’t do that, you know.” And then it wasn’t…it was about four years later that Schwab finally as an accommodation for all this business they were getting decided, “All right, we’ll send duplicate statements.” And then not long after that, suddenly that was a division, and then, you know, 10 years later, “We had this vision. We saw the future.” And the future, they were hectored by people. The future was really this small band of advisors which grew eventually, and those people are now running the biggest planning firms in the world.
Michael: And so much of that was basically born out of early NAPFA? NAPFA became a bargaining collective to get RAA custodians to actually function as RAA custodians the way that we’re all used to it today?
Bob: Well, NAPFA was the incubator of it, yes. And the NAPFA advisors, I have to say back then they were not all emotionally intelligent people. They were basically saying, “If you take commissions, you’re probably a thief.” And they were…you know. And a lot of people were well meaning. Even though they took commissions, that wasn’t that they were trying to screw their clients, it was just they didn’t have any other revenue model. They never figured out another way to make money.
Michael: I would argue it’s still true today, right? I mean, I think a huge swath of advisors that have earned commissions have always been the world, “Like, I’m just trying to help people and give them useful advice that gets them to a better place,” you know. Unfortunately, sometimes we get a little around what’s helpful and what’s not because of our competition, our incentives but, you know, the number of people that are maliciously trying to churn commissions out there I think has always been a pretty small percentage of the advisor headcount.
Bob: Yeah. Was then is now, that’s right. So there were levers, a lot of unhelpful innuendo or actually direct accusation in the NAPFA world, but they were trying to figure out a way to serve clients in a way that had fewer conflicts. And I picked up on that early and wrote about it. And that was, of course, one of my less…one of the predictions I’m less proud of is I said that I thought the independent broker-dealer world was going to go away before too long because why would people need broker-dealers when they were, you know, using this AUM model? And I have to tell you, the independent broker-dealers were a lot more resilient than I imagined. And there was another milestone in there.
Michael: Oh, I was going to say although, you know, we may finally be coming full circle on that now that, you know, we’re staring down things like DOL Fiduciary, and there really is a fresh round of conversation of, “Oh, my God, you know, if everybody becomes a level-fee fiduciary, because that’s just the easier compliance path and we’re all operating on an AUM model and you can do an AUM model on non-RAA, like, remind me again what the purpose of an independent broker-dealer is.”
Bob: Yeah. And there actually is a purpose. The purpose is to create services and practice management forums, and, you know, to do what the independent custodians do, only maybe on a more personalized level. But they will be fee-only entities at that point.
Michael: Well, I mean, as I’ve looked at it, you know, both, you know, what groups like Alliance of Cambridge Advisors, now Alliance of Comprehensive Planners, what Garrett Planning Network did, you know, ultimately what we’re doing with XY Planning Network as well, I mean, I view all of these as like what do you get when you try to create an advisor support platform where there’s no products and no FINRA? Because you’re not a product distribution intermediary anymore, which is kind of the classic function of an IBD, you’re just trying to help the advisors involved on your network/platforms/whatever you want to call it to be more successful, and you end out with these important network groups like ACP and Garrett and XYPN.
And, you know, I think, as you said, and a number of independent broker-dealers that are trying to morph themselves the same way. Although I keep looking and I’m thinking, you know, there’s just so much overhead infrastructure and cost around managing the actual broker-dealer part that I still…My gut is your prediction was entirely right, you were maybe just a wee bit too early, but that if we look out 10 years from now, that we may very well, and on a world where, you know, all of these broker-dealers that are…that run dual register platforms, you know, the broker-dealers, both the broker-dealer and the corporate RAA and the advisors have both brokerage business and advisory business. I wonder how many of them when you look 10 years from now will actually having been created as a broker-dealer, will shift everybody over time to the RAA side of the business and actually shut down the broker-dealer. And at some point a lot today’s biggest IBDs will just be the future’s largest corporate RAAs.
Bob: Yeah. Well, you know, there are a number of possibilities. And you mentioned…you failed to mention what I think is one of the most important benefits from being part of…we’ll call him a collective, if you will, what XY Planning Network is is fundamentally a collective, is the collective bargaining power you have to be able to group advisor practices and negotiate with vendors, with people and to gain economies of scale both for the vendor and for the advisors.
Michael: Well, I mean, that’s exactly how we functionally structure and execute on…As I said, now we do on the XYPN side. And I know the others have as well. You know, they use their group of advisors to go to vendors in the industry and say, “Hey, we’ve got this group of dozens or hundreds of advisors, you know, what can you do to work with us?”
Bob: Well, I think the broker-dealers did very well. What gave them their staying power was they create communities out of their affiliated advisory firms, and those communities have a lasting effect. When you’re in a community, you don’t give it up easily.
Michael: No. That’s an interesting point. So you had this stint for Financial Planning Magazine or The Financial Planner at the time, would you say it ended in 1990, which was…this was at the first or the second time that there was a discussion that IAFP shouldn’t merge with ICFP but that time they decided not to do it?
Bob: Yeah, they decided twice not to do it, and the IAFP…It was funny. I was in the board meetings, the IAFP people kept saying, “But what if they…” Larry Carroll at the time was president of the IAFP and he was pushing for the merger, and he kept saying, “There won’t be any they and us. They and us, it will be us. There isn’t any they.” And they kept saying, “Yeah, but they might,” you know, and they just never got it. And I didn’t see any point in the bickering, but I also thought that it would be a really cool organization to combine the ICFP and IAFP. I thought that would be a really interesting…As it turns out, I don’t think it was so great. But that was later.
Michael: So they had their vote to merge, they decided not to, and then you left. So, like, were you just not happy with direction at that point or like did you literally leave just like a protest statement over the unwillingness of IAFP and ICFP to merge?
Bob: It was more a protest statement that…Yeah, I was making these people look good and I didn’t want to do that anymore because I didn’t think they were good, if that makes sense. I mean, Larry was great. You know, we still had limited partnership guys on the board, we still had salespeople on the board, and the IAFP seemed to be still rooted deeply in sales and not willing to change its culture. And that didn’t feel right to me. And they kept telling me things like, “Don’t ever go to any NAPFA meetings, don’t write about them,” you know. And I would ignore that. But it was harmful. You know, it wasn’t the right attitude.
Michael: And so, what did you do at that point when you left Financial Planning Magazine?
Bob: Oh, I embarked on the lucrative career as a financial services writer where I talked to them. I think there were three magazines at that point. I talked to all three magazines and none of them wanted to run the articles that I thought would be most helpful, which were what I put my newsletter basically. Which were profiles of successful advisors, which were new innovations in marketing, what people did on the investment side, and what they were thinking. You know, I think I was the first person to write about modern portfolio theory back in…I think it was 1990 or so. You know, everybody was using the investment pyramid.
Michael: What was the investment pyramid?
Bob: It was the state-of-the-art in building portfolios. You had the solid foundation. It was like a triangle, basically. And at the bottom, you had the solid foundation of income-oriented limited partnerships, and then in the middle you had somewhat dicey limited partnerships, and at the top you had speculative limited partnerships. And there were a lot of ways you could do that. You could, if you were in the mutual funds, you could have the income-oriented mutual funds make up the bottom, and then in the middle you’d have a few more equities in there, and then you’d have maybe some walk-ups at the top as you kind of narrow. But it was so laughably imprecise compared to this modern portfolio theory thing where there were actually equations you could apply to it. So I wrote about…you know, it was one of the things I wrote about back then. I said, “You know, you might want to pay attention to this because it’s a much better way of creating efficient portfolios.” And, you know, the whole idea of the efficient market theory was flowing around academic circles but it hadn’t really reached advisors yet. So at the investment side, I was writing about what the institutional people were doing that I thought advisors could borrow from back then.
Michael: And you were writing like freelance articles for the trade publications at the time that were available?
Bob: Yeah. Well, I was trying to, and they were fighting me as best as they could and kept saying, “You know, that’s not what we want. We want you to write about products.”
Michael: Right. Because the more products you write about, the more ad placements we can do right next to the article.
Bob: I never thought of that. Wow.
How Inside Information Got Its Start In ’91 [40:03]
Michael: I heard that somewhere once from another magazine editor.
Bob: I think that had something to do with what their thinking was, okay. Well, anyway, whatever their thinking was, they weren’t wanting to publish what I wanted to write about, so I started this newsletter. I started in ’91, I think.
Michael: How was it structured then? Like, we’re, and, I mean, these are the old ages but like you kind of predated the internet here. So, I mean, are we talking like you would write a newsletter and you would go to the post office and you would mail it to a whole bunch of advisors that signed up?
Bob: Well, first I had to print it out, and then fold it, and then staple it in the middle, and then I had to stuff envelopes, and then I had to put stamps on it.
Michael: I mean, was that really the world? Like, you were manually producing, printing, stuffing envelopes for a newsletter service.
Bob: Yeah. And then people would get them a week later because the postal service was so inefficient. Yeah, it was frustrating. But stuff I got out was faster than what was coming out in the magazines where their print run was a month and a half in advance. So I was cutting edge back then.
Michael: Well, interesting.
Bob: And it was, it was clunky. No question.
Michael: Yeah. The arrival of the internet and email was this like glorious relief for you that you would then have to print stuff and save an ungodly amount of postage in the post?
Bob: Well, I told people, “I’ll just send it as an attachment by email.” This was…Gosh, what year? 2000, I think, so I was doing it for nine years the old way. And then around 2000, the internet was working…maybe 1999, I did it. And everybody said, “No, no, no, I want the print version,” almost literally everybody. And I said, “Well, you know, it’s kind of a hassle on my end and you don’t get it as quickly, and can’t you print it out with your own printer?” And so, over the course of the year, I kind of grudgingly moved people over to receiving it, and, of course, I posted on the website but nobody ever visited my website.
Why Financial Planning Was Obsessed With Asset Management In The ’90s [41:52]
Michael: So through that era, like what did financial planning of the ’90s look like? So financial planning of the ’80s was the world of limited partnerships, life insurance and needs-oriented selling, which I think will be my best takeaway of the whole discussion so far. I love that, “needs-oriented selling.” So the ’80s was needs-oriented selling and financial planning to support limited partnerships and life insurance, what did financial planning in the 1990s look like?
Bob: It was mostly asset management, and the gradual adoption of modern portfolio theory and efficient market theory portfolios. People started using Morningstar for the implementation. So there was a lot of analysis of mutual funds that really wasn’t possible before, and they were doing it online or through their computers.
Michael: So is that really kind of a statement of an impact of the arrival of personal computers, or it’s like all of a sudden we could actually do all this investment analysis on the computer in our office, and so we could do more investing stuff than we used to do because we had tools to do it the way we couldn’t before?
Bob: Yeah. Well, no question. And so people were able to do analysis that were unavailable to the average consumer. You know, Morningstar was the first that I ever saw producer of CD-ROMs. They would actually send you a CR-ROM and teach you how to use it and then send you CDs.
Michael: Yeah, I still…even from when I started, I still remember, I mean, every quarter, everyone was really, really excited and anxious to get the new Principia Pro CD so that we could update the software with all the latest investment performance numbers.
Bob: Yeah. And I’d never heard of a CR-ROM before Morningstar started sending them out. So what…the advantage that advisors had in the 1980s was they had access to software that would automate the financial planning process to some extent. And somebody just pushed a button and it would produce hundreds of pages of this huge document.
Michael: So like mostly filler…educational filler templates stuff plugged in client data points that you entered into the software to support it?
Bob: And you could make them spit out any recommendation you wanted. And so there was this sudden meddling in the…But it came out as a computer printout, so it looked very official. You know, it looked like the computer was making recommendations to the advisor. The 1990s was all about creating the value proposition, and the advantage that advisors had was they had more access to investment information than consumers did. Consumers could look at the paper and see what the mutual fund did yesterday but they didn’t have sophisticated analysis of the track record of this or that mutual fund. And it turns out that there was a lot of problems with that because people invested in hot funds, they invested in funds that had a great track record but that manager was long gone. I mean, there was a lot problems with pinning…number one, pinning your value proposition on investing, because investing, as you know, is not quite as cut and dried as we’d like it to be. And the other was that there were built-in traps in the data. But the AUM model took off, modern portfolio theory took off and suddenly everybody was an investment manager. And, of course, they were geniuses because I don’t know if you remember the investment performance of the 1990s but the markets…
Michael: Yeah, markets went up a lot.
Bob: So AUM was an extremely profitable service. It was the best service there was for a variety of reasons. One is, you were never embarrassed, because the markets always went up. Another was you kept getting paid more.
Michael: And worst case scenario, if you picked a fund that wasn’t doing well, you just picked another one and that was a transaction. Kind of win-win.
Bob: Yeah, there were all sorts of wins but not all of them were consumer wins. That was one of the issues. And there was a bit more…there was a lot more, I should say, objectivity in the ’90s than there had been in the ’80s. You know, advisors didn’t really have any incentive to burn and churn or recommend unsuitable securities, or…you know, because the AUM model was less conflicted than commissions were. So the problem I had with that era, and I’ve wrote about it a number of times, was there wasn’t as much financial planning being done back then as it probably should have been.
Michael: Because I would produce “the plan,” which was largely a computer printout with some data, client-specific data plugged in, and then it would show you how if you saved and invested for the long run things would go great. So now give me your money and let’s invest it?
Bob: And it was to some extent the front-end due diligence. You know, how much do you need to put in and how much return do you need to get the outcome that you want? And so, financial planning was really kind of the model for getting your portfolios in order.
Michael: The ultimate “know your client” tool.
Bob: I think that’s right, yeah.
Michael: And I guess still a trailer onto needs-oriented selling as well. “You know, hey, if you’re going to make it to retirement, you need to enjoy the returns of equities, so invest your money with me and I’ll help you pick the right equity funds and will get you to retirement?”
Bob: I think that’s right.
Michael: That sort of characterization?
Bob: That’s fair.
Bob’s Thoughts On The Merger That Created The FPA [47:21]
Michael: So you had said…you made some interesting comments about…as I think like moving forward over time. So you had left the magazine after the IAFP and ICFP merger didn’t happen in 1990. Ultimately, as we get to the end of the 1990s, that conversation came up again and actually did happen and culminated in FPA being born in 2000, and so I’m curious of just your perspective on that…that merger. Like, what happened? Was there something that changed in the profession or the dynamics the rest of the 1990s that we couldn’t get down to the merger in 1990 but we could make it happen 10 years later?
Bob: Well, there were certain personalities in the 2000s that were lacking in the 1990s, and more of a fiduciary view toward the profession, if you will. In other words, what’s good for the profession not what’s good for us. And not necessarily what’s good for our organization, but how is our organization and their organization going go forward to be better for the profession? And the FPA was born with a great deal of idealism. Yeah. And I was one of the supporters. This was another one that I’m not totally happy with. I was a big supporter of the merger because it made no sense to me that the good people at the ICFP, and the good people at the IAFP were fussing with…at each other, carping at each other and often in the press. I don’t think you can build a profession when the house is divided. So that was my argument back then anyway.
Michael: I’m curious then like would that have extended to NAPFA as well? Like, was a merger of NAPFA and Society of Financial Services Professionals the others? I mean, was there ever a discussion like, “Let’s roll all of these things up?” Because as much as what there was between IAFP and ICFP, we had even more organizations than that serving financial advisors, both then and now.
Bob: Yeah, rolling NAPFA came later. And then I kind of envisioned that happening actually at some point. But what I envisioned was the professional ICFP culture would eventually beat the sales-oriented or open…they called it the open forum, I think was the word that they kept using. I was just trying to think there was a precise word they kept using of the IAFP that the professional organization should be made up of professionals. And it’s been a little disappointing to see that I think that, in my view, the IAFP culture survived the ICFP culture. In my view, the open forum, the big tent that let everybody in and not make distinctions between who is and who is not a professional didn’t happen. I would have preferred for the ICFP culture to survive. And, you know, I see the culture had something to it. You know, there was no exhibitors at the local chapter meetings, I thought that was great. It made the chapter meetings more professional, if you will.
How The 2008 Crash Brought About The Emergence Of A Bona Fide Profession [50:28]
Michael: With a small caveat that that’s kind of a major financial pillar for running an association with some of the current models.
Bob: It might have been unworkable. I don’t know. But the 2000s, the thing about the 2000s was that the markets didn’t continue to go up. I don’t know if you were paying attention back then, but, you know…
Michael: No, I kind of noticed that, that was my career. And when I showed up, I started in financial planning literally within two months of the all-time high in 2000. And so, from my perspective of a career, you know, it took more than 15 years of my career for the Dow to get above the price of the market when I started my career.
Bob: I wondered what was retarding the profession at that…the markets at that time. I had never seen the cause and effect of it.
So, you know, I had been pounding the table for a better value proposition. You know, since the 1980s I’d been talking about the fact that financial planning was there to make people’s lives better and help them create a better road forward to their vision of prosperity, their vision of, I don’t know, maximizing their happiness. I’m not sure what the word is. Fulfillment, I guess, is the word I’m looking for. And it was kind of in the 2000s that…the early 2000s that people rediscovered the idea that they could add value, not in the investment side and not in the product side, but in the procedural side, and the advice side. And the profession kind of got back to what I think the original vision had been, although it has never actually been implemented that way. So, you know, we had, I think, a crisis of confidence in 2008, when the markets very nearly went under. And I think a lot of advisors had sailed through the 2000s because they didn’t follow the sirens on of putting all their money in tech and thought they were invulnerable. And then they hit 2008 and there was no procedural investment solution to 2008/2009, or 2007 to 2009.
Michael: That was the thing that had always struck me about how the financial crisis hit our industry very differently than…than the tech crash did. You know, in a world where we were all taught and trained about owning diversified portfolios and diversification is your protector, and diversification is your savior, and yet you have some things go up and other things go down and don’t take excessive risks. Like, all of that, you know, obviously worked great in the ’80s and ’90s because things were mostly just going up with…you know, maybe that’s mostly the bulk of ’97. And then, frankly, if you like it, it made us look even better after the tech crack and the crash in the 2000s because not being over-concentrated plus rebalancing worked brilliantly.
Government bonds had a monster rally, in part because interest rates were higher, so we started a higher point, but government bonds had a monster rally through the crash, small caps, and particularly small cap value made money through much of the crash in the early 2000s. And, you know, anybody that was preaching good diversification and not over-concentrating had been preaching against the techs stocks all along. So, you know, when the techs stocks crashed, you got, “I told you so.” And so, like, we came to the tech crash in this world where all the stuff we’d been preaching finally got fully validated. And then when the 2008 crash happened, we got hit more or less as hard as everybody else because everything went down at once.
Bob: Yeah. And so people questioned the value of financial planning, which was primarily the value of investment management. “You know, am I paying you to lose money?” And to the extent that they were asking that question, that was a profession’s fault because the answer had been, “Yes, you’re paying us to get you a better return, and now we’re not doing that and so maybe you should stop paying us” was kind of the implicit message that clients perceived.
Michael: Except the interesting thing to me is, you know, now that we are eight or nine years out from that volatility, the AUM model and the independent RAA model, I mean, overall it’s only bigger than it was before the RAA community is growing, the RAA firms are, you know, an order of magnitude larger. You know, the big thing that I remember, you know, the big thing in the mid-2000s before the financial crisis showed up was, you know, it was the race to a billion, right? It was like who could someday manage to grow their advisory firm to the point of being a billion dollars under management?
Bob: That never happened.
Michael: Yeah, maybe not.
Bob: Take that to the bank.
Michael: And now, you know the…I mean, the big thing this decade is everybody is trying to figure out, how do you grow to $10 billion, at least the big RAAs, that’s the discussion now. And, you know, you have firms from, you know, capital to experience, and more of that that are pushing that barrier. And so, I’m curious from your perspective like, the…clearly the financial crisis hit us way harder and much more sort of central to questioning our value maybe than the tech crack did, because our advice looked good in the tech crack but we got hit hard in the financial crisis, yet, here we are almost 10 years later and the AUM model is bigger and better than ever.
Bob: Yeah. How is that possible? Right.
Michael: I mean, is that some weird testament to the AUM model, is that just, you know, bear markets are okay as long as you get a good enough bull market rally shortly thereafter that we all eventually sail through with flying colors and, you know, who remembers that crash from 10 years ago? I just know that the market is up 300% since then?
Bob: What a cynic you are, Michael. Gosh.
Michael: I mean, I think it raises interesting questions when, you know, certainly much of the growing buzz today is around what’s the future of the…both the financial planning as a profession, what’s the future of the AUM model? And, I mean, it’s a striking thing to me that, you know, who would have thought if there was someone that would manage to kill the AUM model it would have been something like a global financial crisis that causes virtually every asset class to fall monumentally all at once, yet here we are still running the AUM model trying to 10X the goals that we had 10 years ago?
Bob: Well, I do have an explanation and it’s a fairly simple one. The crisis that hit the financial planning profession was basically, you know, you’ve pinned your value on asset management. What other values are you offering me? And fortunately the profession had something they could turn to, which was called financial planning, which was called, you know, giving them advice on the rest of their life, on their financial life, if you will.
Now, there was a lot of innovation there. You know, we’ve got the financial organizers that are online, eMoney. I just talked to people at FutureVault they’ve got something really interesting. The more engaged advisors were giving their clients what we call life planning but it’s really better financial planning, deeper financial planning, helping them achieve their goals and objectives. And at the same time, the brokerage firms had totally trashed their reputations, how people viewed them in the marketplace. So, yeah, financial planning had to adjust, and they had something they could turn to more less immediately. The brokerage firms meanwhile were the greedy monsters that had nearly taken the financial…the global financial system down. So you had a combination of things. You had advisory firms moving to what I think is a more sustainable and better value model, at the same time, their competition was being reviled in the press and in congressional hearings. And that ultimately turned out to be a wind at our back…a double wind at our back because it helped advisors finally start to get to what I saw more or less immediately in the 1980s as a great future value proposition.
What we have today, I think, is finally the opportunity to achieve what was the promise of financial planning from the very beginning. And we’re starting to do that now with a different revenue model. I predicted that what some people are calling retainers, I think we need to start calling them flat fee arrangements, are we’re moving toward them and away from AUM. To some extent there are people…I’m doing a study by the way, I’m doing a whitepaper right now where we asked a thousand advisory firms, “How are you charging?” And something like 85% of them are charging some form of AUM, but the interesting thing is more than half have a different way of charging in addition to that.
Michael: They’re doing AUM plus some kind of planning fee or meaning like they’re doing AUM but they’ve also got some other structure that they do, at least for some of their clients, that’s just not AUM?
Bob: Well, it’s hard to tell, to be honest. It’s AUM plus retainers, we’re still calling retainers, or it’s AUM plus hourly, or in some cases it’s AUM plus commissions. But the point is that what used to me monolithically AUM is not monolithically AUM anymore, it’s starting to break up, and we’re starting to see that. And when I come out with a whitepaper, it’ll probably be a couple of weeks, three weeks or so, there will be actual visible progress away from total reliance on the AUM model.
What It Will Take For Financial Planning To Become A Profession From Here [1:00:16]
Michael: And we’ll…we’ll make sure we include a link to that in the show notes because we’re actually recording a couple of weeks ahead here. So by the time the episode is available and everybody here is listening to it, we should be able to reference the whitepaper as well. So if people are interested, go to kitces.com/19 for episode 19 and we’ll include the link out to the whitepaper, for those who want to check it and look for the right trends and competition.
So I’m curious that where do you see all of this going from here? And I know you just did a new book actually called “The New Profession” about this whole dynamic of our financial planning profession and where it goes from here, and I’m really curious about how you think this plays out in the coming years. I guess I should even ask leading up to that, I mean, do you view us as a profession now or are we still on the curse? Like, where are we on the scale of financial planning profession?
Bob: Yeah, we’re not a profession yet because there isn’t any universally agreed on educational credential, although CFP is working on that and doing a pretty good job, I think. But you also, of course, have the AICPA/PFP credential, and then you’ve got a bunch of other credentials that are kind of following along in the trail. You also don’t have a government sanctioning of the profession the way you do pretty much in the other professions. So, you know, I could hang out my shin going…call myself a financial planner and nobody would contradict the fact that, you know, I’d be a terrible financial planner. You know, I’m not trained for it. And other people can do that as well. And we don’t really have clarity around how to diagnose and how to administer the cures, if you will, to the ailments that people bring to a financial planning office. But when you look at what a profession is really, it is people who have unique expertise to solve a certain category of ailments or problems in the greater community. And that’s, I think, what the service model and the revenue model is going to have to become inevitably. And, you know, I’ve been saying this for 35 years, so this is not something that…
Michael: Eventually, we will collectively catch up, so you mean?
Bob: Well, eventually, my prediction might actually come true. You know, I’m good at making predictions but I can’t tell you when. So when someone comes into a financial planner’s office, here’s what the future looks like. They will present some symptoms. The advisor will do a full check-up, a financial check-up on that person. And we’ll get a sense of what that person’s idea of personal fulfillment means, so that you can sketch out a destination. You can sketch out where this journey is heading. And in order to create a map to get there, you have to know where the destination is. And that will finally start to happen.
The advisor will give advice…I mean, the first service…I guess I should back up. The first service you’re giving that client is the ability to understand what fulfillment means to them. And I have to tell you that in our society right now, 99.9% of the human population has no idea. They don’t know what their goal is, they don’t have a goal. They’re being buffeted around by circumstance. And, of course, they end up wherever the wind blows them, and then wonder how they get here.
Why Bob Believes We’re Closer Now To Financial Planning Fulfilling Its Original Intent [1:03:51]
Michael: Which, I guess, is part of the whole dynamic that I feel like now we’re only slowly and steadily figuring out, which is we’re all taught and trained like as consumers, as society and you’re supposed to save and invest to accumulate for retirement, and then a whole bunch of people get to retirement and say, “This is actually boring and not very fulfilling. I need something to do when I wake up every morning.”
Bob: Well, their career is the same way. You know, is this the right career for you? Is this fundamentally or should you be doing something different that gives you more fulfillment and maybe makes you more money, maybe makes you less? Should you be even living where you’re living right now? You know, there are any number of variables that people are not examining.
So, in order to move people toward fulfillment, the first value you give them is to help them understand what fulfillment means to them. If you can simply do that in the first couple of meetings, they’ll be among the upper one-tenth of 1% of the human population that has a clue where they’re going. That alone will justify everything you charge them from here on out for the life of the relationship. And then you help them map a way to get there and set interim goals in the meantime. “What do you want to happen this year? What do you want to happen in the next six months? What do you want to happen in three years? Let’s break that down.” And I’ve got a whole presentation on this, but the bottom line is that if you break these long-term goals down into achievable, bite-sized chunks that the advisor and the client together can address, you can get pretty much anywhere. You can achieve things that seem impossible. And that’s one of the great secrets of financial planning is that with time and intention, you can get…you can accomplish pretty much everything.
Michael: But it strikes me. And you’re now vey squarely in the world of helping people change their behaviors and move in different directions. I mean, frankly, a lot of what you just described, like it feels much more like coaching. I know people who do both advisor coaching and executive coaching, and, I mean, they would describe what they do almost exactly the way that you just said it. Perhaps minus a little less emphasis on the financial parts, because they’re not trained in finance, they’re trained in coaching. But, you know, that whole like, “We’ll try to figure out where you want to redirect your life and your career and your energies, and then work with you on an ongoing basis to try to get there with three and six and 12 months goals.” So that’s a very coaching style engagement, at least to me. Like, do you think that’s fair?
Bob: That’s the life planning component of financial planning is coaching, fundamentally. I mean, you call it coaching, I might call it something different because it’s an exploratory process at the beginning, which might not be part of coaching. You know, coaching I think, sometimes principles, as you know when you’re trying to get to, when you bring on somebody to help you get there. But in addition to that, there are other components. One of them is to handle the paperwork of life. And part of that, I think a huge value was when you organize a person’s financial life and put it all online, either in a…something like FutureVault or eMoney, or you just do one of these mind maps.
Michael: I like that framing, “helping people handle the paperwork of life.”
Bob: Most people aren’t equipped to do that, and financial planners just do what is a part of who they are and what they are. And then, you know, navigating the investment markets. Coaching is somewhat different I think from sitting down with someone who says “The markets went down 35% in the last three months, I should sell everything.” And you say, “No, you shouldn’t. We’ve got this cash and this is a great time to invest in.” To the extent that an advisor is capable of doing that. And that, I think, is going to require an uncommon amount of emotional intelligence and courage. And I don’t think you’re going to get that advice from a broker. I think you’re going to have to get that from somebody who is fighting on your behalf.
Michael: So I’m curious then, how much of that…where does technology fit into that picture? I mean, clearly to me, when you talk about this…so deep ongoing coaching process, like, we’re very much not talking about a piece of technology although I guess, in theory we can always say, you know, anything can be technology. That at some point, you know, you’re entering your goals into your personal financial app on your smartphone and then every day it gives you a little nudge about how you’re doing, which frankly is more contact than I could do with all my clients. So where’s the intersection of the advisor and the technology in this future picture that you’re painting?
Bob: Yeah. This is a good time to talk about robo-advising, I think, because…And I hate the term, by the way. I think it’s highlighted by these platforms. But, you know, the original article…so I think I might have written the first article about these online advice platforms when I said that…I actually quoted the…I can’t remember his name now, from Betterment saying, “You know, we’re going to bury the financial services profession.” And he did actually think that they were going to do that. What seems obvious and retrospect and what become obvious kind of early on in the process is the sideboard model was going to win. We’re all sideboards now. You know, a lot of what I know is on my hard drive. A lot of what… a lot of my thinking is done by Siri now, a lot of stuff. And so, financial planners, they’re leveraged by their software, they’re leveraged by…And where they have not been leveraged very well and where they will be is the client contact, which is what you pointed out immediately. So people will have not just performance statements online in the future, they’ll also have lists of their goals and what they’ve achieved and what is still to be achieved. They’ll have, as I said, all their financial stuff online, and more importantly, they’ll have the financial plan online, updated with yesterday’s market. So if the market goes down 10%, they can look and see, “Yes, I’m still in the green zone.”
Michael: So when I think about like who does that and how does that get provided, you have advisors that are broker-dealers that provide that, you have advisors that are in the independent RIA world to provide that. And then you get, you know, large platform businesses today that get to do that. Vanguard Personal Advisor Services is, to use your word, a giant online advice platform, Schwab has their Intelligent Advisory platform. You know, when you just talk about this combination of people who having advisors who provide the personal financial advice plus a world where you have technology that keeps track of all your financial life online. Like, well, that basically sounds like Fidelity having a couple of hundred retail branches and earning eMoney advisor software which they could use for their own firm as well. So I’m curious like what do you see the competitive landscape looking like in this future? I mean, are we all still an independent broker-dealers, which is more for the giant fee-only platforms, or are we still mostly independent RAA, or is this a world where, you know, the biggest companies that can do the biggest tech solutions are going to be the ones that start taking the market share and in 10 years from now the only question is whether you want to be a Vanguard employee advisor, Schwab employee advisor, or a Fidelity employee advisor. Or maybe one or two others that show up.
Bob: What a dystopian universe, you’re, you know, envisioning here.
Michael: You know, I mean, when you talk about these dynamics, there’s a lot of people that are trying to get into this game now.
Bob: Yeah. Well, you know, you and I had a panel discussion where we were sitting side by side and I was forced to agree with you a couple of times. And it still kind of hurts when I think about it.
Michael: I know. It’s unfortunate when it happens.
Bob: Yeah. It probably won’t happen during this conversation. But, you know, you were talking about the challenge. And there’s no question that the companies you’re citing believe they’re challenging the financial planning profession, just like the Betterment…Jon Stein, that’s his name, who said, “You know, we’re going to bury financial planners.” They believed that they have a better mouse trap because they have a really good sideboard model to manage assets. But the game has changed since 19…I’m sorry, since 2008. The game was who could do the best, most efficient job of managing assets and maximizing their AUM revenues? And now the game is, “Who can do the best job of sitting down with clients and mapping out how to get from here to there?” And so, what you’re not getting from these online platforms plus somebody you call occasionally to ask directions is this…you called it a coaching element, this personal service element, this element where you get fairly deeply into somebody’s life.
And so, if you want to characterize the long-term evolution of the financial planning profession, it’s constantly moving to higher ground as circumstances arise. And the higher ground in the future is going to be the ability and willingness of a professional to give personalized advice based on the extremely unique circumstances of that individual client or clients who are sitting down in the office, or Skyping or whatever. You know, the conversation is going to be a lot deeper than anything you’re getting from Vanguard. And I have a lot of respect for Vanguard, I just don’t think that they’re a financial planning firm.
Michael: So the transition becomes maybe some of those large firms will start gobbling up some of the market share of the AUM model, but if the AUM model is going to be the “old model” and flat-fee financial advice coaching is the new model, then we’ll just kind of cede the territory to those firms that take over the old model as we move onto the new one? I mean, I guess, kind of…I mean, we’ve done that before, right? Like we were stockbrokers, and then discount brokerage came and so we became mutual fund folks, and then the internet came, so we became asset allocators. I mean, we’ve been through these transitions before. Is this just another one of those?
Bob: I think a lot of the people in XY Planning Network are ceding that ground already. They’re saying, “You know, someone else can manage the assets for 5 or 10 basis points. They can have it. It’s not where my value is, and frankly, that’s not enough of a margin for me to bother being in that business to begin with.”
Michael: You know, it’s an interesting through experiment as technology just makes it faster and easier and more automatable to do investments to the point where the value proposition gets eroded. Is there some point where a subset of financial planners start, you know, really putting new stake in the ground and saying, “You know what our model is? Our model is we get paid for financial planning and we give the investment management away for free. We’ll just give it away.”
Bob: Yeah, I think that’s the future. Or outsource it to others who do it better and cheaper. You know, why have a whole department with investment committee when you can get pretty decent asset management with using active funds even when you outsource it, when you have somebody else doing this, who really enjoys it, who loves it, and who has the scale to do it cost effectively?
Michael: So who’s at the front-end that drives this? Does this become the future of being an independent advisor and a solo advisor is you have to do this because if you’re going to stick with the old AUM model then you’re going to get out competed by large firms, you’ve got to do the new thing to stand your ground? I mean, I’m curious. There’s so much debate in the industry these days about our solo…You know, there’s either view A is solo advisors are doomed because you have to have scale in order to succeed in the future. And then there’s the other like opposite extreme view which is technology is the ultimate instant scalability. Solo advisors can be more successful now than at any point ever in history because technology gives them all the scale that they need for all the things that matter.
Bob: I think it’s all of the above. You know, in my book I talked about…I constantly would get asked…you know, when Mark Hurley wrote his famous series of papers and suggested that smaller advisory firms were doomed, and I said, “That’s wrong,” and people said, “Prove it.” And, you know, saying it’s wrong was really easy, proving it, you know, was a little more complicated. So in order to prove it, I did a very simple thing. I looked at the spectrum of size of accounting firms and law firms. And what I found was that there are, I think four law firms…sort of three law firms that are truly national in scope. They’re huge. They have 3,000 lawyers, roughly, and one is bigger than the other two, and, there’s of course, four, they call them the final four in the accounting world. And then you have…I don’t know, I think it was something like 300, 350 law firms and a relatively like number of accounting firms that are regional, that are fairly big in certain regions. And smaller than that but not greatly smaller are individual firms that kind of dominate a city, and maybe they have a specialty or two. And the majority, the great majority, 80% of each profession is solo or small practices.
And they’re in a steady state process where some small practices become large, and as they become…and at the same time, the larger businesses, the larger firms, not everybody will make partners, as I’m sure you know the dynamics of those things. It’s kind of rare to make a partner actually. And so a lot of those people wash out and they go out and they start their own firms. And those firms grow, and they hire people, and then people don’t make partner in those firms and they go off and start their own firms. And so the actual percentage of small firms compared to large firms doesn’t change very much, the individual players change. But what that tells me is that the financial planning profession is going to have large scalable firms, maybe, I don’t know, we might get as many as five or six, we might get as many as 10, I don’t know, large national firms. And then we’ll have a number of regional firms, and then we’ll have a number of firms that are dominant in their city and then most people will be solos and there’ll be a lot of churn at that bottom, but there’ll be also a lot of business being done by those people who are allowing their customers to talk to the person whose name is on the door.
Bob’s Advice For New Financial Advisors [1:18:19]
Michael: So if someone is coming into the financial planning world today. I mean, maybe they’re entirely new as a student or a career-changer, or maybe they’ve…you know, they’re still in the first decade of their career with a long time horizon ahead. They’re trying to figure out what their action is. Like, what’s your advice for younger/newer advisors today about how they should look at things going forward if they’ve got a long time horizon for their career?
Bob: I love questions like that because, you know, it’s sort of like saying, ‘What advice would you give our client?” You know. And every client is obviously presenting a different challenge. What I tell younger advisors when they ask me, the first thing I ask them is, “You know, how comfortable are you talking to your friends and neighbors about doing their financial planning work?” And some people say, “I’m not qualified. I’m not ready yet. I don’t know.” And so I say, “Well, you’ve got to work somewhere, and you’ve got to pick up experience and then start.” Others say, “Well, I’m already talking, I’m already giving advice, I’m just not charging for it.” And I said, “Well, so we need to solve that. You know, you can just charge for what you do and build through them that way.”
But what I tell everybody that age is, “Your generation has been locked out of the traditional financial planning services that most financial planning firms…” and you know this, you’ve talked about this yourself. Most financial planning firms have asset minimums. And so, if you don’t have $2 million, or $500,000, or whatever those minimums are, you’re not really welcome to come in there and talk to a financial advisor about your circumstances. And I tell the younger advisors, “You have an obligation to your generation to bring these services to them. And you’ve got to figure it out. You and you cohorts, which are numerous, are going to have to figure out the revenue model that makes that happen, service model and revenue model. And it’s up to you because we haven’t done that yet.” And XY Planning Network is doing a great job of figuring that out. You’ve got a community of people who are trading thoughts and ideas. My community, we’re talking a lot in the Inside Information world about how to make this happen. My best advice is to hire people who are young and let them figure it out.
Michael: You know, our profession has our own version of the classic innovator’s dilemma that businesses get so accustomed to their way of doing business that they can’t figure out how to innovate themselves to the next thing and so, you know, get some young entrepreneurial people and just get the heck out of their way and wind them up and see what they do. Sometimes it’s the only way to push forward through that.
Bob: Yeah. But I would like to tell you that pretty much everybody is taking my advice in this area, but I think it’s moving pretty slowly, true to tell. And it shouldn’t be. It needs to be moving much faster.
Michael: Well, and, I mean, to be that…it’s the glorious thing of our capitalist society or like, you know, they don’t move exactly as quickly as we can figure out how to deliver a valuable service and consumer is ready and willing to pay for it. And when that happens, you know, the businesses that are there are going to grow and the transition happens.
Bob: But that’s where financial planning will finally achieve what was obvious in its promise to begin with. People will offer advice on how to move forward and fulfill your destiny, if you will, fulfill your chosen destiny. It’s not something that’s imposed on you by the universe, but something you can choose. For a fee, every profession, they sit down, they diagnose, they give you prescriptions, and tend your ongoing health, or ongoing needs. And that financial planning will be exactly the same. And they charge fees for that service. They don’t charge based on how big your wallet is or how much you have and how wealthy you are.
Michael: So is that like a pure flat fees? You know, I know a lot of the discussion right now is people are talking about alternative fee models is…you know, it’s fees not tied to AUM but there are people who’re talking about pure retainers, there are people who talk about income-based retainers, some people talk about net-worth-based retainers. Do you see one of those in particular moving forward or just is the point just disassociating from the AUM and being so portfolio-centric?
Bob: I think I’d be doing everybody a disservice if I said I knew where it’s going in that respect. It’s still an experiment, and I’m watching the experiment carefully, and every time I run into somebody who seems to have a good solution, I write about it. But unfortunately, they don’t all agree on how they do it. If I had to guess, I’d say it will not be based on net-worth, it will not be based on total assets. It won’t be based on anything financial, it’ll be based on how complicated the case is. How do you measure that objectively? I’m not sure.
Michael: Okay. So a complexity-based retainer but not necessarily a, “Let’s just scale it to the client’s financial capabilities,” kind of.
Bob: Yeah. And that’s how doctors work. You know, when you come in and they have to work on a hangnail, that’s different than when they have to replace your knee.
Michel: So as we come to the end here, and this is a show about success and trying to be successful going forward, and you know, one of the themes to our discussions and the guests that we have is that success means different things to different people and sometimes even different things to the same person over time as we grow and evolve. And so I’m curious for your perspective as someone who’s had a very successful career in the industry and as…you know, I don’t think you don’t give yourself enough credit for the businesses that you build of Inside Information community and your Insider’s Forum conference, and what you’ve created and how you’ve impacted the profession, but I’m curious how you view it from your perspective. Like, how would you define success?
Bob: You know, it’s funny. Any writer will tell you that success is attention. The idea that I would put pen to paper, or that I would sit behind my keyboard and give people advice, and people would actually read the advice is still kind of fascinating to me. You know, I’m not sure why. And the only thing I can think of is because I really, really care about the success of the profession and the best people who practice it. And they know that, they can see that. It shows up in what I do and what I write. And if it didn’t show up in what I do and what I write they wouldn’t be paying attention. So success for me is, “Am I getting attention from people who I respect in the business and people who seem to me to be important?” I’m getting your attention right now. Who knows how that happened. But the fact that I am justifies the work I’m doing, to some extent.
Michael: I find a very similar dynamic on my end as well. I think particularly when you…you know, when you publish and write regularly, you produce a lot of content through Inside Information as well as writing for other sites. You know, I love my similar version writing long articles at kitces.com. And there is an interesting dynamic that this psyche drive for it is kind of that feedback mechanism of, “Are people reading it, and are people engaging with it in a way that it impacts them and changes them?” And, you know, it’s definitely going to change everyone all at once. So, you know, hopefully at least periodically as some of these things get out there, a few people get impacted and slightly change their trajectory. And if we write enough articles cumulatively over time, maybe we can cumulatively positively impact a lot of people over time.
Bob: Yeah. The thing that fascinates me is I probably, and you probably do too, we probably have a majority of the people who think and read. The odd thing about the profession is there are an awful lot of people. I’d say, you know, 70, 80% who don’t think and read, they just kind of do. And the people who think and read have an unfair advantage over the rest of them. The people who say, “I don’t have time to read. I don’t have time to get into a lot of stuff.” They don’t get the benefit of an awful lot of insight that’s out there. And not just you and me but others.
Michael: Well, hopefully we always give them credit today for thinking, reading and listening.
Bob: Yeah, listening. I don’t think they read and listen. That’s good.
Michael: Yeah. I think that’s a fantastic note to wrap up on. So thank your Bob Veres for joining us on Financial Advisor Success podcast.
Bob: Well, thanks for having me.