In financial services, the terms "industry" and "professional" are often thrown around casually and used interchangeably. But in the end, are financial advisors simply part of the financial services "industry", or do they deserve to be recognized as "professionals" instead? Is there a point at which we switch from one to the other? What does it take to really earn the label of "professional"?
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the difference between an "industry" and a "profession", and what this distinction means for those who wish to see financial planning regarded as a bona fide profession.
Because the reality is that there truly is a difference between an industry and a profession. Bona fide professions – such as divinity, medicine, and law – are distinguished from other occupations by common elements, such as having a specialized body of knowledge, education and experience requirements, societal recognition of the "good" they provide, ethical requirements (to which they're actually held accountable), and control of their terms and labels (and who can and cannot hold out as a professional).
By contrast, the term "industry" typically refers to a grouping of companies focused around particular service or business activities. Industries are also broader in scope than professions. Professionals may work within an industry, but there's more to an industry than just professionals. Which means it's not a matter of whether financial advisors are professionals or part of an industry, but that as professionals they would still be part of an industry.
Nonetheless, the question still arises as to whether financial planning itself really merits the label of being a profession... and unfortunately, it appears the answer is "No", or at least "Not Yet". Because while many financial planners have voluntarily decided to fulfill more rigorous education, examination, experience, and ethical requirements (such as via CFP certification), the reality is still that anyone can choose to call themselves a financial advisor or a financial planning professional, and the public often can't tell the difference (at least, not until after the fact).
Which means until financial planning (re)gains control of its terms, the financial services industry will continue to include both the financial advisors who elevate themselves to the standards of a professional, and also all the rest who may hold out as "financial advisors" to the public but who have little actual training as such!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Today I want to talk about the financial planning "profession", what that label really means, and how it's different from the broader financial services industry that we work in.
Today's question comes from Chad, who says:
"Michael, you often write about the 'industry', but I consider myself to be a professional financial planner. I worked hard to get my CFP marks. I'm not just a member of an industry! Is there a reason why you refuse to call us financial planning professionals?"
Great question, Chad! The terms financial planning "industry" and "profession" are thrown around a lot – usually rather casually and haphazardly – and I understand the angst it creates for all of us who have earned professional designations like the CFP marks, and want to be recognized as professionals in the truest sense of that label.
But I want you to know that I don't throw those terms around loosely. When I talk about "industry" versus "profession" (and I use both on this blog), it's done with deliberate intent as to the true meaning of those words. So while I use both industry and profession from time to time, I don't use them interchangeably. They're really meant to refer to different things.
The Difference Between An Industry And A Profession [Time - 1:32]
The key point here is to recognize the fundamental difference between an industry and a profession.
Take the world of medicine as an example. Doctors are clearly professionals, but there's also a medical industry - sometimes labeled as the healthcare industry - as well. The "industry" label here refers to the broader grouping of companies around which there's a service or a business activity... so the mining industry is mining companies, and the clothing industry is clothing manufacturers and distributors, as well as clothing stores that we buy from. The healthcare industry includes not just the doctors but also the nurses, the hospital administrators, drug companies, medical equipment makers, device makers, and more.
The point here is that professionals may work in an industry, but there's more to an industry than just the professionals. The professionals are just one of many stakeholders within a broader industry.
In our context, there's both the financial services industry, and there are financial planning professionals within that industry. It's not an either/or categorization where the two are mutually exclusive. When I say, "the financial services industry", it's not a snub to professional financial advisors – I'm simply recognizing that professionals are a subset of the broader industry. In other words, "industry" is really meant to reference the whole industry, which is not just financial planning professionals who give advice to clients, but also the staff that support us, the platforms we build on (e.g., broker-dealers and RIA custodians), the product manufacturers who create financial services products that we implement or recommend to our clients, etc.
The other reason, I have to admit, why I sometimes use the label "financial services industry" is to recognize that there are a lot of people out there who call themselves "financial advisors" as though it's a professional term, when they're really not people that I would call professionals...
Requirements To Become A Profession(al)? [Time - 3:27]
The label "professional" gets thrown around a lot.
There are classic, "learned professions" that we've recognized for a long time. The big three, historically, were divinity, medicine, and law, and they have requirements for training, education, and experience before you can be recognized as a member of one of the learned professions.
But the term "professional" has widened in recent years. So we have professionals in divinity, medicine, and law, but we also have professional hair stylists, professional golfers, professional dog walkers and, apparently, even professional mattress jumpers.
In today's environment, "professional" is often just a way to describe a person who gets paid for something... as opposed to an amateur that does it for free. But when I use the term "professional" (especially in the context of our financial service industry), I'm talking about the formal definition of a profession.
When we look at what formally connotes a real, bona fide profession and not just something like professional dog walkers (no offense to anybody who walks dogs!), the hallmarks of a real profession are typically:
- Unique and specialized body of knowledge – one that you have to actually get advanced schooling for, not generally accessible to the public;
- Education and experience requirements so the public is assured that someone has learned and can apply their professional knowledge;
- Recognition by society itself as a service that has a public good and necessity;
- Bound by a code of ethics regarding what defines professional practice and actually disciplines those who fail to act professionally; and
- A profession actually controls the use of terms and labels, so the public can clearly distinguish between the actual professionals who meet those requirements and the amateurs who don't meet the requirements or aren't bound by or accountable to any kind of professional standards.
So when I talk about a professional, especially in the context of financial service industry, I'm talking about someone who actually has education, training, and experience to act as a professional financial advisor, and who is accountable to professional standards (because that's what really makes them a professional and not just a person who gets paid for a service).
Is Financial Planning Really A Profession (Yet?) [Time - 5:40]
When we actually take a close look at the definition of what constitutes a real profession, arguably, financial planning is not quite a real profession yet. I think we're getting close. Programs like CFP certification are a huge step forward, because the CFP marks actually do entail education, a competency exam, an experience requirement, and a code of ethics (those are the four Es that are fundamental requirements for any recognized profession).
Of course, the reality in today's world is that there's no requirement to have the CFP marks to call yourself a financial advisor, or say you offer comprehensive financial planning advice. In fact, the irony is that we're actually at the opposite end of the regulatory stream right now! After all, by law, anyone who works for a broker-dealer can't be in the business of giving financial advice, and can only give tiny amounts of advice that are solely incidental to the sale of products, under the Investment Advisors Act of 1940. But because the SEC hasn't enforced this for decades, huge swaths of broker-dealer representatives put financial advisor on their business card, even though they haven't necessarily met any professional standards to give advice, and actually, can't even legally be in the business of giving the financial advice that they claim in the title on their business card!
Which means we have a huge gap right now... where there are people that step-up to being real professionals, but many others who don't, and there's no control of the terms that allows the public to clearly understand who is a professional financial advisor and who is not. This is precisely why so many other terms like "doctor" and "accountant", or engaging in the practice of law, have regulation of their terms and professional licensing requirements. Because it's important to make a clear distinction between the professionals who have met the entrance and ongoing standards versus those that do not, and that professionals have a regulatory body to which they're accountable if they fail to meet those standards.
I would argue that even the CFP Board is weak in this regard, as it has limited ability to discipline CFP certificates for failing to meet the CFP Code of Ethics. The CFP Board does, periodically, revoke the marks from people that don't meet the practice standards requirements, but it's very limited.
I don't mean to throw the CFP Board under the bus for this. It's simply an acknowledgment that, at the end of the day, the CFP Board is not actually a regulator with the legal power to investigate those it "oversees". It's a 501(c)(3) non-profit charity that owns a trademark called the "CFP" and licenses those marks to us, and we agree to adhere to the CFP Board's terms and conditions in order to license those marks, which includes meeting their education, experience, and ethics requirements.
And all of this matters, because even the use of the label "profession" for financial planning is arguably still more aspirational than a reflection of where we are. There's no actual requirements to go through, or professional standards to meet, in order to hold yourself out as a financial planning professional. Getting the CFP certification is optional.
Of course, I do strongly encourage anyone who's becoming a financial planner to go and get their CFP marks, because getting a professional designation is the future of being a professional. But, ultimately, I'd also still make the case we're not really a profession yet, until we put up the appropriate barriers that control the terms and ensure that the only people who hold out as a financial planner really have the training, education, and experience to be one.
I think we'll get there someday and, aspirationally, I do like to talk about the financial planning profession that we're building towards as a way to refer to that subset of financial advisors... those of you who have voluntarily stepped up to the kinds of professional standards that should and, I think eventually will, be required of real professionals.
But in the context of Chad's original question, recognize that professional financial planners are really just a subset of all the people who use the financial advisor or financial planner label, and those are just a subset of the broader financial services industry, which also includes the platforms that support us, manufacturers of products that our clients use, and a lot of other ancillary services that all relate back to how consumers to engage with the financial services sector.
I hope that helps provide a little food for thought, and further context regarding the difference between the financial planning profession and industry. And I hope it clarifies why I actually do use both labels – not interchangeably, but to describe distinct elements of this financial advisor world that we all live and operate in.
This is Office Hours with Michael Kitces, 1:00 p.m. east coast time zone, Tuesdays. Hope this has been helpful, and thank you very much for joining us today!
So what do you think? What is the difference between a profession and an industry? Can financial planners currently call themselves professionals? If not, what will it take to get to that point? Please share your thoughts in the comments below!