Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the announcement that the CFP Board is ‘updating and modernizing’ its governance structure as an organization, including a revision to its Board terms, and more significantly, an expansion of the Board’s role in both enterprise risk management (after the CFP Board’s recent PR woes with Wall Street Journal exposes) and enforcement of the new Code and Standards (a further signal the CFP Board intends to further its enforcement efforts of its new standards in the years to come, and perhaps finally begin to clean up its own bad apples?).
Also in the news this week is the announcement that the “Schwabitrade” merger has received its final clearance (from the Federal Reserve, given the sheer size of its affiliated-bank business) with the deal anticipated to close in the coming week (but will still take until as late as 2023 to actually complete the merger integration process), and the revelation that, while most RIAs have been in “wait-and-see” mode about the outcome of the merger, that mega-RIA Edelman Financial has already begun an RFP process to solicit competing RIA custodians to bid for its $30B AUM business (for which the rumored leading contender is lesser-known-but-more-tech-savvy Apex Clearing).
From there, we have several articles on recent regulatory issues for advisors, including the rise of “credential stuffing” where hackers don’t try to brute force their way through advisors’ passwords but instead find already-exposed passwords from other website hacks and try to use them on the advisor’s business websites (which makes it all the more important to regularly change passwords, use different passwords for different websites, and/or enable multi-factor authentication so a compromised password alone is no longer enough for hackers to get through), how the rise of fee-based annuities and advisors extracting AUM fees to manage them may now be permitted by the IRS for tax purposes but could still require an additional (and often not obtained) insurance consultant’s license from the state, and why advisors who are managing clients’ 529 college savings accounts need to be certain to check the right boxes (literally, on Form ADV) but in most cases still should not be claiming their clients’ 529 plans as part of their “Assets Under Management” for regulatory reporting purposes.
We’ve also included a number of articles on the theme of how advisory firms name and market themselves, including a small study that analyzed how often RIAs today are still marketing with the “fiduciary” label now that Regulation Best Interest has obscured the difference between fiduciary RIAs and broker-dealers (answer: less than 1/3rd of RIAs studied even note that they’re fiduciaries on their homepage now), a second that looks at how advisory firms are overwhelmingly using ‘generic’ names (e.g., “Capital Management”, “Wealth Management”, “Partners”, etc.) and may be amplifying their differentiation challenges, and some tips for advisory firms that are looking to establish a new firm name (either for the first time or as a name change) about what to consider.
We wrap up with three interesting articles, all around the theme of financial planning’s pathway to finally becoming a bona fide recognized profession: the first explores what are the ‘traditional’ hallmarks of a distinct profession; the second examines whether the industry currently has the right regulatory and oversight structure to become a profession; and the last explores the CFP Board’s recent efforts to begin developing a “roadmap to profession” for financial planning, and why it may still take a long time to truly achieve recognized “profession” status (and what we collectively must do to get there!).
Enjoy the ‘light’ reading!
CFP Board Overhauls Governance As Part Of Ongoing Changes (Tobias Salinger, Financial Planning) – Last summer, the Wall Street Journal ran an expose on how the CFP Board’s “Let’s Make A Plan” often omitted material regulatory disclosures that were included on FINRA’s BrokerCheck but weren’t self-reported by the CFP professional, spurring the CFP Board to begin doing ongoing background checks on all CFP certificants, spawning an independent task force that assessed the CFP Board’s enforcement processes for further overhaul, and kicking off a series of new enforcement changes this year as the CFP Board seeks to both remedy its prior mistakes and prepare for what may be an even more active enforcement obligation going forward under its new more-fiduciary standard that took full effect this July. Now, the CFP Board has announced a series of changes to ‘update and modernize’ its own internal governance structures as well, including an adjustment to Board member terms from a single 4-year term to a 3-year term with one opportunity for re-election, an expansion of the Appeals Committee to have more full oversight of the entire Code and Standards Enforcement, an expansion of the Audit committee to also review and monitor enterprise risk (especially given the CFP Board’s repeated incidents of the enterprise brand risk with Wall Street Journal exposes!), and a broadening of the scope of the CEO Oversight committee to monitor compensation for all senior staff (as well as continuing to set the compensation for the CEO). Notably, the independent task force also recommended an adjustment to the CFP Board’s composition of directors as well, in particular, that the CFP Board adopt a policy that the majority of the board be members of the public, which the CFP Board declined and instead decided to maintain the current policy that the majority of board members be CFP certificants themselves (and have at least but as few as two public members of the board). For most CFP certificants, the changes will have little visible effect, but the expansion of the Board’s role and oversight in the enforcement of the Code and Standards represents yet another signal that the CFP Board is gearing up to take enforcement more seriously than it has in the past (a positive for CFP certificants who would like to see the ‘bad apples’ removed, but a greater caution for those who aren’t following the CFP Board’s new standards now that the CFP Board may be more aggressive in pursuing complaints in the future?).
Schwab Cleared To Close TD Ameritrade Merger But Schwabitrade Looking Less Fearsome Than Anticipated? (Oisin Breen, RIABiz) – This week, the Schwab-TD Ameritrade merger cleared its final hurdle, winning merger approval from the Federal Reserve Board in a 4-1 “yes” vote (with Fed Board member Brainard the sole naysayer over rumored concerns that the size of Schwab’s cash/banking business could be creating another ‘too-big-to-fail’ candidate if a future financial/banking crisis were to emerge again), queuing up the transaction to officially close in the coming week on October 6th. Notably, though, even with “Schwabitrade” closing in the coming days, it is anticipated that the two firms will remain as separate brands and systems as late as 2023 (with technology systems integration not anticipated until at best April of 2022), and the 18-36 month integration plan still leaves much to be determined about what TD Ameritrade systems Schwab will keep (or not) and how the integration process (in particular, the merging of accounts and the transition of TD Ameritrade RIAs over to Schwab systems) will actually occur. Still, though, the mega-merger is expected to steer the broader RIA custody marketplace, as Schwab’s $2.6 trillion in RIA assets form 51% of the RIA marketplace, as a part of its total $6.1 trillion in administered assets (and reducing the RIA custodial marketplace to a ‘big 3’ including Fidelity and Pershing that combined hold more than 80% of total RIA assets), and spawning questions about whether Schwabitrade will lead to higher prices for advisors (due to the concentration of providers and limited competition) or lower costs as Schwab enjoys even greater economies of scale (as the provider that already pushed trading commissions to $0 last year).
Edelman Throws His RIA’s $30B+ Client Accounts Up For Grabs In RFP As Anchor Custodians TD Ameritrade And E*Trade Are Swallowed Whole (Lisa Shidler, RIABiz) – While most advisory firms have been taking a “wait-and-see” approach to the Schwab acquisition of TD Ameritrade before deciding whether to change RIA custodians, this month, mega-RIA Edelman Financial announced that it had already begun an RFP (Request For Proposals) process to potentially move its $30B of ‘retail’ RIA business (a subset of the larger primarily-401(k)-plan $220B of AUM for Financial Engines at large) to a new RIA custodian, as Edelman’s two primary custodial relationships today – TD Ameritrade and E*Trade – are both being acquired (by Schwab and Morgan Stanley, respectively). The question, of course, is where else a firm at the size of Edelman would even go, given only a few other large players (Fidelity and Pershing), and that most of the remaining ‘second-tier’ RIA custodians may not have enough capacity to handle Edelman’s business (as Edelman alone has more AUM than the entire custodial platform of many of the second-tier players that historically have focused on small-to-mid-sized RIAs). The rumors are that the leading contender may be Apex Clearing, a relatively unknown player amongst the ‘traditional’ RIA community but the back-end custodian that powered the launch of most of the robo-advisor platforms (including Betterment, Wealthfront, Robinhood, and more), as APIs and tech-savvy integrations (for which Apex Clearing is known with its ‘robo’ street cred) become the dominant driver of mega-RIA custody decisions. On the other hand, historically one of the biggest lures of RIA custodians have been their ability to refer retail consumers via their advisor networks – an edge for Schwab and Fidelity but not Apex, which has no direct retail presence and is ‘exclusively B2B’ instead. Still, though, as technology itself takes an increasingly central seat in the efficiency of RIAs and even their client experience, the potential for Edelman to go to Apex would be a watershed moment for the industry if the depth of tech integrations and APIs trumps all other factors to win $30B of mega-RIA business.
SEC Warns Of Rise In ‘Credential Stuffing’ Cyberattacks (Melanie Waddell, ThinkAdvisor) – In a new Risk Alert from the SEC’s Office of Compliance Inspections and Examinations, OCIE is warning of a rise in “credential stuffing” attacks against advisors and their clients’ investment accounts. The “credential stuffing” tactic involves cybercriminals obtaining client or advisor login credentials on other websites that may have been hacked (where the usernames and passwords are subsequently sold on the dark web) and then trying to use those credentials to log into RIA custodian or broker-dealer platforms. As a result, if an advisor or client uses the same password across multiple websites, a compromised account on one (relatively innocuous) website can result in the hacker gaining access to a more important financially related account that also opens to the same password. The suggested remedy is to either regularly update and change passwords – so an ‘old’ compromised password doesn’t open the door to a current important website – or alternatively to use different and varied passwords for each key website the advisor or client logs in to (so even if one is compromised, it won’t actually work on any other site). The SEC’s Risk Alert also strongly encourages the use of Multi-Factor Authentication (MFA), where the login requires also entering a code sent separately via email or text message, which ensures that even if the login password is obtained via other means, the cyberattacker still won’t actually be able to gain access (because the password alone is not enough if they don’t also have access to the advisor or client’s email or smartphone).
The Rise Of Fee-Based Annuities And Potential Licensing Issues For Independent Investment Advisers (Max Schatzow, Adviser Counsel) – With the ongoing growth of the RIA channel, insurance and annuity companies have been actively working to develop “fee-based” versions of their products that don’t pay any commissions but instead allow RIAs to apply their assets-under-management (AUM) fees directly against the annuity’s account balance (made permissible on a tax-favored basis last year after a favorable Private Letter Ruling from the IRS). Notably, though, just because the client agreement includes advising on the annuity as part of the scope of the advice relationship, and the IRS permits the AUM fee to be assessed, doesn’t mean the advisory firm is in the clear to do so. Instead, as Schatzow notes, some state insurance laws stipulate that if a financial advisor sells or ‘just’ reviews and evaluates an annuity, they may have to become licensed as an “insurance consultant”, effectively requiring the advisor to obtain a state license to advise clients in that state on their annuity product (which, depending on the state, may be the same as a life/health insurance producer‘s license that selling agents also must obtain, or a separate standalone license). However, not all states require an insurance consultant license to advise on annuities, and Schatzow suggests that a narrow reading of at least some states’ rules may mean that if the advisor solely guides the investments within the annuity (but doesn’t actually “appraise, review, or evaluate” the insurance/annuity contract itself), they may still be in the clear from licensing. Alternatively, some vendors like DPL Financial and RetireOne are cropping up to serve as intermediaries between advisors and their clients’ insurance/annuity contracts, where the third-party service provider serves as the registered agent (alleviating the RIA of the duty) and effectively sub-advises the annuity investment management back to the RIA themselves. In addition, Schatzow indicates that, at least in New York (known to be a major enforcer of insurer laws), there haven’t been any known enforcement actions against RIAs… but with fee-based annuities for RIAs on the rise, it may only be a matter of time before a regulator in one state or another that has an insurance consultant licensing requirement ‘notices’ that advisory firms in its state are providing insurance and annuity advice without their requisite insurance consultant’s license.
Compliance Reminders For Advisers Offering College Funding Services (Chris Stanley, Beach Street Legal) – Given the ever-growing cost of a college education, advice on college funding and management of college 529 savings plans has become increasingly popular amongst RIAs, especially with a new crop of 529 plan providers specifically looking to work productively with RIAs (e.g., the Utah my529 Plan). However, Stanley notes that if advisors are aiming to manage (and advise upon and charge fees for advice on) 529 college savings plans, updates must be made to Form ADV Part 1 (describing the type of fee to be charged in Item 5E) and also in the ADV Part 2 (Items 4 and 5 – to include college funding as a service being offered to clients and a description of the fees being assessed for such a service). In addition, advisory agreements should also reflect that advice on college savings plans is an included service, and how fees will be applied for providing such a service. It’s also important to note that if the advisor is not actually managing the 529 plan with discretion, and/or only provides periodic reviews (but not “continuous and regular supervisory or management services” and does not “arrange or effect the purchase or sale” of investments in the account), the value of the 529 plans should not be included in the advisor’s calculation of Regulatory AUM on the ADV. And while some advisors may want to execute trades on behalf of clients in their 529 accounts (and claim the assets as AUM for reporting purposes), obtaining client login credentials can also trigger custody issues (and should generally be avoided), although ‘view-only’ or limited access logins on behalf of clients are still permitted.
Forget The F-Word… RIAs Playing Down Fiduciary Standard Online? (Mark Schoeff Jr., Investment News) – A recent review of 45 fee-only RIAs by the Institute for the Fiduciary Standard found that only 14 of them mention the term “fiduciary” on their homepages, 20 more at least mention the word somewhere on their internal pages, and 11 don’t cite the “fiduciary” label anywhere at all on their websites. Smaller RIAs in particular were more likely to hold out as fiduciaries, while larger firms appear to be focusing on other differentiators. The study comes as the new Regulation Best Interest threatens to further blur the marketing differentiation value of the fiduciary label, with the new standard allowing brokers to claim that they too provide “Best Interests” advice when making recommendations to clients, and the fact that fewer than 1/3rd of advisory firms feature “fiduciary” as a differentiator on the homepage of their websites may already be signaling that the label is no longer perceived to distinguish firms the way it once did… which, in turn, raises further concerns as to whether it’s time for a more uniform fiduciary standard for all RIAs and broker-dealers (particularly if consumers can’t understand the difference between the fiduciary and Reg BI standards that now exist for each).
What’s In An RIA’s Name? Probably ‘Capital’ And ‘Management’ (Jessica Mathews, Financial Planning) – In a review of more than 14,000 Form ADVs of SEC-registered RIAs, over 1,400 used “capital management” in their name, 1,250 used “partners”, and 808 contained “wealth management”… which advisor brand consultant Amy Parvaneh suggests highlights a problematic genericizing of the names of advisory firms. As not only does a name with common industry terms fail to make the firm memorable or distinct, it can more directly prevent prospects from even finding the firm as Google and other search engines have trouble figuring out which “capital management” firm the prospect might have been searching for amongst a sea of name sameness. Furthermore, choosing a name that is too similar to another firm’s can actually result in intellectual property challenges and the risk that the firm that already has the name may issue a cease-and-desist letter forcing the newer firm to change its own name to avoid copyright or trademark infringement. Some advisory firms instead choose to use the name of the advisor/founder as the name of the firm – which, at least for those with less common names, tends to be more distinct – but naming the firm after the founder can potentially create concerns for successors after the founder leaves. As a result, the emerging trend is for advisory firms to use neologisms – newly made-up words – to brand their firms instead, from Hanson McClain rebranding to “Allworth” last year, or Kilgroe Frantzis Quinty & Associates Wealth Management rebranding to “Cyndeo Wealth Partners” instead.
The Dos And Don’ts Of Naming An RIA (Gordon Abel, Financial Planning) – Naming an advisory firm feels like a high-stakes proposition for most advisory firm founders, as the name becomes the outward manifestation of the brand of the company, how it will be ‘known’ in the marketplace, and the firm’s first opportunity to describe what it does for those it serves. Accordingly, one of the most common practices is to include the name of the founder in the business – either by their last name or their initials – which helps to convey the level of personal connection to the advisor/founder and can humanize the brand (e.g., Smith Financial Group or MEK Capital Management). Alternatively, other advisory firms try to establish a name that ties into what they do or the values they espouse (e.g., “True Private Wealth Advisors”). The caveat, though, is that with so many advisory firms in practice, such descriptive or functional names are increasingly difficult to use for differentiation. Which is leading some advisory firms to become more creative, either inventing new words or at least choosing less traditional and more evocative ways to describe their value (e.g., “Procyon Partners”, where Procyon is a binary star system that is one of the brightest in the night sky and often used for navigational purposes). Arguably, advisory firms can turn any name they wish to use into a brand if they invest enough time and marketing effort to do so, but Abel still suggests a number of tips as a starting point to picking the right name, including: avoid any name or word that might resemble a former employer (no need to invite litigation!); eliminate phonetic sounds that may be hard to pronounce (especially in the emerging era of voice search via Siri or Alexa); remember that people tend to abbreviate longer names into shorter ones, so give some consideration of how the name might be shortened or turned into an acronym; and don’t fall in love with a name before doing a competitive review to be certain it hasn’t been taken by others already!
How Financial Planning Can Become A True Profession (Ron Rhoades, Advisor Perspectives) – It was just over 50 years ago, in December of 1969, that 13 individuals met at a hotel near Chicago’s O’Hare Airport to begin the creation of a new profession that we now know as financial planning. Yet five decades later, financial planning is still not widely recognized as a “true” profession… raising the question of what else will it take to finally ‘get’ there? Rhodes notes that, in practice, there are a number of hallmarks that determine when a skilled trade becomes a recognized profession, including: a unique body of knowledge that is distinct unto itself, which is still a challenge for financial planning (when much of its knowledge overlaps other professions – from the tax planning that accountants also do, to the investment management that third-party managers provide, and the estate planning that lawyers provide) but is increasingly being recognized as financial planning is less about the individual subject matter domain and more about how it connects the dots between them; a required course of study to become a professional (just as doctors must go to medical school and lawyers to law school), for which financial planning is only partially ‘there’ with college-level courses and an undergraduate degree requirement, but not a specific “financial planning degree” and no requirement for a (financial-planning-specific) graduate degree as other professions require; a strong professional code of ethics with a clear client-centric fiduciary standard (for which the CFP Board is arguably just now making headway with a broader ‘fiduciary at all times’ standard but limited enforcement capabilities, while Federal and state regulators do not consistently apply a fiduciary standard to all financial planning advice in the first place under Regulation Best Interest); a sanctioning professional regulatory organization to enforce the code of ethics (which remains a challenge for financial planning, and its myriad of regulators that oversee the various products that advisors implement, but don’t actually regulate financial planning advice itself); a broad-based professional membership organization that professionals belong to and work towards (a challenge point when even the largest such organization, the Financial Planning Association, has dropped to the point of having barely 15% of CFP certificants as members); and a licensing requirement to ensure that only those who meet the required knowledge and code of ethics standards can even hold out as financial planners (and in turn can have their right to practice rescinded for failing to adhere to such standards). Notably, though, Rhoades emphasizes that a key part of becoming a bona fide profession is earning the right to have such regulatory protections, including a commitment to serve the interests of the public, which financial planning arguably hasn’t fulfilled yet either, still largely lacking a business model that serves more than just a small segment of the affluent nor having an active pro bono arm for those who cannot afford (but still need) financial planning services.
Why Making Financial Planning A True Profession May Harm Consumers? (John Robinson, Advisor Perspectives) – While most CFP professionals, who themselves do act like professionals, would like to see financial planning at large be recognized as a bona fide profession, a key question is how, exactly, to arrive at that outcome… and who (or what organization) should be responsible for leading the charge. As while Robinson notes that by the standard hallmarks of recognized professionals like law, accounting, and medicine – all of which have a unique body of knowledge, required course of study, professional membership organization, strong code of ethics, sanctioning professional regulatory organization, and a commitment to serve the public interest – financial planning is not quite ‘there’ yet, it’s not clear if the CFP Board as the current ‘standards setter’ for CFP professionals is the right organization to pave the way forward (in the way the American Bar Association does for lawyers and the AICPA does for the tax/accounting profession). In particular, Robinson suggests that the CFP Board’s history of not necessarily having and enforcing stringent standards, effectively allowing ‘loopholes’ in its prior fiduciary obligations by allowing CFP professionals to be such without doing financial planning and just selling products, and engaging in a public awareness campaign that the CFP marks are the “gold standard” without necessarily having the framework to enforce such promises. And arguably from its very start, the CFP marks were not necessarily created as a professional hallmark, but more as a means for what were originally insurance salespeople trying to convey to the public that they were credible advice-givers (even though their focus remained clearly on the sale of products at the time)… a perception the CFP Board still struggles to shed given its various accommodations over the years to the brokerage industry’s use of the CFP marks for non-advice-giving salespeople (which Robinson suggests is still occurring, as the recent standards still allow CFP certificants at broker-dealers to not fully disclose in writing all of their conflicts of interest and compensation sources when providing certain commission-based product recommendations). Of course, the question remains “If the CFP Board won’t be the future regulator and profession-builder of financial planning, who/what will?” For which Robinson suggests that the SEC, and its fiduciary framework for registered investment advisers, arguably already provides the necessary pathway… at least as long as the SEC interprets providing financial planning advice as an advice activity that would require registration as an investment adviser under the “solely incidental” exemption for broker-dealers.
Roadmap To Becoming A Profession (Bob Veres, Inside Information) – The CFP Board recently hosted a brainstorming session with industry leaders which focused on defining the challenges that the financial planning profession faces on its journey to become a ‘true’ recognized profession. Veres suggests that the path to becoming a bona fide profession faces two primary challenges to overcome. The first includes elements that are mostly under our control and just need to be developed further, including continued evolution of our professional body of knowledge, development of clear ethical and competency standards for those who provide financial planning advice, and developing a clear pathway and pipeline to train in becoming a financial planning professional. Some challenges will be more difficult to overcome, though. For instance, financial planning currently only serves a relatively narrow (and very affluent) segment of the population, and alternative business/fee models and services models still need to evolve to expand financial planning’s services and relevance to the general public (as other professions that serve the full spectrum of the public’s needs have done). On the other hand, some challenges are largely outside the control of the profession itself, and may remain the most intractable, including “regulatory acknowledgment” (i.e., that Federal or state regulators recognize financial planning as a distinct profession unto itself, including a regulatory body with full enforcement capabilities to maintain the established professional standards), and “respected baccalaureate programs” (i.e., programs at established universities that teach financial planning, confer a degree in financial planning, and teach a consistent professional body of knowledge in a recognized financial planning department that is distinct from finance, economics, human sciences, or agriculture, where such programs are most commonly housed today). Nonetheless, the starting point to obtaining formal recognition of financial planning as a profession distinct from the broader financial services industry is to figure out what has to change – for which the CFP Board is aiming to develop the roadmap we can all collectively follow.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors, and Craig Iskowitz’s “Wealth Management Today” blog as well.