Historically, the competency standards to become a “financial advisor” have been very low. After all, technically in order for someone to hold themselves out as offering “comprehensive financial advice” and get paid for it, all they really need to do is pass a 3-hour regulatory exam that takes just a week or few of preparation. In the meantime, though, salespeople who are “only” licensed to sell insurance or investment products and technically can’t be paid for their advice itself can also still publicly call themselves financial advisors as well. Which is why it’s so difficult for consumers to tell which is which, and for comprehensive financial planners themselves to differentiate their services from the army of other “advisors” out there who say they do the same thing… even though they don’t, and can’t actually be paid for it in the first place. That challenge, in turn, has led many to wonder if there’s a path for regulators to enact (and enforce) rules requiring anyone who says they provide comprehensive financial advice to actually be trained and educated to do so, and whether it might make sense to someday require a minimum standard like CFP certification as a licensing requirement to provide financial advice.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the CFP marks are not a license to practice now, the differences between the CFP certification and a bona fide license like the CPA, possible avenues to transition the CFP certification from a trademark into an actual license, a few of the many hurdles such a potential transition would encounter… and why it still might be a worthy goal to pursue anyway.
It’s important to understand that, unlike a CPA license – which is granted by a state certifying body and grants accountants legal authority to perform certain tasks (e.g., attesting an audit) that they wouldn’t be able to do otherwise – the CFP certification does not fall under any state or federal regulatory body, and instead is a trademark that the CFP Board allows advisors to use if and only if they agree to honor the Board’s Terms and Conditions (which happen to include following the Four E’s of the CFP education, exam, experience, and ethics requirements). But that also means that financial advisors aren’t required to obtain CFP certification, or any substantive education or experience, in order to hold out as providing (and get paid for) financial advice, and instead need only to pass some very basic licensing exams.
In the past, this wasn’t a big deal, as the industry was focused primarily on selling investment and insurance products in the first place, for which financial planning was an effective sales strategy. However, in a world where products are increasingly accessible through technology itself, the value that advisors must bring to the table has less and less to do with financial products that are sold, and more and more to do with the quality of advice itself. Yet without the proper education, examination, experience, and ethics requirements that could be prescribed (and then overseen) by a regulatory body, financial advisors aren’t being held to the sort of standards common to professionals in other industries where the advice provided often makes such a significant impact on clients’ lives (and where the depth of expertise of the professional makes it difficult for consumers to vet who is “good” or “bad” in advance).
Unfortunately, the pathway towards turning the CFP certification into a required license to provide financial advice is difficult, as it must fall under the purview of either state or Federal regulators, and both have their own unique challenges. State regulation is often easier to implement – at least something – but rarely ends out being uniform, in a world where advisors are increasingly likely to work with clients across state lines. Federal regulation allows for uniformity across all 50 states, but can be difficult to prevail against concentrated industry lobbying forces, and ironically existing regulators themselves may not want to see their existing regulatory purview entrenched upon!
Nonetheless, the transition to higher competency standards for financial advisors might become inevitable, given the accelerating rate of adoption of the CFP certification itself amongst advisors. Because at some point, the CFP marks will become so ubiquitous that it will be “easy” for the industry to demand that anyone getting paid for providing financial advice should be required to have CFP certification to do so… simply because most advisors already will have it at that point (and the majority will then require the rest to conform).
Ultimately, though, the key point is simply to recognize that CFP certification is not a license today, and realistically can’t become one while it’s still only held by a minority (about 30%) of all financial advisors. But ironically, the best path to enshrining a minimum competency standard like CFP certification into licensing regulation may simply be to support its continued and ever-broadening adoption – which appears poised to accelerate further as it becomes a “mainstream” certification – because at the point most advisors have voluntarily adopted the standard anyway, it’s not a big leap to make it official… and set a formal competency standard akin to other recognized and true professions!
(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.
For today's Office Hours, I want to talk about a topic that I'm hearing coming up more and more often lately, which is this, what will it finally take for CFP certification to become a requirement to be a financial planner akin to what a CPA license is for accountants? You know, to the point where a regulator would say, "I'm sorry, you can't claim you're doing financial planning for your clients because you don't actually have the proper certification and license to do it." Because unfortunately, the reality is in today's environment, you can still say you're a financial advisor, offering comprehensive financial planning with only a high school diploma and a three-hour regulatory exam that you can study for in a week or two. Like, that's all it actually takes to give someone advice on what to do with their entire life savings they might have spent decades accumulating. And technically, the high school diploma part is optional.
And even beyond that, because the SEC is so lax in its own enforcement of the Investment Advisers Act of 1940, in practice, right now any product salesperson registered with FINRA can also put "financial advisor" on their business card and say they're giving financial planning advice even though they don't actually have a license to get paid for advice in the first place. Which means if you are a comprehensive financial planner who actually has the training and education and experience to do it and the certification to show for it and you want to get paid for it, you're stuck trying to differentiate yourself from all the other advisors who say they do the same thing but don't have the training, don't have the education, don't have the experience and aren't actually even being paid for it in the first place. Which is pretty frustrating for all of us who are actually doing comprehensive financial planning.
And it leads to this question that I'm hearing more and more often, which is, "What will it take for regulators to finally step up and require that people who say they're in the business of providing financial advice actually have the training, education, and experience to do so and to be properly licensed and get paid for it?" And not to necessarily eliminate insurance agents and brokers and people who fulfill certain functions selling those products, but to separate what do brokers do? What do insurance agents do? And what do financial advisors do? Just as the comment earlier just pointed out, we have CPAs and enrolled agents coexisting, but they only do certain functions. An EA can prepare a tax return, an EA cannot attest an audit. These are separate functions that are regulated as to who's allowed to do what without allowing a whole bunch of criss-cross.
The CFP Certification Trademark Vs The CPA License [02:29]
Now, to understand the path forward from here, the starting point is just to get a clear understanding of where we actually are today. Which is that CFP certification is not on the same level as a CPA license, at least not from a legal and regulatory perspective. Because the CPA license is actually a license. You cannot do certain functions as an accountant, particularly around auditing and attesting an audit, if you are not licensed to do so. And the way you know someone has a proper license is that they're a CPA. Those three big letters are given by state certifying bodies that affirm every CPA who's going to fulfill those accounting functions has met certain examination, education, experience, and ethics requirements. And more importantly, if you don't have a CPA license, you legally cannot perform some of those key accounting functions like attesting an audit, you must have the license to do the work and get paid for it.
Now, in the case of CFP certification, there actually is a similar requirement to what's colloquially known as the four Es of education, examination, experience, and ethics requirements that underscore virtually every profession, just as there is with the CPA license, but CFP certification is not granted by a sanctioned regulatory body like the CPAs, where CPAs are bound with four Es as required by their regulator. Instead, technically, we as advisors voluntarily bind ourselves to the four Es of CFP certificants as a private deal with the CFP Board in exchange for being allowed to license and use their trademark, the CFP certification.
So in other words, the CFP marks literally aren't a license. The CFP Board just happens to be an organization, a 501(c)(3) charity, that owns a trademark with those three little letters and has created an agreement with advisors that says we can license their trademark in exchange for a payment of $355 a year and an agreement to honor the Terms and Conditions set forth by the CFP Board to license their trademark, which happens to include meeting the four Es of education, exam, experience, and ethics. That's why we call them the CFP marks. It's short for CFP trademarks. And that's why we can't call ourselves a CFP the way that accountants call themselves a CPA and instead have to say CFP professional or CFP practitioner instead because CPA is a license. You are a CPA. CFP marks are just a trademark. You aren't a CFP. You're a professional who happens to have CFP certification and thus you're a CFP certified professional or just CFP professional for short.
But unfortunately, that also means that you can simply be a financial advisor without the CFP marks as well, because the only actual licensing requirement is the very basic industry exams, either Series 65 to become an RIA or Series 6 and 63 to sell mutual funds and variable annuities for a broker-dealer, Series 7 if you want to sell stocks as well. Which unfortunately don't have much of anything to do with the four Es of education, exam, experience, and ethics required of bona fide professionals actually giving advice and not just selling those products or managing investment portfolios.
Turning CFP Certification From A Trademark To A License: State vs Federal Regulation [05:32]
So what does it take for CFP certification to actually reach the point that it's a license and not just a trademark that some advisors voluntarily choose to affiliate themselves towards? Ultimately, this can go one of two routes: federal regulation, state regulation. Most professions today are regulated at the state level, with professional certifying bodies like state boards of accountancy and state bar associations that are endowed by the states with the power to both grant the license, oversee the professionals who have the license, and take action against those who practice without the license.
The challenge, though, is that more and more professions serve clients across state lines, especially in the domain of financial advising where most of the actual issues we help clients with are not really state-specific in the first case, certainly not compared to lawyers that have to advise on state business issues under particular state laws. And financial advice is increasingly a domain where we use technology to serve clients virtually anyways, which means that the domain of state regulation are really state by state by state by state regulation. There's a huge risk that we end out with different rules in different states and then it becomes this patchwork nightmare for us as advisors with clients across state lines.
Anyone who's an insurance agent has experienced at least a little of this today. Every time you get a client in a new state, you've got to get appointed with the insurance company in a new state. And state-registered RIAs with clients across state lines ought to become even more acutely aware of this challenge, especially because these days you can often have situations where two regulators in two different states have two different views about a single advisor's Form ADV, where state A says something is permitted that state B won't allow, and then state B requires a change that state A won't below. And while there are organizations like NASAA, not the space folks but the North American State Administrators Association, NASAA, that try to facilitate coordination and create model rules to promote uniformity across the state lines, but state regulation is rarely uniform.
And in fact, this is one of the primary reasons why even CFP Board came out recently against pursuing state regulation for financial planning because it's so hard in the real world to get uniformity across state lines in an emerging profession that we know is going to entail many or even most practitioners having clients across state lines.
So the alternative path is federal regulation. This typically means an organization designated by Congress to operate across state lines at the federal level and set regulation from the top coming down, or at least stating the industry to have the authority to regulate itself. So examples here would be organizations like the SEC, which is a federal regulator, or FINRA, which is technically a self-regulatory organization of broker-dealers that has federal authority to regulate the broker-dealer community.
The outside of federal regulation is that the rules are national. They span all 50 states. They don't create the potential irregularities from one state to another. That's why multi-state advisors often eventually move up to federal SEC regulation so they don't have to comply individually with each of 50 states one state at a time. The bad news, though, is that federal regulation battles, very public, very challenging, very difficult to change, entrench ways of regulating and doing business because no regulator ever wants to cede any jurisdiction in the first place and make themselves smaller.
So when we talk about the potential for federal regulation of financial planning, the question quickly becomes what regulator exactly would we advocate for? FINRA was designed to be the self-regulatory organization for broker-dealers and doesn't actually have much knowledge around financial planning and the practice of financial advice. In fact, when brokers are sued for bad advice and go to FINRA arbitration, they typically make the case that they weren't even giving advice, they were operating solely as a brokerage salesperson.
The SEC could gain authority to regulate financial planning, but the SEC is already struggling just to examine the RIAs it currently oversees with an exam rate so low that the typical RIA isn't seen more often than once about every six to eight years. So adding a whole bunch of additional financial planners to the SEC's purview when the SEC can't even get a budget increase for what it currently oversees, not very promising.
Now, we could potentially create a new standalone regulator, which I think in theory would be the ideal. An organization that actually understands financial planning and what it's all about, who would oversee all financial planners giving advice regardless of what channel they're in and require them to have CFP marks in order to prove that they have the training, education, and experience to hold out as a financial planner.
But that would potentially mean moving those advisors from their current product-based regulators to a new federal financial planning regulator. Because it would give the new financial planning regulator the opportunity to oversee insurance agents giving financial advice, brokers giving financial advice, RIAs giving financial advice, which means in the real world, there is now a new federal financial planning regulator taking jurisdiction away from 50 state insurance regulators and FINRA and 50 state securities regulators and the SEC. None of them will necessarily want to see their own regulatory organizations in purview get smaller because all these financial advisors are getting shifted to the new financial planning regulator.
Not to say that we can't get there someday, but the more it becomes clear that regulating financial advice one product channel at a time instead of holistically, the more pressure there will actually become to make a change in the years ahead. But it's really hard to battle for higher standards of financial advisors against not just lobbyists from the product manufacturers and distributors that don't want to see higher standards because they like selling their products under the lower standard, but when you threaten 50 state insurance regulators, 50 state securities regulators, FINRA, and the SEC by shrinking all of their regulatory purviews as well, it becomes even more of an uphill battle.
And point of fact, that's one of the reasons why a lot of people who advocate for higher standards for financial planning have pushed for state regulation as a better pathway, because you don't have to fight a zillion different regulators and lobbyists all at once. You just have to convince a few state legislators to pass a law in their state and then try to get that law duplicated in some other states, and then build a nationwide movement towards state regulation over time. Except again, not all 50 states necessarily enact the same law.
And from a practical perspective, it's really hard for financial planning to organize a state-level grassroots effort to move the needle in all 50 states at once. Not only is it just literally expensive to marshal the resources, but the product manufacturing and distribution side of the industry still has more money, more resources, deeper pockets, more lobbyists to fight in each and every one of those 50 states. Which means opening the door to state regulation and facing that much potential lobbying opposition risks actually getting worse and lower standards than we already have, right? Just look at how weak the SEC's proposed Regulation Best Interest and the new Form CRS would be, imagine if the profession had to fight that 50 crappy versions of that rule in 50 different states all at the same time.
So basically, the regulatory challenge is that at the state level, there's better odds of getting something done, but it probably won't be uniform and we may not like what we get. At the federal level, we could potentially get wide-reaching uniformity, but it's more likely to be a pitched battle not just against the product industry, but also many of the regulators themselves who may find their own turf threatened by the potential changes.
From The Gold Standard To The Minimum Standard And The S-Curve Of Adoption [12:54]
Now, all this being said, I don't think we should give up hope on some kind of real regulation for financial planning as a profession with something like CFP certification at its core as a minimum competency standard to hold out as a financial advisor. Because while the regulatory battle is difficult to get proper regulation of financial advice instead of just being regulated for investment management, securities products sales, insurance product sales etc. down the line, financial planning itself and CFP certification is on the rise. The "Financial Planning Magazine" survey last year showed that amongst the top 50 broker-dealers, the majority of broker-dealer revenue is now fee-based. Even commission-based broker-dealers, the majority of their revenue is fees now.
And even when we look at the CFP marks more broadly, CFP certification first launched in 1973 with the first class, and it took 27 years, until 2000, for us to finally reach the point that CFP certificants were 10% of all financial advisors, 27 years to get to 10%. But it only took another 11 years, until around 2011, for us to go from CFPs at 10% of all advisors to 20% of all advisors. And now, just 7 years later, we're about to cross the threshold where we go from 20% to 30%. So if we just continue this current accelerating pace, by the end of the 2020s, a decade from now, I suspect we will find the majority of all financial advisors, more than 50%, are CFP certificants. And with another 10 to 20 years after that, we'll get to the point where CFP certificants are 70% to 80% of financial advisors, so basically almost all of them.
And this phenomenon of accelerating adoption isn't unique either. It's actually known as the S-curve of adoption. Kind of picture the letter S stretched out a little. Because the point of the S-curve adoption is the time it takes for you to go through that lower part of the S, to get from 0 to 20%, is often the same as the time it takes to get from 20% to 80% adoption as it ramps up, and then it's really slow to get the last 20% on board. And I think we're actually in the midst of that exact transition right now, where we go from really slow to get the first 20% to really, really fast to go from 20% to 80%. After all, as I just pointed out, it basically took us 38 years from when the CFP certification originated until 20% of advisors had the marks. And after taking 38 years to go for the first 20%, in just 7 years, we're halfway from 20% to 40%, and the pace is accelerating.
Because now, CFP certification is just becoming an industry standard. It's what you do when you're becoming a financial advisor. Everyone is doing it now. It's all the rage. Or more seriously, it's becoming the standard process that all firms serious about financial planning, from small independents to even the largest firms that are out there, they're all requiring CFP certification as a part of what new advisors do. So not only do we see it growing in the independent RIA community, but CFP certification is now a standard part of the Merrill Lynch wirehouse training program. And it's a standard for Vanguard's Personal Advisor Services platform. And the reason this matters is that, at some point in the future, I'm guessing probably 10 to 20 years out from now at the current rate, the majority and then the overwhelming majority of all financial advisors will be CFP certificants. At that point, it won't be the gold standard of financial planning anymore, it'll be the standard. It'll be the minimum standard that everybody does.
And at that point, when CFP certification and comprehensive financial planning literally is the majority and the standard for all firms, large and small, you will see a new lobbying coalition form. It'll be comprised of organizations like CFP Board itself, FPA and NAPFA, Vanguard, Merrill Lynch, Schwab, Commonwealth, and Ameriprise. All forming together to lobby for a federal regulator for financial planning. And by today's standards, that is a bizarre coalition. That's a fee-only membership association, a wirehouse, two independent broker-dealers, and an asset manager who right now have some very opposing views on certain regulatory proposals. But in the future, that's a coalition of firms that aren't so different anymore. Because they may have come for different product routes, but in that future, they're literally all CFPs and they're all doing financial planning.
And at that point, you will see them all band together and go to the regulators and say, "We the collective industry believe that it's crucial to enshrine CFP certification and regulation to stamp out that rogue minority of advisors who are giving advice to the public without any education, training or experience to do so. It's only about 20% of them, we need to get rid of those 20% rogues."
That's a difficult battle now because, up until just a few years ago, CFPs were the rogues. They were the rare 20%, the other 80% didn't have CFP certification. And even now, we're still approaching just 30% and it's just not feasible for a vocal minority to convince a regulator to completely change the rules for the majority of the industry, who obviously will lobby and fight against the change because they feel it may harm them. But with the continued growth and adoption of CFP certification, at some point financial planning and CFP certification that is the mainstream and is not the gold standard, it's the standard, at that point, you will see all those major firms and organizations across all the lines [inaudible 00:18:23] industry channels come together to truly lift the standards. Because once they've already gotten themselves there voluntarily, now it's even in their interest to lift the standards, if only to push out the rest who haven't stepped up.
That's why continued growth of CFP certification I think is so important. Why I'm such an advocate for the CFP marks, even though I don't always like everything the CFP Board does, and I'm often quite vocal in public comment letters against certain changes they propose, because CFP certification is still the best and most positive pathway forward that we have towards becoming a recognized and real profession. And the more adoption of the CFP marks themselves continues to grow and becomes the standard and the more you see firms, large and small, adopt financial planning and start doing it, the closer we move towards that end goal.
So I hope that's helpful as a little food for thought around future regulation of financial planning itself, why the CFP isn't a license yet, and why I think we actually are on the right track to getting there already. It's just going to take more time. But growing adoption of CFP marks across all financial advisors and channels is the pathway that we ultimately get there.
So I hope this is helpful as some food for thought. This is Office Hours with Michael Kitces. Thank you for joining us, everyone, and have a great day.