As financial planning continues its path towards profession, the next major hurdle appears to be the application of the fiduciary standard to the delivery of financial planning advice. For many planners, though, the push for fiduciary is not just about advancing the profession; it’s also about cleaning it up, and getting rid of all those people who say they do financial planning when they do not. In other words, it’s about carving out a protected space – as is done with most other professions – where only those who really do it can call themselves professionals, just as only licensed medical professionals can practice medicine, and it’s illegal to conduct an unauthorized practice of law. And although establishing such barriers around a profession can also make it more financially rewarding in the long run for those who practice – part of the reason that doctors and lawyers are compensated well is that not just anyone can be one – it may actually have the opposite effect in the nearer term. In other words, it’s possible that putting a firm fiduciary legal standard into place could actually cause a dramatic increase in financial planning competition.
The inspiration for today’s blog post comes from a conversation I had last week with some financial planners at a NAPFA Carolinas study group meeting hosted by Abacus Planning Group. During side conversations at the meeting, the topic came up of how a true legal fiduciary standard – not just the fiduciary standard espoused in the CFP Board’s Standards of Professional Conduct, but a legal and regulatory one as well – would go far to cleaning up the profession. – and part of the implication in the conversation is that many of the independent fiduciary planning firms already in existence would enjoy a business boon, as their competition is stripped away by regulatory fiat. In other words, the view was that if all those "salespeople" who don’t really do financial planning aren’t allowed to call themselves financial planners anymore, then the "real" financial planners will be able to step up and shine.
Yet as I listened to the discussion, I found myself anticipating the exact opposite result. Regulating a uniform fiduciary standard, and preventing huge portions of the financial services industry from holding itself out as financial planners, is not going to just make them all go away. Instead, I think it will make a large number of them also cross the fiduciary line, embrace the standard, and try to deliver the value of financial planning – in direct competition to the firms that are already doing it!
The viewpoint seems to be that broker-dealer firms in particular will not possibly try to practice "true" financial planning, because they’re afraid of the legal ramifications and risk of a fiduciary standard. Yet I don’t see why. Banks and trust companies operate on various forms of fiduciary standards, with scale, as large organizations. So do large law firms. And although some people question the particular decisions in certain managed care situations, we still accept that even large medical services organizations are filled with doctors who have taken the Hippocratic Oath and put their patients first. Sure, any profession has its few bad eggs, but by and large, there’s nothing about fiduciary that makes it incompatible with "big firm." It does require a different kind of oversight and compliance, and may entail a lot of new hiring, but deliver fiduciary services as a large firm is, to say the least, not without precedent.
In point of fact, most broker-dealers already have an RIA division that delivers investment advice held to a fiduciary standard, and many practitioners under that umbrella are delivering fiduciary financial planning advice as well. It’s true that for a lot of the largest broker-dealers, these are only small sections of a firm that is dominated by its traditional product distribution force. But if regulators intervene and separate the delivery of advice from the delivery of product – in other words, they regulate the financial planning out of product distribution – that doesn’t mean the large firms will go away. It simply means they may re-direct MORE energy into their financial planning divisions!
After all, it’s not as though financial planning isn’t profitable. One benchmarking study after another shows how profitable financial planning firms are these days. It’s true that perhaps the product distribution model that a number of major broker-dealers use right now might be even more profitable, but if we regulate the financial planning portion of their product distribution model out of existence and force them to simply run the same financial planning business model as everyone else… they will. With so many planning firms sporting 90%+ retention rates and 20%+ profit margins, why on earth would a major firm walk away from that!?
So what’s the future that I see? When the Financial Planning Coalition and/or its various constituents eventually win the legal fiduciary standard they seek, there will be a split in the industry. A few major broker-dealer firms will decide to step away from financial planning and fiduciary, and simply focus on their "core" product distribution business model. But other firms will step up; they will launch genuine, fiduciary financial planning divisions to the company. They will hire people who genuinely want to deliver true financial planning; they will develop the compliance and oversight systems necessary to manage it. As a new venture with great promise for a major firm, they will throw a few marketing dollars at it to help it grow – and of course, for a multi-billion dollar company, even a minor marketing effort may dwarf the amount of marketing dollars that the CFP Board has pushed in their own Let’s Make A Plan public awareness campaign!
The end point is that a number of small independent firms may find themselves competing against major financial services behemoths genuinely running true fiduciary financial planning businesses (or likely, subsidiaries), that have scale, systems, processes, efficiencies, and real marketing dollars. No, I don’t think this means it will be the death of the independent firm – some clients will always prefer to work with a "small" and local firm – but it is a future where the independent fiduciary firms of today face far more competition, not less.
Notably, I see this as good news for consumers, who will find themselves with more fiduciary, client-centric providers of financial planning than ever before, and frankly the potential marketing dollars of a major firm’s nationwide financial planning initiative has the potential to take the visibility and public awareness of financial planning to yet another level we’ve never seen.
But one thing is for certain, at least in my mind. As long as financial planning delivers value to consumers and is profitable as a business, firms both large and small are going to compete. And if a regulatory change draws a fiduciary line in the sand and forces large firms to either step back from financial planning, or step across the line and embrace the business on the other side, without a doubt at least a few of them will choose the latter. Financial planning is too success as a business not to do so!
So what do you think? Will winning the fiduciary fight increase financial planning competition by forcing major firms to actually deliver more financial planning that competes with independent firms? Or will all the major firms step away and allow free reign to the smaller firms in the space that can "better" navigate fiduciary waters?