This week, the CFP Board officially released its new Code of Ethics and Standards of Conduct, which was unanimously approved by the organization’s board of directors and will go into effect on October 1st of 2019. The new Standards cap what was ultimately a more-than-2-year process since the Commission on Standards was first announced in late 2015, and culminated in an initial proposal, a round of public comments, a re-proposal based on that public feedback, and then a second public comment letter period that led to a few final adjustments. Overall, the biggest shift of the new Standards is that going forward, a CFP professional will be required to act as a fiduciary at all times when providing financial advice, as opposed to the old version of the Standards which only required a fiduciary duty when actually delivering a financial plan (or material elements of financial planning). Notably, the CFP Board moved forward with the expanded fiduciary rule despite substantial opposition from the brokerage industry for the CFP Board to delay until the SEC comes up with its own fiduciary rule, though some critics suggest that because the CFP Board maintained compensation neutrality and did not impose substantial limitations on conflicts of interest for CFP professionals they still didn’t go far enough in trying to lift the fiduciary standard as it will apply to CFP certificants working at brokerage firms. Nonetheless, because the new Standards do at least require firms to “adopt and follow business practices reasonably designed to prevent material conflicts of interest that would compromise their ability to act in the clients’ best interests”, questions also loom large about how exactly CFP certificants at broker-dealers can and should comply, and whether any major firms will abandon the CFP marks in the wake of the new standards (as State Farm did with its nearly 500 CFP certificants after the standards were last updated in 2008). Yet with the success of the CFP Board’s public awareness campaign, it would arguably be even more painful in the current environment for any firms to publicly abandon the CFP marks because of their new fiduciary obligations. Ultimately, though, the real question will come in the future when the CFP Board actually has to enforce its new higher standard, and apply it to real-world situations across a variety of advisor business models.
As we live in the “Golden Age” of advisor fintech, the number of great products to help financial advisors increase the value they deliver to clients continues to expand. Yet, an unfortunate reality of switching from one technology solution to another is that such changes can often come with substantial switching costs, both in terms of the financial costs that might be incurred during the process, and also the costs of the time and effort that must be invested by staff and advisors in order to get data transferred to the new tool and the entire team up to speed on using it. And when it comes to financial planning software, these costs can be even higher, as planning software generally doesn’t have an export functionality needed for migrating data from one program to another, and the required training of advisory staff is higher relative to some other types of technology (e.g., CRM and performance reporting software), since advisors increasingly need to be able to confidently use planning software “live” in the client meeting in order to not undermine their credibility with clients.
In this guest post, financial planner Matt Cosgriff shares his perspective on BerganKDV Wealth Management’s recent transition from MoneyGuidePro to eMoney, including their lessons learned, how to build an internal transition team, tools for “gamifying” the process, and how the transition can actually serve as a great training opportunity for both advisors and administrative staff. As Matt notes, a successful transition is crucial not only for preserving your existing work for clients, but also understanding how much variation exists between the results of your old software and your new software and why, so that you can effectively use your new software going forward and communicate any different outcomes to clients.
So if you’re contemplating a transition from one financial planning software program to another, or perhaps are just interested in how you can incentivize staff to make progress on a large goal by “gamifying” the process, I hope that you find today’s guest post and the insights from BerganKDV’s transition from MoneyGuidePro to eMoney helpful!
The Challenge Of Switching To New Financial Planning Software
As financial plans are delivered and updated over time, most advisory firms accumulate a substantial amount of client history inside their financial planning software. Yet unfortunately, the reality is that “old” financial planning software tools don’t always keep up with the pace of change – especially as the pace of advisor technology change continues to accelerate. In other cases, the focus and philosophy of the advisory firm itself changes, and existing tools are simply no longer a good fit. And sometimes, new financial planning software companies start up that just provide a superior solution for an advisory firm’s particular needs.
At the least, the growing volume of alternative and new financial planning software solutions makes the decision of which one to pick – or change to – very challenging. The challenges, however, do not simply stop at making the right selection. In fact, in the case of financial planning software, the rather in-your-face heavy lifting effort of changing software has only just begun once an advisory firm selects the new planning solution.
Ultimately, the primary challenge of changing financial planning software is not actually the selection at all, but instead of the more hidden and far less discussed challenge of migration – of rebuilding dozens, hundreds, or even thousands of financial plans into the new software. Because unlike most industry CRM and performance reporting solutions, most financial planning software solutions do NOT offer any useful ability to port client data, creating a significant barrier to switching in the first place!
And even once you’ve managed to migrate all client data, from birthdates and investment holdings to insurance policies and income streams (not to mention the actual recommended scenarios you’ve built out in the past), you still have the unenviable pleasure of trying to rebuild the underlying assumptions (e.g. Social Security inflation, investment returns and standard deviations) to ensure that client’s results don’t dramatically sway simply because you’re using a new tool to deliver your value—advice.
Overarching the challenges noted above is the more common barrier to any change—while no easier to solve—and that is simply overcoming the fact that it is remarkably difficult to teach old (and young) dogs new tricks. In other words, even if the new financial planning software will be objectively “better” for the firm, that doesn’t mean every advisor in the firm wants to go through the process of changing what they do and learning new tools!
The change management aspect of changing any software can be extremely difficult, but even more so for financial planning software solutions. On a grossly oversimplified level, changing CRMs for advisors amounts to changing where advisors are prompted to enter client notes (though for operations staff it’s still a far larger undertaking!). By contrast, though, changing planning software requires shifting away from the vehicle that fundamentally allows us as advisors to deliver on our value proposition, and can dramatically alter the nature of client conversations that advisors may have grown comfortable with (based on the familiar output of their existing financial planning software). And that change requires an extremely strong level of commitment on the part of the firm, and ALL of its people, to make the switch for the betterment of the business, and ultimately the client. Overlook the critical step of establishing the “why change,” and lose the buy-in of the advisors in the firm, and the previously noted challenges only multiply.
In this blog post, we examine the all-too-painful challenges of switching financial planning solutions and migrating existing client data, and share ideas on how to handle those challenges, to better arm advisory firms with the critical knowledge necessary to make a transition as painless as possible. The focus will be less on the actual selection of which solution is “best”, given that there are so many tremendous resources on this topic already, from T3’s 2018 Software Survey to Nerd’s Eye View’s very own blog on the topic, and instead focus on laying the groundwork for how to successfully make the transition in your firm, given many of the lessons we learned over the last nine months at BerganKDV Wealth Management as we made the switch from MoneyGuidePro to eMoney.
Also, noteworthy and in fairness to both providers, our switch is not meant to be an indictment on MoneyGuidePro, or an anointing of eMoney as the holy grail of planning software. In fact, I remain (as do many at our firm) big proponents of MoneyGuidePro, even as we’ve transitioned away from it. Ultimately, planning software, like any software solution is more about fit for the style and planning philosophy of the firm, rather than simply which one is “better”, and for us, eMoney was more aligned with our current business model than MGP. However, I will miss a lot of MoneyGuidePro’s unique features, like their health care cost estimator, Play Zone, and Portfolio Probability Matrix!
The (Painful) Migration of Financial Planning Data
Having participated in both performance reporting and CRM migrations, it remains remarkable to me that only two-thirds of the typical advisor technology stack is “portable” from one solution to the other. Sure, in a CRM conversion, “ported” data must still be massaged once it finds its way into its new home, and there is significant effort required to map fields in one CRM to another. But when it comes to financial planning software, the migration is considerably clunkier.
Ultimately, there are only two ways advisory firms can migrate data from one planning software to another with today’s financial planning software. You can either pay someone else to manually migrate the data (which assumes you can find someone to do this in the first place!), or you can rebuild each plan manually yourself (or as a firm), one client at a time, into the new planning software. In other words, the only choices are a lot of manual labor, or a lot of manual labor!
In the case of paying someone from the outside to do the manual conversion, the options are incredibly limited. In fact, most tech consultants (at least the ones I’ve spoken with) don’t even offer this as a service anymore, and only did it to begin with when they launched and were starving for business (not dissimilar from advisors working with anyone early in their careers, to simply help keep the lights on!), or continue to do this only on a one-off basis if they are deeply embedded with a client and the migration of data was preventing the client from executing on a strategy they were collectively embarking on. This is largely because the business of simply migrating data is such a low margin, labor-intensive, and fairly high-stress business (but one that will hopefully become easier in the future as integrations at the very least minimize the amount of data that has to be ported!).
In some cases, the new planning software provider will itself take on the task of helping with the manual migration of data. But as far as we’re aware, the only planning software company that actually offers this iseMoney, and even their process isn’t very seamless, as it still requires the advisor to basically fill out fact finders for ALL clients that they eventually will rebuild into plans for you. In other words, the advisor still has to manually re-create every client scenario… eMoney will at best just help then re-enter that manually created data into their software. Additionally, the challenge is really that an outside party knows nothing about the client they’re migrating data for, which virtually guarantees that the entire process will be an ongoing (and potentially seemingly endless) loop of inefficient back-and-forth communications to get inevitable data questions answered (e.g., “This field doesn’t exist in the new solution, how do you want us to handle this?”).
In the end, we decided to manually transition over 300 financial plans on our own, for two primary reasons. First, we didn’t feel like any of the limited outside parties would be very efficient (i.e., cost-effective), or accurate, given their lack of insight into each client situation. Most importantly, however, we viewed the data transition as a critical training opportunity for advisors and client service reps—because what better way to learn how to use new planning software, than to build out over 300 financial plans from scratch in three months!
CREATING AN INTERNAL FINANCIAL PLANNING CONVERSION TEAM
The first critical step to conversion success is simply setting up a clearly defined task-force (serving as a project-management team) that will ultimately own the planning and execution of the transition. This project management group for us included (myself), an operations lead, a client service rep, and an intern, all with the end-goal of successfully transitioning all financial plans from our old software to our new software in three months (we picked summer months, because they tend to be a little quieter with respect to the number of client meetings being scheduled).
Once our conversion team was built, we spent considerable time working to gamify the process, and to create clear expectations around our collective goal, as well as a clear mechanism for tracking progress in real-time over the three-month conversion cycle that would allow us to reallocate support resources to those who needed it most. This mechanism was built largely off the book, The Four Disciplines of Execution, and our tracking sheet can be seen below. We believe it was likely one of, if not the most, critical aspects of our successful conversion.
After a month of planning, it was off to the races on June 1, with each advisor committing to a full rebuild of six financial plans per month throughout the summer, which we found proved to be an incredibly valuable training ground (discussed further below) for advisors to learn the new software solution from scratch. For all other plans, we had Client Service Reps (CSRs) and an intern work tirelessly to manually migrate all plan data into eMoney (coordinating with advisors when questions arose) to help with a large chunk of the time-consuming data entry.
Throughout the entire conversion process, we used a process checklist cheat sheet to help outline the critical steps necessary to achieve an efficient and accurate transition of data, while also being able to track in real-time our team’s progress. As part of this process, we also required that advisors validate plans before they could be officially completed, so while CSRs and interns helped do much of the heavy lifting when it came to data entry, the advisor, with his/her intimate knowledge of the client, still had to go back and validate the data to ensure the new plan’s data and ultimately the results looked accurate relative to the prior solution. In addition, this validation process proved extremely helpful for troubleshooting plans that had dramatically different results, which could have been due to incorrect data entry, a missing piece of information, or even simply because the calculation methodology and assumptions differed (see below for more).
New Planning Software: Not Necessarily Better or Worse, But Definitely Different
We currently live in the golden age of advisor fintech, and yet with that comes an overwhelming number of options. And in the case of most software for advisors, it’s important to recognize that broadly speaking, solutions in a category aren’t necessarily inherently good or bad, but rather just different.
In the case of financial planning software, the most visible differences are the user experience for the client or features like offering account aggregation (or not), but ultimately, it’s the differences that exist under the surface level that can have the biggest hidden impact on the advice we give to clients! This stems from the fact that different planning solutions all have different underlying calculation engines, use and apply assumptions differently, and therefore may end out with different conclusions based on how “success” is calculated.
With these differences, it’s critically important to truly understand how planning solutions differ in their philosophy, calculation methodology, ability to customize assumptions, and what the default underlying assumptions are, before making the final decision to switch. In the end, however, you won’t likely really know the true impact until you start rebuilding your plans in the new solution. Sure, most advisors will (and should) try comparing a couple clients in the new solution while using a free trial to kick the tires, but until you really get into the nitty-gritty, it’s tough to truly grasp how the differences—again, neither good nor bad—will impact a clients’ results on a firmwide basis. What follows is a breakdown of some of the major (and minor) differences that we experienced when switching between the industry’s two leading solutions: MoneyGuidePro and eMoney.
Differences Between MoneyGuidePro and eMoney Advisor
The first difference to be sensitive to when it comes to financial planning software is that different tools can differ dramatically in their philosophical approach to planning.
On the one hand, MoneyGuidePro, Advizr, RightCapital, and many others take a more simplified (simplified should not be construed as less accurate) goals-based approach to planning, whereas eMoney and NaviPlan take a more robust cash-flow based approach. The goals-based approach can be simpler and more efficient when it comes to planning with clients, because it generally doesn’t require you (or the client) to pinpoint every dollar they spend now and well into the future. Instead, you and the client can simply state how much a client plans to save per year (regardless of income or expenses) towards their goals, the cost of those goals, and the resources available to meet them, to project the outcome. On the flip side, cash-flow based solutions require considerably more data to properly calculate results.
This transition from goals-based to more robust cash-flow based planning created challenges when it came to converting plans properly, as in some cases we didn’t have the additional data required of a cash flow-based planning solution like eMoney (i.e. up-to-date monthly expenditures), which were necessary to generate any kind of legitimate plan.
Additionally, the philosophical change brought to light the “Year-End Savings” setting in eMoney. In short, once you enter a client’s income, their annual expenses, their annual savings amounts, and the system estimates projected tax figures, there will either be a surplus or shortfall of money at the end of each year the plan is run for. In the case of goal-based planning solutions, year-in and year-out cash flow during accumulation years doesn’t matter, as it simply asks you to tell it (generally speaking) how much you plan to save, and the software doesn’t much care what income you use to do it with. When it comes to eMoney’s cash-flow-based planning, however, that end-of-year surplus or shortfall during accumulation years must be dealt with, and it can be done in one of two ways. The software can either assume it is saved/invested, or that the money simply disappears (more akin to the implicit assumption of goals-based planning software). And as you can imagine, the difference between the two can have a DRAMATIC impact on the client’s successful outcomes.
To hit home the point, below is a comparison of one affluent couple using the exact same data in eMoney, where they earn $350,000/year and are known to be saving $28,000, but by changing the “Year-End Savings” setting from “Spend 100%” of excess money at the end of each year to “Save 100%” of those dollars the results differ dramatically. Yes, you read that right: it took them from 60% probability of success to 77%. The dramatic change in results makes sense when considering that the first scenario has the client spending $322,000 per year (includes taxes), whereas the “Save” scenario has them spending $17,000 less and instead saves that money (on top of the already-stated $28,000/year of savings).
Note: The blue highlighted row signifies a lower expense level for the year, because that money is being defaulted to “saved.”
In the end, we defaulted to having the system effectively spend any excess cash at the end of the year, as we figured if the client can’t account for the money, it’s unlikely they are saving it. This also proved to be a valuable new aspect of our planning process, as it allowed us to show on the annual cash flow breakdown how much money was essentially unaccounted for. The conversation went something like, “Mr. and Mrs. Client, you make $150,000 a year, save $30,000, pay tax on $30,000, and spend $75,000, which leaves you with about $15,000 unaccounted for. Let’s spend our next 12-months focusing on trying to account for where those dollars are going, to ensure they are being used most efficiently. If it turns up that the money is being saved then it will only serve to help improve the odds of successfully accomplishing your goals; and if not, it will be an opportunity to improve how you budget and manage your cash flow!”
Additionally, one of the other major differences between the two systems is how they estimate a plan’s annual tax liability, and how much flexibility exists from an advisor perspective to edit those assumptions. In the case of MoneyGuidePro, their “design philosophy focuses on reasonable estimates” as they “do not believe it is possible to accurately predict certain tax assumptions for 20, 30, or 40” into the future. Thus, in addition to accounting for capital gains. On the other hand, eMoney (again being cash flow based) attempts to dive deeper into the weeds on taxes, projecting out a full 1040, and even going so far as to account for the fact that if the client has a mortgage some portion of that interest is deductible (eMoney also allows you to simply apply a flat tax rate). Neither one of these methodologies is inherently good or bad, and we could likely spend the remainder of this post debating the validity of each approach; the point, though, is that they’re different, which can ultimately lead to dramatically different results for the “same” plan! In one case, we had with a couple million in qualified assets and roughly a million in taxable assets, that had their tax bill differ by well over $300,000 over the course of their 30-year plan between the two planning tools, which not surprisingly had a dramatic impact on the plan’s results! Now to be clear, part of the large discrepancy was that the client earns over $250,000 per year and is about five years from retirement, which means MoneyGuidePro, being cash-flow based, doesn’t factor in employment income and subsequently the appropriate taxes on that income during working years, whereas eMoney does. Additionally, differences surrounding long-term gains, Social Security taxation, and other granular differences played a role once the client was in retirement and both systems effectively both become cash-flow based (as MoneyGuidePro does get more granular in retirement).
The third critical difference—and the one that seemed to have the biggest impact on skewing client’s results from one solution to the other—was the difference in Monte Carlo engines, which is ultimately driven by the underlying investment assumptions! In the case of MoneyGuidePro, the system defaults to roughly standard asset classes (including the ability to use both historical and either system default or custom-created projected assumptions), while also allowing advisors to customize additional asset classes and assign them specific returns, standard deviations, and even correlation coefficients. eMoney, on the other hand, allows you to build asset classes (while also having roughly 25 default asset classes “out of the box”) using their roughly 50 underlying indices (data provided by FactSet and Ibbotson Associates). Unlike MoneyGuidePro, however, eMoney allows you to set both the average return for an index (and ultimately an asset class built with that index), as well as the geometric average
One of the tricky downsides we learned the hard way, though, that can have an unintended big impact on the variance of results, is that eMoney does not allow you to customize (or even view) the correlation coefficients assigned to an asset class matrix, nor even get access to the underlying coefficients (they claim it’s proprietary!). This blind spot created challenges for us as we tried to reconcile why and how client’s results differed from one system to another, with the eventual goal of being able to explain the variance to a client on a high level to ensure that they were comfortable with the new solution in the first place! I was ultimately able to work with an eMoney planning analyst to have him review our MoneyGuidePro correlation coefficients, and then provide commentary on how eMoney’s assumptions differed. For example, in speaking with the eMoney planning analyst, he was able to inform us that eMoney generally had higher correlations between equities, with more instances of negative correlation between stock and bond indices in eMoney, than MGP. Again, not good or bad, but definitely different (and admittedly a little into the weeds!).
In the end, both systems do a tremendous job of allowing advisors to provide comprehensive planning to clients, and ultimately the process of changing from MGP to eMoney or vice-versa is more a process of recalibration than recognizing one system as right or wrong. In the spirit of helping advisors reconcile all the major differences between the two solutions, the following is a list of additional aspects of the two systems that varied significantly in our experience and can ultimately impact results—making them good to be at the very least cognizant of when making the leap!
The Challenge of Teaching Old and New Advisors New (Financial Planning Software) Tricks
As noted above, changing CRMs and performance reporting software is a difficult undertaking, but one that largely falls on the shoulders of a dedicated operations team tasked with rebuilding processes into a new CRM, or porting and validating decades worth of transactions into a new performance reporting solution. Advisors largely just need to learn how to log into a new software website, and how to navigate around enough to enter notes into the new CRM or to hit “run” to pull up various performance reports for a client. Both of which tend to be done in the safe confines of an advisor’s office, where a client can’t see our initial ineptitude as we learn the software and scramble around trying to change the time-period from year-to-date to quarter-to-date.
On the flip side, however, is financial planning software which is increasingly shifting to front and center in the client meeting as an interactive platform for exploring various planning strategies and the feasibility of client goals. This makes for wonderfully engaging meetings, especially relative to the textbook-thick financial plans we, as an industry, used to produce. But it makes it critical that we as advisors are well trained and dynamic enough to navigate the planning software adeptly in front of a client in the first place! The consequences of not being able to model out various scenarios in real-time at best might simply lead to an awkward pause while one clicks around trying to figure out how to model delaying Social Security and boost pre-retirement savings, but at worst could jeopardize the perceived competence of us as advisors and undermine the client’s trust in our planning recommendations. Which means the unfortunate reality is that while we could be the most knowledgeable advisors in the business, if we are unable to effectively use the “tool” of our craft, we threaten our very own credibility, no different than a doctor struggling to use the latest and greatest x-ray machine might cause a patient to question a doctor’s abilities to diagnose one’s ailment.
All of this is to say that training is a remarkably important aspect of any transition, especially when it comes to financial planning software, and one that must not be overlooked. This is precisely one of the reasons we did not pay an outside consultant to help port data and required advisors to do some of the heavy lifting. The actual rebuilding of six plans per month per advisor over the course of the summer meant that each advisor had to effectively build out eighteen financial plans in 3 months as a means of learning the basics of the software. This was largely step-number-one in our training efforts, as our advisors needed to walk (enter client data) before they could run (know how to dynamically use the software in front of a client)!
Once we wrapped up the data migration over the summer and heading into Labor Day weekend, we set sights on officially turning off our MoneyGuidePro license by December 31. This allowed us to continue to reference MoneyGuidePro in a pinch as we began using eMoney with clients but gave us a hard deadline and a certain level of urgency behind actually learning how to use eMoney! As we headed into the fall months, we set a three-month target of 80-hours per advisor of eMoney “training,” which on the surface sounds like an unconscionable amount of training, but we loosely defined training to include any time spent in group or 1-on-1 training, time spent building financial plans (what better way to learn than to build!), or even time spent in meetings with clients engaging with the new software. This broke down to roughly five hours per week of eMoney training (or at least using the software in practice as a means of training) in our effort to become great at using our shiny new tool.
Like our data migration efforts, we also crafted an accountability scorecard to help gamify the process of training, as well as weekly advisor-led group and 1-on-1 training sessions. The scorecard looked at two simple numbers: how many hours have you trained (input), and how would you rate your abilities in using eMoney (output). This allowed us to track our progress towards our goal of being great with eMoney, while controlling for the key activity that would eventually allow us to reach it!
When it came to conducting internal training, one of the other advantages we had in kicking off our training efforts is that I had personally been using eMoney in somewhat of a beta fashion for over a year as the planning solution of choice for our next-gen efforts through Lifewise. When we launched our intrapreneurial venture of serving younger clients, one of the goals of it was to create a testing grounds of sorts for trying out innovative new tech solutions and in this case, we wanted to explore eMoney more broadly but didn’t want to make a huge investment firmwide in a solution that might not end up being a good fit. By launching it with our next-gen efforts (eMoney works especially great with young accumulator clients trying to master their cash flow!), it gave me a year’s head start on learning the nuances of the system that could then be transferred to our larger group of advisors as we made the formal switch into our primary business. This proved to be incredibly valuable in our training efforts, as even though eMoney and MoneyGuidePro have no shortage of recorded training videos, they tend to be fairly dry (not a great recipe for getting advisors to watch!), and they aren’t dynamic enough to answer real-life questions about client scenarios that an advisor may have just run across in a prior meeting. Being able to then serve as the in-house trainer proved to be an invaluable resource for crafting our own training, which we even turned into a day-long training effort around specific topics unique to our advisor’s needs, instead of spending the money to travel to an eMoney-led training session (although we did have them call in to conduct a couple deep dives on more sophisticated planning topics as part of our internal training day).
One of the last aspects of out training efforts was simply to help advisors self-assess their eMoney abilities, and where they should be focusing their efforts on improving. Outside of just asking advisors to grade themselves on a weekly basis on a 1-5 scale, we didn’t have a great way to score our abilities until the end of our training efforts, when we developed a simple self-assessment exercise to help advisors gauge if they really were a 4 out of 5, or just a 2. The simple framework seen below allowed advisors to actually gauge their level of competence when it came time to use eMoney.
Making the Client Facing Transition to New Financial Planning Software
The last big piece of the conversion puzzle is ultimately rolling out the new planning software to clients once all data has been migrated and advisors feel confident utilizing the new solution. While this aspect of the conversion did not require nearly the heavy lifting that came with data migration, nor the challenges of training advisors, it proved to be the last critical step in making the switch a positive in the eyes of those who matter most—the clients!
When it came to rolling out eMoney to clients there were four primary areas we focused on: (1) communicating the enhanced benefits of eMoney to clients, (2) helping them understand the necessary differences, (3) making sure advisors were capable of using the software in front of clients, and (4) getting clients set up with their fancy new eMoney client portal!
In working to educate clients on the benefits of the transition we used email newsletters, client agendas, good old-fashioned phone calls, and in-person client meetings, all to reiterate the value of the new solution. Talking points included outlining the added robustness of the cash-flow based planning software, deeper tax planning abilities, more capable estate planning functionality, and a sleek client dashboard to help streamline the data collection process, as well as giving the client constant access to their aggregated spending, investments, reporting, etc. We were also careful to communicate that this was not an indictment on our previous solution being incapable (and ultimately us for using it!), but rather a natural progression in our industry as tech evolves and our business evolves—we are staying proactive in using the best solutions to serve our clients!
Ultimately, the largest hurdle in rolling out new planning software to clients is what to do when a client’s results differ dramatically from one solution to the other. In our case, we tracked the probability of “success” difference between the current scenarios in both solutions so we could troubleshoot results that differed greatly. In the end, we found there to be a roughly 2.5% average difference in Monte Carlo results (with eMoney having slightly higher results; keep in mind this could vary in your firm based on the underlying assumption you use), which is actually pretty good, but this is only after we got all the underlying assumptions adjusted to mirror our old solution as much possible. However, even with a muted difference “on average” we found that 40% of plans had a difference of more than 10% in their probability of success! With a roughly equal number of plans being better off in eMoney than in MoneyGuidePro, and vice-versa.
Now admittedly, some of the differences can be attributed to data integrity, or lacking certain cash-flow based data points in eMoney that weren’t required in MoneyGuidePro. However, the ultimate point is that changing planning software is more than just adding sexy data aggregation functionality, cleaner aesthetics, or more dynamic in-meeting functionality, but requires keeping a careful eye on the difference in results and ultimately how that will be communicated to clients. It also required us to “re-calibrate” our belief of what “success” was defined as. For example, in one software you might require clients to have an 80% probability of success but find that your new solution tends to skew results more positively, so you may need to adjust your version of success to 85% being the new hurdle rate for “success.”
In wrapping up our client rollout we focused on ensuring advisors were comfortable utilizing eMoney in front of clients as noted above in the training section, which included being able to interactively demonstrate various scenarios and planning strategies, as well helping clients get their portals set up (one of the big selling points of the new software!). This was largely done in meetings or over the phone to help walk them through how to get their portals set up, as well as in meetings drawing parallels to the old software (i.e. the Goal Planner section is like MGP’s Play Zone, etc.) to help familiarize and get clients comfortable with the new solution.
The Financial Impact of Changing Financial Planning Software
In wrapping up, one of the other critical aspects of changing planning software is simply the hard dollar cost, both in the form of any data migration costs, as well as any financial incentives for the team that are used to motivate them to reach your firm’s conversion goals (e.g., we did Amazon gift cards drawing for those who completed their 6-plans per month, but one-time bonuses could also factor in), and ultimately the ongoing price difference between solutions. The good news for advisors is that while planning software costs can differ widely relative to each other (for example, eMoney costs nearly 3x as much as MoneyGuidePro), the total cost of planning solutions remains relatively small when compared to many of the industry’s performance reporting solutions (which is largely tied to the fact that performance reporting solutions remain a direct revenue-generating cost of the business, rather than being viewed as an overhead cost like financial planning software—at least for now!).
When it comes to pricing, I will throw out the disclosure that pricing, pricing structure, and ultimately what you can negotiate seem to change frequently with vendors, so the information below could be dated by the time you read this! Nonetheless, when it came to eMoney they offer two options: (1) Individual Pricing or (2) RIA office pricing. Individual pricing allows (and in fact requires) each advisor to have their own independent license and access to the software. The latter allows you to share clients across advisors in the firm, brand consistently, use global investment assumptions, etc., but bases pricing off the total number of advisors registered on your ADV. While this may increase the number of licenses you likely need to buy, eMoney does allow you to mix and match the licenses across their three solutions, which include eMx Select ($1,944/year/user), eMx ($2,592/year/user), and eMx pro ($3,888/year/user). This allowed us to ensure support staff (i.e. client service reps or paraplanner) had full data entry functionality, ability to help clients with account aggregation connections, (with eMx Select), etc., but that way we didn’t need to pay for full-blown licenses with client facing and planning functionality (i.e. eMx Pro) if it was unnecessary for a particular staff member.
On the flipside, MoneyGuidePro charges $1,295/year/user, which is a steep discount to what eMoney’s comparable solution costs, providing advisors with tremendous value for what is the #1 used financial planning software across the industry according to Financial Planning Magazine’s annual tech survey. Ultimately, we viewed the additional cost as an investment in our business, and one that we believed would make us more efficient, provide additional value to clients in the form of a robust client portal that functions as a full-scale Personal Financial Management solution for clients, as well as allowing us to go deeper into planning with (what we believed) is a more robust solution.
In the end, however, it wasn’t the actual decision of which software solution to pick (and its licensing cost) that was the real challenge, as you frankly can’t go wrong with MoneyGuidePro or eMoney (or many of the other great solutions available!); instead it was the unenviable challenge of switching, and migrating client data, that became the true barrier (and cost) to changing, and one that we’re happy to have behind us!
So what do you think? What additional challenges have you found in changing financial planning software solutions? Have any advisors had success using a third-party to “port” data? Has the thought of migrating all that data held you back from making the switch? Please share your thoughts in the comments below!
Yesterday, the 5th Circuit Court of Appeals dealt a major blow to the Department of Labor’s fiduciary rule, by not only ruling in favor of the financial product industry that the Department of Labor “overreached” by requiring brokers and insurance agents to be subject to a fiduciary standard, but declaring that the entire DoL fiduciary rule should be vacated, ironically by relying on statements from the industry that brokers and insurance agents should NOT be regulated as advisors by convincing the judge that with “one-time IRA rollover or annuity transactions… it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers.”
In other words, the industry was able to convince the courts that its “advisors” aren’t actually serving as trusted advisors, and therefore shouldn’t be regulated as such! The Appeals ruling overturned a prior Texas court’s ruling in favor of the fiduciary rule, but notably came within just days of a ruling from the 10th Circuit Court of Appeals in favor of the fiduciary rule on Tuesday. Which means the decision from the 5th Circuit to vacate the rule does not mean it will automatically and immediately be voided. Instead, there is a rising likelihood that the DoL fiduciary rule may actually end up going all the way to the Supreme Court to decide which Appeals court ruling should hold. In the meantime, though, all eyes are on the Department of Labor and how it will proceed – especially since President Trump had already directed the DoL to reconsider the rule.
The DoL could ask the 5th Circuit decision to be re-reviewed by the entire Appeals court (to defend its rule), or take the matter to the Supreme Court (to resolve the differences between the Appeals Courts), or may ask for a stay of the latest ruling to “hit the pause button” while it resolves all the court differences. Alternatively, the DoL might simply let the 5th Circuit Court decision to stand, and use it as an excuse to start over on a new rule process, ostensibly in coordination with the SEC’s own fiduciary rule that is anticipated to be coming soon (as regardless of the DoL outcome, the fiduciary duty is now in the public and media eye).
Being a financial advisor is a high-stakes stressful job. Not only can it be emotionally exhausting to be the supporting pillar for our clients during their times of emotional stress, but for most of us, it’s also our livelihood, and our family’s livelihood, and our employees’ livelihood when they rely on the business for their jobs… and of course, we may be responsible for dozens or hundreds of our clients and their life savings. Which means being a financial advisor comes with its own emotional rollercoaster as an advisor – from the wonderful feelings that come from times of great business and client success, to the pressure and stress that come from more difficult times. Which raises an important question: Where do you as a financial advisor turn for support to deal with your own emotional stress of being a financial advisor?
In this week’s discussion, we discuss where financial advisors can turn to deal with the emotional stress of being a financial advisor, and why it is so important to build a social support system for yourself that may include different “tiers” of support, since you will likely need to turn to different people for help with different problems and needs!
For most advisors, our first support system for the ups and downs of the business is our support system for all the ups and downs of life: our spouse, other family members, and/or our close friends. These people are close to us and we can trust that they want what’s best for us, so they are great for support – whether it’s just someone to vent to or a shoulder to cry on, or to give us candid and sometimes critical feedback when we need it. Of course, the biggest caveat to going to friends and family as your support system for the business is that they don’t necessarily knowanything about the actual advisory business. So while they may be able to provide some basic emotional support – which may be crucial during tough times – they often won’t be able to provide the type of advice that may be needed to truly change an advisor’s situation for the better.
As a result, the second tier of support for financial advisors is peers and colleagues in the business. Much like how support systems evolve around people facing similar problems in many areas (e.g., AA for those suffering from alcoholism), sometimes the best people to go to for support are yourpeers who have similar experiences. For many advisors, these are co-workers in their office, but particularly for those working under an independent broker-dealer without a large local branch, or starting an independent RIA (which may not even have an office), this support system can be formed through friends outside the firm but in the advisor industry. The benefit of this support system is that these advisors can better commiserate with you on the challenges you face, and give even better context for what’s really a big deal, and what’s not. The downside to this support system, however, is that sometimes the relationships may not be intimate enough for you to truly turn to when you need help (e.g., people you only communicate with occasionally on message boards), and other times they may not be people you can openly communicate with regarding certain issues you may be facing (e.g., you may not feel comfortable discussing career opportunities with your manager or at an association meeting).
The third tier of an advisor support system – the study group (or “mastermind” group, since it’s not really about “studying” but finding experienced peers) – can help address some of these prior issues. Due to the smaller and more intimate setting of study groups, you can form deeper trust and make yourself vulnerable to the people in the group. Additionally, since study groups are formed by people far enough removed from your own situation that they won’t have conflicts of interest in how they advise you (unlike an employer or co-workers), you can receive more objective feedback. The challenge for many advisors in this tier is forming a study group in the first place. But fortunately, the process isn’t that complex (find a half a dozen advisors or so that you want to trust and get to know better, invite them to be in a study group, start meeting regularly, and form those connections!), but it does take time and effort.
All of that being said, sometimes people simply do not prefer to interact in a group setting when dealing with certain issues, which brings us to the fourth tier of an advisor support system: mentors and executive coaches. Finding a mentor means finding someone who has at least a little more experience than you, and hopefully a little more wisdom and perspective from that experience, that you can go to with your problems. Mentors can provide great support, but the challenge here is that not everyone will be a great mentor (even if they are a great advisor), and sometimes it’s simply too hard to find a great mentor. As a result, some advisors will decide to hire an executive coach. Notably, this is not a consultant for technical business issues, but instead, someone who can help you figure out what you want from your business, hold you accountable when needed, and sometimes just provide a bit of emotional support. Of course, coaches aren’t cheap (especially for financial advisors), but a skilled coach can have a really powerful impact that more than recovers their cost.
The bottom line, though, is just to understand that you need to havesome kind of personal support system, to deal with the inevitable ups and downs that come from being a business owner in general, and a financial advisor in particular. We’re all human, so we need to keep an eye on our own mental health. So make sure you have the support system you need. And if you don’t… go find someone!
First Tier Advisor Support System: Spouse & Close Friends
For most advisors, your first support system for all the ups and downs of the business is really the support system you have for all the ups and downs in your life – your spouse or significant other or your close friends. I mean, after all, we’re social animals. We rely on our relationships with the herd for support. When we have stress in our lives, we look to destress by spending time with friends and family. And spouses, in particular, are for many people our deepest confidants and our biggest supporters. Now for others, I know, it’s a close group of friends or maybe a particular friend that you go to when you need to vent about something that’s frustrating in your personal life or your business and get some support.
Of course, the biggest caveat to going to friends and family as support in your system for the business is just that they don’t necessarily know anything about the business. So you may get a good shoulder to cry on, you may get someone to vent to, or just someone that gives you an outside perspective that maybe you’re blowing a problem out of proportion (because we all tend to do that sometimes). And the great thing about having a good relationship with a spouse or other family or friends is that you’ve got someone to turn to with a trusting relationship that lets them say, you know, either, “You need to get over yourself,” or, “You need to stop freaking out. The problem isn’t that bad.” Or to commiserate with you and say, “Yeah, that’s pretty rough. You want to talk about it?”
And it’s important because sometimes that business slowdown or the loss of a client, or the bad thing that happens at work, sometimes it isn’t that bad and you need an outside perspective. And sometimes it is that bad and you need spouse, family, friends… someone to provide emotional support that you can deal with it. For me, for most of my life, it’s been talking to my father, a good friend, and a business partner. You know, those are my three close people for finding my support when I’ve got to talk through a challenge.
Second Tier Advisor Support System: Peers & Associations
As I noted earlier, one of the big problems with relying on friends and family as your support system as an advisor is that they are usually not advisors as well. And so while they can provide some support, they don’t always have the context sometimes to know what really is a big deal or not.
And it’s harder for them to be empathetic for situations we face
as advisors if they’ve never actually been through it themselves, which is why you see so many support groups out there for people to get support from other people with similar problems. Right? Those who are struggling with alcohol go to Alcoholics Anonymous to get support from other people struggling to overcome alcoholism. Those who are struggling with a family member with Alzheimer’s go to a support group for others struggling with family members with Alzheimer’s. Now, the support we usually need as advisors doesn’t necessarily escalate to the level of dealing with family with Alzheimer’s or trying to beat alcoholism. But the point remains, sometimes the best people to go to for support are your peers who have similar experiences.
So building some relationship with friends in the advisory business who can better commiserate with you on the challenges and give better context for what’s really a big deal or what’s not may be more helpful. For many advisors, these relationships come from the coworkers in our office. If you’re in a larger advisory firm, that can be a large RIA or a wirehouse, there’s often a lot of other advisors who are around as coworkers. And even with a lot of independent broker-dealers that are in a branch with a lot of other advisors, there may be peers and colleagues there that you can connect with and talk to when you’re struggling with something in the business.
For the more independent advisors though, those who start their own independent practices under a broker-dealer without being in a big branch and, especially, those of you who start as an independent RIA, you don’t necessarily have colleagues around because you’re on your own as an independent. Heck, if you’re starting up, you might not even be in a formal office setting. You may be working from home all by yourself.
And for those in this situation, this is actually one of the reasons why I think it’s so valuable to join advisor networks or membership associations for advisors. So groups like Garrett Planning Network, Alliance of Comprehensive Planners, our own XY Planning Network, thrive in part because it’s a community of advisors, almost all of whom are independent, often solo advisors, who can connect with other advisors in similar situations, talk through the challenges you’re facing, and get a little emotional support sometimes.
Membership associations like Financial Planning Association (FPA) orNAPFA are similar. NAPFA has not only a national community with forums but helps facilitate local meetups in a lot of bigger metropolitan areas. And the FPA has almost 90 chapters across the whole country, most of which hold regular local meetings that bring out dozens or hundreds of advisors at a time. Younger advisors even have subcommunities under FPA and NAPFA (either FPA NexGen community or NAPFA Genesis community) specifically to help support younger advisors with their own unique set of problems that they want to commiserate with. All of which are opportunities to form a deeper support system with other advisors who can better commiserate with the challenge of being an advisor and the ups and downs that go along with it, and maybe lend a little bit of emotional support when you need it.
Third Tier Advisor Support System: Study Group
Unfortunately, though, for most advisors, just being in an office with other advisors or in a network or member association with other advisors isn’t enough to really get the support you need when the tough times come. Because the reality is that you only get to see these folks in the hallway, at the water cooler, maybe occasionally at a chapter meeting every few months, in an online forum where you’re maybe typing messages but not talking real-time, and it makes the support value somewhat limited. It’s still not the same as either having a face-to-face meeting with someone to really feel more connected or at least a face-to-face video meeting or a phone call, just to actually talk live, real-time.
Which is the reason why I’m such a huge advocate, as well, of having a study group. Sometimes they’re also called “mastermind groups”, because the idea is you’re not really with them to study (the way you might have had a study group in college when you were preparing for a big test), the point is to have a group of peers and colleagues who can challenge you, hold you accountable for improving yourself and your business, and be a support system for when you need a little lift.
Personally, I’ve been involved in a support group since very early in my career… Or, I should say, a study group who is my support group. My study group actually got formed in the early days of NexGen (so going to the NexGen conference back in 2006), when most of us were in our late 20s to 30s. We were almost all employee advisors at mid to large-sized independent firms where we didn’t actually have much of a support system for ourselves outside of the four walls of the firm that we were in. Which is, I think, actually not the best place always to get emotional support, when the problem you’re dealing with is frustration with the firm you’re working for, right? Because even in a good firm, everyone gets frustrated from time to time. But if your coworker is the one you’re aggravated with, that’s kind of hard to talk to your coworkers about. So our study group formed back then as, you know, a group that we could bounce things off of. We keep a private mailing list for ourselves. And there are still 11 of us meeting in person twice a year, almost 12 years later now.
And a lot of organizations actually help to facilitate the formation of study groups. NAPFA creates what they call “local mix groups.” XY Planning Network puts all of our new advisors who are launching firms into what we call “launcher groups” of fellow advisors going through a similar stage of the launch process who can be your friends and help support you. Because the key distinction here is that the smaller and more committed study group, the deeper trust you can form. You can make yourself a little bit more vulnerable, which is the real key to getting support. If you’re not comfortable in wanting to make yourself vulnerable and actually talk about the problems you’re having, and where you’re struggling and where you’re hurting, you can’t get the feedback and support that you need.
Study groups work because the smaller and more intimate setting makes it easier to make yourself vulnerable so that you can get the help and interaction that you need. That’s how it works. So if you’re not in a study group and don’t feel like you have the close group of advisor friends and colleagues that you can go to with real problems, find one. Make one. We have a guide to it on Nerd’s Eye View that you can look up. The process isn’t that complex. Find half a dozen advisors or so that you want to trust and get to know better, invite them into a study group, start meeting regularly, and start building those connections. There are lots of even different formats about how you can structure a study group. Some meet regularly in person, some don’t. Some like to do monthly calls.
I know a few that do weekly video calls for an hour every Monday where every week, a different person is in the hot seat to share their successes and struggles for the week, bring one challenge to the group they need help with. And then they rotate around so everybody gets a turn going through that process. So you may have to take a little bit of it into your own hands to make it happen. Study groups do take at least some effort from someone to be a point person to form them. But they’re a really powerful support system. The other advisors in my study group have become some of my closest friends in the industry and the ones that I still take most of my problems to when I need an ear or a voice of support.
So look even to your local advisor community. Who can you come together with and say, “Hey, you know, I know we see each other sometimes in the chapter, but I’m thinking about forming a study group just to get into this stuff a little bit deeper on the business and practice management, and just to be there for each other. Do you want to be involved?”
Fourth Tier Advisor Support System: Mentor or Executive Coach [Time – 12:27]
All that being said, I recognize not everyone likes to interact with others in, we’ll call it a “group setting,” even when it’s a relatively small, closer, and more intimate study group environment. For some, the most comfortable way to connect is one to one, which to me means finding a mentor. So for those who want to learn more about mentoring and forming a mentor relationship, I highly recommend the book, “The Heart of Mentoring,” by Dave Stoddard.
It does a really good job of painting a picture of what mentoring is all about, including some good ideas about how to identify and find and reach out to a mentor. But the essence of it is pretty straightforward. Finding a mentor means finding someone who has at least a little more experience than you, hopefully, a little more wisdom and perspective that comes from that experience, that you can go to with your problems and get some support when you need support and feedback when you need feedback and guidance about when a problem is really a problem, and when it’s a slump you need to be patient with and work through. And maybe, occasionally, telling you even to suck it up and deal with it when the problem arises because sometimes that’s what we need to hear. But the good news of mentors is that you can form a very close relationship and get some great support.
Now, ironically, the bad news is that some people just have trouble finding mentors. And unfortunately, not everyone turns out to be a good mentor. Even some people who are otherwise great advisors in what they do for clients doesn’t necessarily mean that they are good at being a mentor for other advisors. And so for some, that’s why they ultimately decide instead to hire it professionally and get an executive coach, to get someone who actually has training and experience in playing that role of coach and mentor and supporter.
I should note that I’m not talking about a consultant here. This isn’t someone to come in and give you tips on your business or how to sell more or do more business development or pick better technology (although sometimes changes to those things come as a part of your coaching relationship).
This is about finding someone who just can help you figure out better what you want for your business, help you be accountable to yourself and what you need to do, and sometimes when you need it, just to be a little bit of emotional support when you need some support. Frankly, we could have a whole OfficeHours or blog post at some point about how to actually find a really good financial advisor coach, and maybe we’ll do that at some point on the blog. But the point is just to recognize that hiring a coach is another option here. It does have a cost unlike most mentors, and coaches aren’t cheap, especially, when it comes to the financial advisory industry. But a skilled coach can have a really powerful impact. Because unlike a mentor or a study group (or friends and family), coaches get trained and have experience in how to help you work through the challenges of your business and persevere through those challenges, while giving you a little bit of support when you need it.
But if there’s one thing that you take away from this discussion, it’s just to understand that you need to have some kind of personal support system to deal with the inevitable ups and downs that come with being a business owner in general, and a financial advisor in particular. From the challenges of growth and business development, managing employees and the business itself, and just the emotional toll sometimes that it takes in working with clients who are stressed and transfer that stress to us. This is hard work and for most of us. It’s our livelihood. And it’s our family’s livelihood, which can be a lot of pressure. It’s our employees’ livelihood if you’ve built up your business and hired them. They rely on you for their jobs. And we maybe are responsible for dozens or hundreds of clients and their life savings.
Being a financial advisor is a high-stakes job. And being a business owner, I think, is actually a higher-stakes job. It just compounds some of the pressure on. So I’m not trying to make you stress, but just to acknowledge that it’s going to be stressful. And it’s okay that it’s stressful, and you don’t have to feel bad that you’re stressed sometimes and want someone to talk to or to vent to, or to have a little emotional support from.
Just please, make sure you have that support system. Whether it’s spouse or family or friends for you… or colleagues or peers in an advisor network or association… or a study group that you join… or a mentor that you find… or an executive coach that you hire. We’re all human and we have to keep an eye on our own mental health, which means that we all need some kind of support system. So make sure you have whatever works for you. And if you don’t, go find someone. And hopefully, the list of options here are helpful with some directions to go.
So what do you think? Is being a financial advisor an inherently stressful role? Does being a business owner compound the stress of being a financial advisor? Who do you turn to when you need help dealing with the stress of your business? Please share your thoughts in the comments below!
The annual requirement of all Americans to pay taxes on their income requires first calculating what their “income” is in the first place. In the context of businesses, the equation of “revenue minus expenses” is fairly straightforward, but for individuals – who are not allowed to deduct “personal” expenses – the process of determining what is, and is not, a deductible expense is more complex.
Fortunately, the basic principle that income should be reduced by expenses associated with that income continues to hold true, and is codified in the form of Internal Revenue Code Section 212, that permits individuals to deduct any expenses associated with the production of income, or the management of such property – including fees for investment advice.
However, the recent Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the ability of individuals to deduct Section 212 expenses, as a part of “temporarily” suspending all miscellaneous itemized deductions through 2025. Even though the reality is that investment expenses subtracted directly from an investment holding – such as the expense ratio of a mutual fund or ETF – remain implicitly a pre-tax payment (as it’s subtracted directly from income before the remainder is distributed to shareholders in the first place).
The end result is that under current law, payments to advisors who are compensated via commissions can be made on a pre-tax basis, but paying advisory fees to clients are not tax deductible… which is especially awkward and ironic given the current legislative and regulatory pushtowards more fee-based advice!
Fortunately, to the extent this is an “unintended consequence” of the TCJA legislation – in which Section 212 deductions for advisory fees were simply caught up amidst dozens of other miscellaneous itemized deductions that were suspended – it’s possible that Congress will ultimately intervene to restore the deduction (and more generally, to restore parity between commission- and fee-based compensation models for advisors).
In the meantime, though, some advisors may even consider switching clients to commission-based accounts for more favorable tax treatment, and larger firms may want to explore institutionalizing their investment models and strategies into a proprietary mutual fund or ETF to preserve pre-tax treatment for clients (by collecting the firm’s advisory fee on a pre-tax basis via the expense ratio of the fund, rather than billed to clients directly). And at a minimum, advisory firms will likely want to maximize billing traditional IRA advisory fees directly to those accounts, where feasible, as a payment from an IRA (or other traditional employer retirement plan) is implicitly “tax-deductible” when it is made from a pre-tax account in the first place.
The bottom line, though, is simply to recognize that, while unintended, the tax treatment of advisory fees is now substantially different than it is for advisors compensated via commissions. And while some workarounds do remain, at least in limited situations, the irony is that tax planning for advisory fees has itself become a compelling tax planning strategy for financial advisors!
Deducting Financial Advisor Fees As Section 212 Expenses
It’s a long-recognized principle of tax law that in the process of taxing income, it’s appropriate to first reduce that income by any expenses that were necessary to produce it. Thus businesses only pay taxes on their “net” income after expenses under IRC Section 162. And the rule applies for individuals as well – while “personal” expenditures are not deductible, IRC Section 212 does allow any individual to deduct expenses not associated with a business as long as they are still directly associated with the production of income.
Specifically, IRC Section 212 states that for individuals:
“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year:
- for the production or collection of income;
- for the management, conservation, or maintenance of property held for the production of income; or
- in connection with the determination, collection, or refund of any tax.”
Thus, investment management fees charged by an RIA (i.e., the classic AUM fee) are deductible as a Section 212 expense (along with subscriptions to investment newsletters and similar publications), along with any service charges for investment platforms (e.g., custodial fees, dividend reinvestment plan fees, under subsection (1) or (2) above), or any other form of “investment counsel” under Treasury Regulation 1.212-1(g). Similarly, tax preparation fees are deductible (under subsection (3)), along with any income tax or estate tax planning advice (as they’re associated with the determination or collection of a tax).
On the other hand, not any/all fees to financial advisors are tax-deductible under IRC Section 212. Because deductions are permitted only for expenses directly associated with the production of income, financial planning fees (outside of the investment management or tax planning components) are not deductible. Similarly, while tax planning advice is deductible (including income and estate tax planning), and tax preparationfees are deductible, the preparation of estate planning documents thatimplement tax strategies (e.g., creating a Will or revocable living trust with a Bypass Trust, or a GST trust) are not deductible (at best, only the “planning” portion of the attorney’s fee would be).
The caveat to deducting Section 212 expenses in recent years, though, washow they are deducted. Specifically, IRC Section 67 required that Section 212 expenses could only be deducted to the extent they, along with any/all other “miscellaneous itemized deductions”, exceed 2% of Adjusted Gross Income (AGI). In turn, IRC Section 55(b)(1)(A)(i) didn’t allow miscellaneous itemized deductions to be deducted, at all, for AMT purposes.
Thus, in practice, Section 212 expenses – including fees for financial advisors – were only deductible to the extent they exceeded 2% of AGI (andthe individual was not subject to AMT). Fortunately, though, given that financial advisors tend to work with fairly “sizable” portfolios, and the median AUM fee on a $1M portfolio is 1%, in practice the 2%-of-AGI threshold was often feasible to achieve, and thus many/most clients wereable to deduct their advisory fees (at least up until they were impacted by AMT).
TCJA 2017 Ends The Deductibility Of Financial Advisor Fees
As a part of the Tax Cuts and Jobs Act (TCJA) of 2017, Congress substantially increased the Standard Deduction, and curtailed a number of itemized deductions… including the elimination of the entire category of miscellaneous itemized deductions subject to the 2%-of-AGI floor. Technically, Section 67 expenses are just “suspended” for 8 years (from 2018 through the end of 2025, when TCJA sunsets) under the new IRC Section 67(g).
Nonetheless, the point remains: with no deduction for any miscellaneous itemized deductions under IRC Section 67 starting in 2018, no Section 212 expenses can be deducted at all… which means individuals lose the ability to deduct any form of financial advisor fees under TCJA (regardless of whether they are subject to the AMT or not!), and all financial advisor fees will be paid with after-tax dollars.
Notably, though, a retirement account can still pay its own advisory fees. Under Treasury Regulation 1.404(a)-3(d), a retirement plan can pay its ownSection 212 expenses without the cost being a deemed contribution to (or taxable distribution from) the retirement account. And since a traditional IRA (or other traditional employer retirement plan) is a pre-tax account, by definition the payment of the advisory fee directly from the account is a pre-tax payment of the financial advisor’s fee!
Example 1. Charlie has a $250,000 traditional IRA that is subject to a 1.2% advisory fee, for a total fee of $3,000 this year. His advisor can either bill the IRA directly to pay the IRA’s advisory fee, or from Charlie’s separate/outside taxable account (which under PLR 201104061 is permissible and will not be treated as a constructive contribution to the account).
Given the tax law changes under TCJA, if Charlie pays the $3,000 advisory fee from his outside account, it will be an entirely after-tax payment, as no portion of the Section 212 expense will be deductible in 2018 and beyond. By contrast, if he pays the fee from his traditional IRA, his $250,000 taxable-in-the-future account will be reduced to $247,000, implicitly reducing his future taxable income by $3,000 and saving $750 in future taxes (assuming a 25% tax rate).
Simply put, the virtue of allowing the traditional IRA to “pay its own way” and cover its traditional IRA advisory fees directly from the account is the ability to pay the advisory fee with pre-tax dollars. Or viewed another way, if Charlie in the above example had waited to spend the $3,000 from the IRA in the future, he would have owed $750 in taxes and only been able to spend $2,250; by paying the advisory fee directly from the IRA, though, he satisfied the entire $3,000 bill with “only” $2,250 of after-tax dollars (whereas it would have cost him all $3,000 if he paid from his taxable account!)!
However, the reality is that IRAs are not the only type of investment vehicle that is able to implicitly pay its own expenses on a pre-tax basis!
The Pre-Tax Payment Of Investment Commissions And Fund Expenses STOP!!
Mutual funds (including Exchange-Traded Funds) are pooled investment vehicles that collectively manage assets in a single pot, gathering up the interest and dividend income of the assets, and granting shares to those who invest into the fund to track their proportional ownership of the income and assets in the fund that are passed through to them, from which expenses of the fund are collectively paid.
The virtue of this arrangement – and the original underpinning of the entire Registered Investment Company structure – is that by pooling dollars together, investors in the fund can more rapidly gain economies of scale in the trading and execution of its investment assets (more so than they could as individual investors trying to buy the same stocks and bonds themselves), even as their proportionate share ownership ensures that they still participate in their respective share of the fund’s returns.
From the tax perspective, though, the additional “good news” about this pooled pass-through arrangement is that mechanically, any internal expenses of the pooled vehicle are subtracted from the income of the fund, before the remainder is distributed through to the underlying shareholders on a pro-rata basis.
Example 2. Jessica invests $1M into a $99M mutual fund that invests in large-cap stocks, in which she now owns 1% of the total $100M of value. Over the next year, the fund generates a 2.5% dividend from its underlying stock holdings (a total of $2.5M in dividends), which at the end of the year will be distributed to shareholders – of which Jessica will receive $25,000 as the holder of 1% of the outstanding mutual fund shares.
However, the direct-to-consumer mutual fund has an internal expense ratio of 0.60%, which amounts to $600,000 in fees. Accordingly, of the $2.5M of accumulated dividends in the fund, $600,000 will be used to pay the expenses of the fund, and only the remaining $1.9M will be distributed to shareholders, which means Jessica will only actually receive a dividend distribution of $19,000 (having been reduced by her 1% x $600,000 = $6,000 share of the fund’s expenses). Or stated more simply, Jessica’s net distribution is 2.5% (dividend) – 0.6% (expense ratio) = 1.9% (net dividend that is taxable).
The end result of the above example is that while Jessica’s investments produced $25,000 of actual dividend income, the fund distributed only $19,000 of those dividends – as the rest were used to pay the expenses of the fund – which means Jessica only ever pays taxes on the net $19,000 of income. Or viewed another way, Jessica managed to pay the entire $6,000 expense ratio with pre-tax dollars – literally, $6,000 of dividend income that she was never taxed on.
Which is significant, because if Jessica had simply owned those same $1M of stocks directly, earned the same $25,000 of dividends herself, and paid a $6,000 management fee to a financial advisor to manage the same portfolio… Jessica would have to pay taxes on all $25,000 of dividends, and would be unable to deduct the $6,000 of financial advisor fees, given that Section 212 expenses are no longer deductible for individuals! In other words, the mutual fund (or ETF) structure actually turns non-deductible investment management fees into pre-tax payments via the expense ratio of the fund!
In addition, the reality is that a commission payment to a broker who sells a mutual fund is treated as a “distribution charge” of the fund (i.e., an expense of the fund itself, to sell its shares to investors) that is included in the expense ratio. Which means a mutual fund commission itself is effectively treated as a pre-tax expense for the investor!
Example 2a. Continuing the prior example, assume instead that Jessica purchased the mutual fund investment through her broker, who recommended a C-share class that had an expense ratio of 1.6% (including an additional 1%/year trail expense that will be paid to her broker for the upfront and ongoing service).
In this case, the total expenses of her $1M investment into the fund will be 1.6%, or $16,000, which will be subtracted from her $25,000 share of the dividend income. As a result, her end-of-year dividend distribution will be only $9,000, effectively allowing her to avoid ever paying income taxes on the $16,000 of dividends that were used to pay the fund’s expenses (including compensation to the broker).
Ironically, the end result is that Jessica’s broker is paid a 1%/year fee that is paid entirely pre-tax, even though if Jessica hired an RIA to manage the portfolio directly, with the same investment strategy and the same portfolio and the same 1% fee, the RIA’s 1%/year fee would not be deductible anymore! And this result occurs as long as the fund has any level of income to distribute (which may be dividends as shown in the earlier example, or interest, or capital gains).
Notably, it does not appear that the new less favorable treatment for advisory fees compared to commissions was directly intended, nor did it have any relationship to the Department of Labor’s fiduciary rule; instead, it was simply a byproduct of the removal of IRC Section 67’s miscellaneous itemized deductions, which impacted dozens of individual deductions… albeit including the deduction for investment advisory fees!
Tax Strategies For Deducting Financial Advisor Fees After TCJA
Given the current regulatory environment, with both the Department of Labor (and various states) rolling out fiduciary rules that are expected to reduce commissions and accelerate the shift towards advisory fees instead, along with a potential SEC fiduciary rule proposal in the coming year, the sudden differential between the tax treatment of advisory fees versus commissions raises substantial questions for financial advisors.
Of course, the reality is that not all advisory fees were actually deductible in the past (due to both the 2%-of-AGI threshold for miscellaneous itemized deductions, and the impact of AMT), and advisory fees are still implicitly “deductible” if paid directly from a pre-tax retirement account. Nonetheless, for a wide swath of clients, investment management fees that were previously paid pre-tax will no longer be pre-tax if actually paid as a fee rather than a commission.
In addition, given that the now-disparate treatment between fees and commissions appears to be an indirect by-product of simply suspending allmiscellaneous itemized deductions, it’s entirely possible that subsequent legislation from Congress will “fix” the change and reinstate the deduction. After all, investment interest expenses remain deductible under IRC Section 163(d) to the extent that it exceeds net investment income; accordingly, the investment advisory fee (and other Section 212 expenses) might similarly be reinstated as a similar deduction (to the extent it exceeds net investment income). At least for those whose itemized deductions in total can still exceed the new, higher Standard Deduction that was implemented under TCJA (at $12,000 for individuals and $24,000 for married couples).
Unfortunately, one of the most straightforward ways to at least partially preserve favorable tax treatment of advisory fees – to simply add them to the basis of the investment, akin to how transaction costs like trading charges can be added to basis – is not permitted. Under Chief Counsel Memorandum 200721015, the IRS definitively declared that investment advisory fees could not be treated as carrying charges that add to basis under Treasury Regulation 1.266-1(b)(1). Which means advisory fees may be deducted, or not, but cannot be capitalized by adding them to basis as a means to reduce capital gains taxes in the future (although notably, CCM 200721015 did not address whether a wrap fee, which supplants individual trading costs that are normally added to basis, could itself be capitalized into basis, as long as the fee is not actually for investment advice!).
Nonetheless, the good news is that there are at least a few options available to financial advisors – particularly those who do charge now-less-favorable advisory fees – who want to maximize the favorable tax treatment of their costs to clients, including:
– Switching from fees to commissions
– Converting from separately managed accounts to pooled investment vehicles
– Allocating fees to pre-tax accounts (e.g., IRAs) where feasible
SWITCHING FROM ADVISORY FEES TO COMMISSIONS
For the past decade, financial advisors from all channels have been converging on a price point of 1%/year as compensation (to the advisor themselves) for ongoing financial advice, regardless of whether it is paid in the form of a 1% AUM fee for an RIA, or a 1% commission trail (e.g., via a C-share mutual fund) for a registered representative of a broker-dealer.
Of course, the caveat is that once a broker actually gives ongoing financial advice that is more than solely incidental to the sale of brokerage services, and/or receives “special compensation” (a fee for their advice), the broker must register as an investment adviser and collect their compensation as an advisory fee anyway. Which is why the industry shift to 1%/year compensation for ongoing advice (and not just the sale of products) has led to an explosion of broker-dealers launching corporate RIAs, so their brokers can switch from commissions to advisory fees.
Given these regulatory constraints, it may not often be feasible anymore for those who are dual-registered or hybrid advisors to switch their current clients from advisory fee accounts back to commission-based accounts – especially for those who have left the broker-dealer world entirely and are solely independent RIAs (with no access to commission-based products at all!).
Still, for those who are still in a hybrid or dual-registered status, there is at least some potential appeal now to shift tax-sensitive clients into C-share commission-based funds, rather than using institutional share classes (or ETFs) in an advisory account.
Of course, it’s also important to bear in mind that many broker-dealers have a lower payout on mutual funds than what an advisor keeps of their RIA advisory fees, and it’s not always possible to find a mutual fund that isexactly 1% more expensive solely to convert the advisor’s compensation from an advisory fee to a trail commission. And some clients may already have embedded capital gains in their current investments and not be interested in switching. And there’s a risk that Congress could reinstate the investment advisory fee deduction in the future (introducing additional costs for clients who want to switch back).
Nonetheless, at the margin, for dual-registered or hybrid advisors who dohave a choice about whether to be compensated from clients by advisory fees versus commissions, there is some incentive for tax-sensitive clients to use commission-based trail products (at least in taxable accounts where the distinction matters, as within an IRA even traditional advisory fees are being paid from pre-tax funds anyway!).
Creating A Firm’s Own Proprietary Mutual Fund Or ETF
For very large advisory firms, another option to consider is actually turning their investment strategies for clients into a pooled mutual fund or ETF, such that clients of the firm will be invested not via separate individual accounts that the firm manages, but instead into a single (or series of) mutual fund(s) that the firm creates for its clients. The appeal of this approach: the firm’s 1% advisory fee may not be deductible, but its 1% investment management fee to operate the mutual fund would be!
Unfortunately, in practice there are a number of significant caveats to this approach, including that the client psychology of holding “one mutual fund” is not the same as seeing the individual investments in their account, the firm loses its ability to customize client portfolios beyond standardized models being used for each of their new mutual funds, the approach necessitates a purely model-based implementation of the firm’s investment strategies in the first place, it’s no longer feasible to implementcross-account asset location strategies, and there are non-trivial costs to creating a mutual fund or ETF in the first place. For which the proprietary-fund-for-tax-savings strategy is again only relevant for taxable accounts (and not IRAs, not tax-exempt institutions) in the first place.
Nonetheless, for the largest independent advisory firms, creating a mutual fund or ETF version of their investment offering, if only to be made available for the subset of clients who are most tax-sensitive, and have large holdings in taxable accounts (where the difference in tax treatment matters), may find the strategy appealing.
Notably, for this approach, the firm wouldn’t even necessarily need to pay itself a “commission”, per se, but simply be the RIA that is hired by the mutual fund to manage the assets of the fund, and simply be paid its similar/same advisory fee to manage the portfolio (albeit in mutual fund or ETF format, to allow the investment management fee to become part of the expense ratio that is subtracted from fund income on a pre-tax basis).
Paying Financial Advisory Fees From Traditional IRAs (To The Extent Permissible)
For those who don’t want to (or can’t feasibly) revert clients to commission-based accounts, or launch their own proprietary funds, the most straightforward way to handle the loss of tax deductibility for financial advisor fees is simply pay them from retirement accounts where possible to maximize the still-available pre-tax treatment. As again, while the TCJA’s removal of IRC Section 67 means that Section 212 expenses aren’t deductible anymore, advisory fees are still Section 212 expenses… which means IRAs (and other retirement accounts) can still pay their ownfees on their own behalf. On a pre-tax basis, since the account itself is pre-tax.
In practice, this means that advisory firms will need to bill each account for its pro-rata share of the total advisory fees, given that IRAs should only pay advisory fees for their own account holdings and not for other/outside accounts (which can be deemed a prohibited transaction that disqualifies the entire IRA!). In addition, an IRA can only pay an investment managementfee from the account, and not financial planning fees (for anything beyond the investment-advice-on-the-IRA portion), which limits the ability to bill financial planning fees to IRAs, and even raises concerns for “bundled” AUM fees that include a significant financial planning component. And of course, it’s only desirable to bill pre-tax traditional IRAs, and not Roth-style accounts (which are entirely tax-free); Roth fees should still be paid from outside accounts instead.
The one caveat to this approach worth recognizing, though, is that while paying an advisory fee from an IRA is pre-tax (i.e., deductible), while paying from an outside taxable account is not, in the long run the IRA would have grown tax-deferred, while a taxable brokerage account is subject to ongoing taxation on interest, dividends, and capital gains. Which means eventually, “giving up” tax-deferred growth in the IRA on the advisory fee may cost more than trying to preserve the pre-tax treatment of the fee in the first place.
However, in reality, the breakeven periods for it to be superior to pay an advisory fee with outside dollars are very long, especially in a high-valuation (i.e., low-return) and low-yield environment. Accordingly, the chart below shows how many years an IRA would have to grow on a tax-deferred basis without being liquidated, to overcome the loss of the tax deduction that comes from paying the advisory fee on a non-deductible basis in the first place. (Assuming growth in the taxable account is turned over every year at the applicable tax rate.)
As the results reveal, at modest growth rates it is a multi-decade time horizon, at best, to recover the “lost” tax value of paying for an advisory fee with pre-tax dollars. And the higher the income level of the client, the morevaluable it is to pay the advisory fee from the IRA (as the implicit value of the tax deduction becomes even higher). Nonetheless, at least some clients – especially those at lower income levels, with more optimistic growth rates, and very long time horizons – may at least consider paying advisory fees with outside dollars and simply eschewing the tax benefits of paying directly from the IRA.
In the end, the reality is that when the typical advisory fee is “just” 1%, the ability to deduct the advisory fee only saves a portion of the fee, and the alternatives to preserve the pre-tax treatment of the fee have other costs (from the expense of using a broker-dealer, to the cost of creating a proprietary mutual fund or ETF, or the loss of long-term tax-deferred growth inside of an IRA), which means in many or even most cases, clients may simply continue to pay their fees with their available dollars. Especially since the increasingly-relevant “financial planning” portion of the fee isn’t deductible anyway.
Nonetheless, for more affluent clients (in higher tax brackets), the ability to deduct advisory fees can save 1/4th to 1/3rd of the total fee of the advisor, or even more for those in high-tax-rate states, which is a non-trivial total cost savings. Hopefully, Congress will eventually intervene and restore the tax parity between financial advisors who are paid via commission, versus those who are paid advisory fees. For the time being, though, the disparity remains, which ironically has made tax planning for advisory fees itself a compelling tax planning strategy for financial advisors!
So what do you think? Are you maximizing billing traditional IRA advisory fees directly to those accounts after the TCJA? Will larger firms creating proprietary mutual funds or ETFs to preserve pre-tax treatment for clients? Will Congress ultimately intervene and restore parity between commission- and fee-based compensation models for advisors? Please share your thoughts in the comments below!
With the now-more-than 80,000 financial planning professionals who have their CFP certification, one of the most common complaints I hear is from financial planners who receive a letter from the CFP Board stating that they need to update their website so that it doesn’t simply state that they are a CFP, and instead, that they call themselves a “CFP certificant” or “CFP professional” instead. Which to many seems trivial, when the CFP Board could be spending their time (and enforcement resources!) going after “real” problems like CFP professionals who don’t meet their fiduciary duty to clients, or just give bad financial planning advice in the first place. Additionally, it’s not as if we see any State Boards of Accountancy sending letters to CPAs saying, “You should call yourself a CPA professional.” But the reality is that there’s actually a really good reason why the CFP Board requires us to put that little trademark symbol after the CFP marks, and why they require us to say “CFP professional” or “CFP certificant” and not just “CFP” the way accountants can call themselves a CPA.
In this week’s discussion, we examine why the fact that the CFP marks are a trademark and not a license means that the CFP Board must diligently defend the proper use of the CFP marks, including going after financial planners for the seemingly minor misuse of those marks by calling themselves a CFP!
As a starting point, it’s important to understand that the reason we get to call ourselves CFP professionals or CFP certificants in the first place is that we sign an agreement with the CFP Board, where the CFP Board grants us the right to use their trademark. Because the CFP Board is the organization that actually owns the trademark on the CFP marks (along with the label “CERTIFIED FINANCIAL PLANNER”). Which means the CFP Board has the right to grant us a license to use their trademark… which they grant in exchange for meeting certain requirements, most significantly, that the financial planning professional meeting the “Four E’s” of education, exam, experience, and ethics requirements, along with signing an agreement that we’ll honor the CFP Board’s Terms and Conditions, including those on the use of the marks. Which is distinct from how a license works (like a CPA), where an accountant’s state actually grants a license to operate as a CPA.
The reason why this license-vs-trademark distinction matters is that since the CFP Board must rely on trademark law to control the CFP marks, they must abide by trademark law – which stipulates that trademarks should only be used as a descriptor of a noun, and not as a noun (which is why Nabsico calls their product “Oreo cookies”, instead of “Oreos” and it’s technically “Budweiser beer” and not just a “Budweiser”). And for the CFP Board to retain control of its trademark, and not be accused of abandoning it or allowing it to become generic (to the point that it can no longer be controlled as a trademark), they have to treat it like a proper trademark, which includes enforcing its proper use. Of course, organizations cannot do anything to stop consumers who start using trademarks as nouns, but since the CFP Board has a bona fide business relationship with us as CFP certificants, the CFP Board must take action to ensure the marks or used properly, or they risk losing the trademark altogether, which would allow anyone to use the CFP marks however they want.
This situation may not be perfect. Ideally, you’d actually need a license to become a CFP and a practicing financial planner, which would be a controlled title like CPA, and there would be a state or Federal regulator that ensures the only people who say they’re CFPs are actually CFPs, meet the requirements for CFPs, and are sanctioned and lose their license for failing to abide by the rules for CFPs. But that’s not the reality of financial planning today. We have licenses for selling insurance, selling investments, or managing a portfolio, but there’s no license to be a financial planner or do financial planning. Instead, we voluntarily choose to obtain the CFP marks to distinguish our professionalism… by paying the CFP Board for the right to use their trademark (not by getting a CFP license!).
The bottom line, though, is just to recognize that the reason we can’t just call ourselves CFPs, and have to say we’re CFP professionals, is because the CFP is not a license. It’s a trademark. Owned by the CFP Board, which grants us the right to use the marks as long as we meet their standards. Which means, if you really value the CFP marks, and want to see them remain distinct, you want the CFP Board to be taking the necessary steps to protect them. Even if it’s a bit annoying when it comes at you directly!
The CFP Marks Are A Trademark, Not A License
The reality is that there’s actually a really good reason why the CFP Board requires us to put that little R symbol after the CFP marks or requires us to say CFP professional or CFP certificant and not just CFP. And the reason simply is this: The CFP marks are not a license like a CPA is, the CFP marks are a trademark.
So technically, the way it works is this. The CFP Board long ago got a trademark of the CFP marks along with the label CERTIFIED FINANCIAL PLANNER. So the reason we get to call ourselves CFP professionals or CFP certificants at all is that we signed an agreement with the CFP Board, where the CFP Board grants us the right to use their trademarks in exchange for paying them a fee, and then meeting certain requirements that they specify, most significantly the “Four E’s” requirement of education, exam, experience, and ethics obligations. So we sign an agreement that says we’ll honor the CFP Board’s Terms and Conditions and pay them their fee for the right to use the trademark, and then we’re allowed to use their trademark and put CFP® on our business card.
Now, this is distinct from how a license works, like a CPA. Accountants get to call themselves CPAs because the state actually grants them a license to operate as a certified public accountant or CPA, and then the state typically delegates the responsibility for certifying and overseeing all those CPA licensees to a state board of accountancy. But it functions as a license.
And here’s why the distinction matters so much. Because the CFP Board is not a state-sanctioned regulatory entity, it’s just some organization that owns a trademark and lets other people use it, and it has to abide by trademark laws. And in order to be honored to respect it as a trademark, you have to follow those U.S. trademark laws, which have some very specific requirements about the proper use of a trademark. The first is that a trademark has to be used in a manner that clearly distinguishes it from the rest of the text around it. For instance, making it all capital letters or bold or underlined or putting that little registered trademark “R” symbol at the end. That’s why you write CFP® in all capital letters. That’s why the CFP Board ask that any time you write certified financial planner, you write all caps, CERTIFIED FINANCIAL PLANNER.
The second requirement is that a trademark is never supposed to be used as a noun, only as an adjective. So it’s sort of a funky grammar thing but it has a reason. And this is why you always see the CFP Board telling us to say CFP professional or CFP certificants. Because just saying CFP is not actually the proper legal use of the trademark. It turns it into a potentially generic term, which means the CFP Board can lose the trademark by allowing it to become generic.
Now, I realize that sometimes we as consumers do kind of turn trademarks into nouns instead of their adjective form, but the proper use of a trademark by the company itself is to use it as an adjective. That’s why you’ll notice Budweiser doesn’t actually say it makes Budweiser. It makes Budweiser beer. Budweiser is the adjective, beer is the noun. And while we often just call them Oreos, it’s actually an Oreo biscuit or an Oreo cookie or an Oreo thin. And if you look, you’ll notice that the company itself only uses Oreo as an adjective to describe a type of biscuit or cookie or thin, not as a noun. Because the whole point of trademark law is you can’t own the thing, the noun, the object. That’s actually a patent, not a trademark. So you don’t trademark an Oreo, you trademark an Oreo-style cookie. You don’t own the trademark on beer, you own the trademark on Budweiser-style beer.
And so a trademark should only be used as a descriptor of a noun, not as the noun, which is why we are not CFPs. We can’t be. The CFP Board doesn’t own the right and doesn’t have an authority to make us CFPs. They own a trademark and have the right to grant us the right to use that trademark to make ourselves CFP professionals, where the CFP is a type of professional, but they don’t actually license the professional.
CLICK TO TWEET
Trademarks Must Be Defended To Be Respected
Now all this being said about the proper use of the CFP marks, as, you know, I mentioned earlier, consumers often do end up using a trademark as a noun even when they’re not supposed to, which raises the question of why the CFP Board bothers with this fight at all. And the short answer is they kind of have to or they actually risk losing control of the trademark in the future. Because a key aspect of trademark law is that if you want the courts to respect your trademark, you have to at least treat it like a proper trademark. If you don’t and people start using it improperly and then later down the road you decide you don’t like how they’re using it (for instance, someone tries to copy and steal your trademark and start using in a way that you don’t like), the courts may say, “Well, why should we take steps to defend your trademark now when you didn’t do anything to defend yourselves along the way? You’ve abandoned your trademark. You can’t go and reclaim it after the fact.”
In other words, if an organization wants to own a trademark but doesn’t take at least some responsibility for ensuring it’s used properly, the courts may consider them as having abandoned the trademark and are reluctant to take action against those who use it improperly later. They just say, “Ugh, you clearly weren’t serious about your trademark. You abandoned it. You haven’t defended it in years, so we’re not going to let you defend it now after the fact.” Or alternatively, courts may say, “You’ve allowed your trademark to be used so widely as a noun, it’s become generic to the point that we’re just not going to recognize it as a distinct trademark anymore. It’s in common use.” Because if you actually look up, once upon a time,zipper was a trademark, so was escalator, now they’re just generic words.
So in the context of consumers, again, you can’t really control how people use your trademark. And the trademark laws don’t literally require every human being on the planet to always use your trademark the right way or you’re in trouble. So it’s not like Budweiser is going to start suing consumers for calling it a Bud instead of Budweiser beer and Nabisco doesn’t sue people for calling them Oreos. However, in part, because there’s no business relationship between Budweiser or Nabisco and the consumer in the first place, the courts recognize you can only do so much here, as long as you use the trademark properly. And you’ll notice that companies really do refer to it as Budweiser beer and Oreo cookies. If other people misuse it, there’s not much you can do.
But when it comes to the CFP marks and us as CFP certificants, it’s a little different because we are in a direct business relationship with the CFP Board. We pay them for the right to use their trademark and they grant us the right to use it subject to their terms and conditions for proper use. So if we pay the CFP Board to use their trademark and then we don’t use it properly and then they take no action to stop improperly use, they risk being deemed as having abandoned the proper use of the trademarks, and then they can lose control of the trademark altogether. And then literally anyone could just use the term CFP or certified financial planner in the same way we throw around terms like financial advisor, financial consultant, or the generic form of, “I’m a planner. I’m a financial planner.”
So simply put, if anyone ever really tries to steal the CFP marks away from the CFP Board and just copy them, start using it without paying them, just kind of take off with the marks… the CFP Board’s entire defense is going to rest on (well not entire but much of the defense) on being able to demonstrate that they were honoring the trademark in the first place, using it properly, and took reasonable steps to defend their trademark, including not only themselves but the people they license it to, which is us. That’s why the CFP Board take steps to make sure we’re properly using the marks by saying CFP professional or CFP certificant, and that registered trademark symbol. They have to take some reasonable steps to ensure we’re using their trademark properly or they risk losing control. But it doesn’t mean one CFP who doesn’t do this properly can invalidate the whole thing, again, but it does mean the CFP Board has to in some way shape or form demonstrate that they’re taking reasonable efforts to defend their trademark.
“Regulating” A Profession By Trademark Law Vs Licensing
Now, I’ll grant that this situation is not exactly ideal. Ideally, you would need a license to become a CFP, a real license which would be a controlled title like CPA. There would be a state or a federal regulator that ensures only people who say they’re CFPs are actually CFPs, meet the requirements for CFPs, and can face actual sanctions and losing their license for failing to abide by the rules of their CFP license. That’s basically how it works for CPAs. If you don’t abide by the rules for CPAs, you lose your CPA license, and then you can’t practice as a CPA anymore. But that’s not the reality for financial planning today. Instead, the only regulatory licenses we have is thevery low bar of becoming an insurance agent or a registered rep of a broker-dealer or a registered invetment adviser, which are actually just licenses for selling insurance, selling investments, or managing a portfolio. None of those are licenses to actually be a financial planner or do financial planning.
So for those of us who want to differentiate from the rest, we voluntarily choose to meet the CFP Board’s education, exam, experience, and ethics requirements in exchange for the right to use their CFP trademark on our business cards and websites, because we essentially pay them to use their trademark as a way to distinguish ourselves. And then they get to decide where to set the line on the standards you have to meet in order to be allowed to use their CFP trademark. And if you don’t meet their requirements, they’ll revoke your right to use the trademark and you can’t say you’re CFP professional anymore. They can’t discipline you… they can’t fine you… they can’t bar you from the industry… because they’re not a regulator. But they grant the trademark, and they can take it away.
But the fundamental point, in the end, is that because the CFP Board is not a state or federally-sanctioned regulator of CFPs or anyone else, we can’t say we’re CFPs because it’s not a license. CFP Board is simply a non-profit entity that aims to serve the public interest by fostering professional standards and personal financial planning through setting and enforcement of education, exam, experience, and ethics and other requirements for CFP certification. So in the end, they’re just a non-profit that offers a popular trademark that people can use and is trying to make that trademark desirable enough and important enough that we’re all willing to step up to their higher standards in order to use that trademark, which ultimately lifts the entire standard for financial planners in the aggregate.
And when you think about it that way, it’s actually amazing how far we’ve come that we now have over 80,000 CFP professionals, almost 30% of all financial advisors, who have stepped up to the higher standard of CFP Board beyond the licensing requirements because this little three-letter trademark has such perceived value in the marketplace. We put ourselves through all those hoops just to add their trademark on our business card and our website. And the whole reason why the CFP Board is a non-profit and not a membership association is because it doesn’t exist primarily to serve CFPs as members, it exists for the primary purpose of protecting the marks on behalf of the public. And it’s that public-facing mission that makes it a non-profit, and then they ask us to step up to their standards in order to use this trademark that they’ve created.
But the bottom line is that the reason we can’t just call ourselves as CFPs and we have to say we’re CFP professionals is because the CFP is not a license, it’s a trademark owned by the CFP Board, which grants us the right to use those marks as long as we meet their standards.
But in order to ensure that the trademark of the CFP is respected in courts, the courts expect the CFP Board to take at least reasonable steps to defend their trademark, ensure it’s not abandoned, ensure it does not become a generic term, and especially by those who pay to use the trademark, which means us, over whom the CFP Board has a bona fide business relationship where it could be exerting authority, and so the courts expect it to do so. Which is why we occasionally get those letters from the CFP Board about fixing the way we’re using their CFP trademark. It’s not that it always has to be done perfectly, but they actually are expected to be able to demonstrate that they tried. Which means if you really value the CFP marks, you want the CFP Board taking the necessary steps to protect them, even if it’s a little bit annoying when it comes at you directly.
I hope that’s helpful as some food for thought about why you have to say you’re a CFP professional or a CFP certificant and why we cannot just say CFP the way an accountant can simply be a CPA.
So what do you think? Is it important for advisors to properly use the terms CFP professional and CFP certificant? Would it be better if the CFP were a state-issued license like the CPA? Do advisors generally understand the importance of the CFP Board defending the proper use of their trademark?
In recent years, the world has been awash in fiduciary regulatory for financial advisors, from the Future Of Financial Advice (FOFA) reforms in Australia, to the Retail Distribution Review (RDR) changes in the UK, and the Department of Labor’s rule here in the US, all focused on requiring financial advisors to act in the best interests of their clients, and to reduce or eliminate conflicts of interest (especially around commission compensation). Yet while the DoL fiduciary rule has been repeatedly delayed in the US, in many other countries the fiduciary reforms have already taken effect… and now we’re beginning to see the next stage of fiduciary legislation emerge.
In this week’s discussion, we examine the new round of financial advisor regulation emerging in Australia, which focuses specifically on competency standards, and what it suggests about what may come next for advisor regulation in the US, and what financial advisors here should be thinking about in order to “future-proof” their own careers against potential future regulation!
Since adopting fiduciary requirements under the FOFA reforms (Future of Financial Advice) in the summer of 2012 and fully implementing those reforms in 2013 (in stark contrast to the ongoing debate in the US over DoL fiduciary which began around the same time but still isn’t fully imiplemented!), Australia has served as a place that advisors can look to see what trends may be coming in the future of financial advisor regulation.
And in that context, Australia has followed up their fiduciary standards with a new round of standards of financial advisor competency, as the reality is that it’s not enough to just have a fiduciary duty for financial advisors to act in the best interests of their clients, but it’s also essential for the advisor to have the technical competency and training needed to know what’s in the best interests of the client in the first place! In essence, the new competency rules would require that all financial advisors have a college Bachelor’s degree, a full professional year of experience, pass a comprehensive exam to demonstrate their competency in core knowledge domains, and commit to ongoing continuing education and ethics requirements. Notably, this is the exact same framework as the CFP Board’s “Four E’s” requirement that already exists in the US: Education, Exam, Experience, and Ethics.
However, just as not even 30% of advisors here in the US have the CFP marks, it is estimated that only about 25% of the financial advisors in Australia will be able to meet the new competency standards there. Accordingly, the regulators are providing a substantial transition period for Australian advisors.
This is important for advisors in the US, as it gives some hint about what may be the next shoe to drop in the regulation of financial advisors here, either in the form of literally requiring the CFP marks to practice – making CFP certification a minimum competency standard for all financial advisors rather than just a voluntary designation – or similar to Australia, some separate-but-similar competency requirement that’s administered directly by a government regulator or an independent entity the regulator creates.
On the plus side, the changes in Australia should not just improve competency to ensure there’s good advice, but also improve consumer trust in financial advisors in the first place. Because even if you show great warmth and caring for clients, if they don’t believe that financial advisors are competent in the first place, it’s difficult to build the necessary trust to have an effective advisor/client relationship. Which is why I think it’s such a big deal that Australia is now rolling out a financial advisor competency standard. Because lifting competency and education standards not only improves the quality of advice, but also trust in financial advisors.
But these changes also mean that, if you’re a financial advisor who wants to “future-proof” your own career, then you really should be reinvesting into advancing your education with programs like CFP certification. As Australia has shown, there will probably be some grace or transition period, so if you’re within 5-10 years of retirement already, you’ll likely be safe to just ride out the status quo. But if you’re younger than that, and still have a longer time horizon in the business, there’s increasingly a risk that once the first round of the fiduciary rule to act in clients’ best interests is done, the next round is going to be about competency standards… which means it may be a good idea to get started future-proofing your own career sooner rather than later! And if you are a CFP certificant today, and you use that to differentiate yourself from the 70% of advisors who don’t, recognize that it’s not going to be a sustainable differentiator for you once the regulators lift the competency standards for everyone… which again highlights the importance of developing your niche and specialization, so that you can stay one step ahead.
The bottom line, though, is just to recognize that much like Australia served as an indicator for what regulation was to come under DoL fiduciary (with a fiduciary rule that took effect 5+ years ahead of the US), Australia’s new adoption of competency standards for financial advisors may be a good indication of where the regulatory focus will be next in a post-fiduciary world in the US. Which means, if you haven’t invested in your education to meet such standards, you may want to start now. And even if you have, it’s important to realize that merely fulfilling the “four E’s” going forward will no longer be a differentiator!
Australian Fiduciary Reforms Under FOFA [Time – 1:31]
To set some context here, back in the summer of 2012, the Australian regulators implemented a bunch of new rules for their financial advisors under what they called their Future of Financial Advice reforms. It was called FOFA for short, F-O-F-A. And the core of the new FOFA reforms were that financial advisors would be required to act as fiduciaries that place the best interests of their clients ahead of their own. Now, that’s not unlikewhat we’ve been discussing here in the U.S. in recent years under DoL’s fiduciary rule, except we’re still debating it since 2012 (actually the first proposal came out in 2010), and Australia just did it, fully implemented by the summer of 2013.
And Australia’s version was actually even more stringent than what we’ve been talking about here in the U.S., as Australia flat-out banned all investment commissions for financial advisors. They also banned any kind of soft dollar payments, shelf space, and revenue-sharing agreements to Australian dealer groups, which are roughly the equivalent of our wirehouse broker-dealers here in the U.S. The FOFA reforms also eliminated the ability of advisors to get paid for switching dealer groups under the auspices that it’s not the client’s best interest for advisors to get paid to move to a new platform. Advisors only need to switch into a new platform because they want to for the benefit of their clients, not themselves.
FOFA rules also limited AUM fees to own leveraged portfolios to discourage anyone from taking out margin loans to increase the size of their portfolio assets for billing purposes, which doesn’t happen much here in the U.S. but apparently was happening more there. And even required that clients have to re-opt in to their advisory agreements every two years just to ensure that they really want to still be clients, rather than just once you’ve got them as an AUM client, they just continue until they proactively fire you.
A lot of these changes should sound familiar because many are the same kinds of rules we’ve been debating here in the U.S. The Department of Labor’s fiduciary rule would similarly require advisors to act in the best interests of their clients. And while DoL fiduciary didn’t entirely ban commissions, it will trigger more scrutiny on whether they’re really reasonable compensation under what situations. DoL fiduciary is already starting to curtail some broker-dealer back in revenue-sharing agreements, and FINRA has been examining for several years whether we at least need to require better disclosures of the compensation that advisors get when they switch broker-dealers. Although at this point FINRA is just talking about a requirement to disclose those payments, whereas in Australia, they were flat out banned under FOFA.
But again, the distinction here is that while the debate about DoL fiduciary has been stretching out almost 8 years since the very first proposal back in 2010 and almost 2 years since it was officially rolled out but with some provisions still on delay until mid-2019, the FOFA reforms were much more abrupt. ASIC, which is the Australian regulator, put the final rule out in mid-2012 and said, “You all have 12 months to figure it out.” Boom. In the middle of 2013, the Australian advisory industry had the new rules in place and had to adjust. And that was that.
And so now that Australia is already almost four and a half or five years into their fiduciary rule, we can look to see how it’s playing out there to get some perspective on what may be coming next in the U.S. based on what’s happening in Australia in, call it a “post-fiduciary” world.
Australia Proposes Financial Advisor Competency Standards
And what’s come next in Australia, as I mentioned earlier, is that now they’re going from their new rules on the fiduciary duty of loyalty to clients (to act and in client’s best interests), to new financial advisor competency standards as well. Because the reality, as I’ve discussed previously on Nerd’s Eye View, is that it’s not enough to just have a fiduciary duty for advisors to act in the best interest of their clients, as it’s also essential for the advisor to actually have the technical competency and training in the first place. Otherwise, you may not even know what’s actually truly in the best interest of the client because their situation may be too complex for you to analyze if you haven’t had much training, education, and experience in being a financial advisor.
Even here in the U.S., the core fiduciary duty itself has always recognized there are really two core duties that go with it. The first is the duty of loyalty (to act in the best interest of the client) and the second is what’s called the duty of care (to only give advice in areas in which you’re actually competent to do so). Other professions have this as well. A brain surgeon can act on your brain and that’s fine, but if a brain surgeon operates on your knee, that’s still a problem even though they’re a doctor and a surgeon because they’re not trained in knee surgery, they’re trained in brain surgery. Very improper for them to do knee surgery if that’s not the specific domain in which they’re trained and competent.
And so, in this context, Australia followed up its first round of FOFA reforms requiring the fiduciary duty of loyalty to clients with the second round of reforms now specifically targeted at financial advisor competency. And in essence, the new competency rules would have four core requirements:
- All advisors would have to have a college bachelor’s degree
- Full year of professional experience
- Passed a comprehensive exam to demonstrate their competency in core knowledge areas
- Commit to ongoing education with the code of ethics.
And a new independent body called the Financial Adviser Standards and Ethics Authority (or FASEA for short) will be responsible in Australia for determining all these details, such as which college degrees qualify, creating and administering their new advisor exam, setting continuing education requirements, and the new code of ethics for their financial advisors.
This is expected to be quite disruptive in Australia because the estimate is that currently, only about 25% of the advisors there would meet all these requirements as they exist today, and many don’t necessarily have that much training in financial advice to pass the new competency exam either. And similarly, only about a quarter of Australian advisors have their CFP marks or some equivalent, which would also effectively cover advisors under the new competency rules as well.
So the Australian regulators are actually providing a rather substantial transition period for all the Australian advisors. New advisors will have to meet the new requirements starting in 2019, but existing advisors will have 3 years until 2021 to take the exam, and 6 years until 2024 to get their college degrees if they haven’t already. All built around this fundamental concept that if you’re going to give people financial advice, you should actually be required to know what you’re talking about beyond just being trained in a handful of products maybe that your company offers, because this is the fundamental transition happening here around the world. We’re not salespeople anymore, we’re advisors who give advice about a lot more than a particular product.
The Rise Of Competency Standards For Financial Advisors ]
For all of you who have CFP certification here in the U.S., these requirements being implemented in Australia, to have an education, pass an exam, get some experience, and meet a code of ethics, should sound vaguely familiar because it’s the exact same framework as what we call the “four E’s” requirements that already exists in the U.S.: education, exam, experience, and ethics requirements. In fact, the CFP Board implemented a bachelor’s degree requirement back in 2007, already has a 2 or 3-year experience requirement, has had a comprehensive exam requirement since 1991, and has long had a code of ethics which we’re now in the midst of updating.
In other words, while CFP certification itself is not actually required to be a financial advisor in the U.S., what the CFP Board requires for CFP certification actually looks exactly like the reforms now being proposed in Australia that would be a requirement for all financial advisors. Which suggests that this really may be the next shoe to drop in regulation for advisors in the U.S., whether it’s literally to require the CFP marks to practice and making the CFP certification a minimum competency standardfor all advisors rather than just the voluntary designation as today, or maybe it’s similar to Australia, some separate but similar competency requirement that’s administered by a government regulator or some independent entity the regulator creates for which CFP certificants would likely be grandfathered because they’re already the higher standard that the profession is moving towards. Because again, what regulators are now recognizing is that it’s not enough just to require that advisors act in their clients’ best interests if we don’t have the training to know what would be the best advice for clients in the first place.
Financial Advisor Competency Standards Increases Trust In Financial Advisors
And it’s worth noting, this ultimately isn’t even just about improving competency to ensure there’s good advice, it is also about improving consumer trust in financial advisors in the first place. And this was actually a point that really hit home for me from another presentation at the Finology conference last week by a gentleman namedHerman Brodie of a firm called Prospecta, out of the UK. So Herman actually just wrote a book coming out in April about how consumers decide whether to trust a financial advisor and ultimately noted that from the research perspective, it basically comes down to two factors, warmth and competency.
Warmth here doesn’t necessarily mean you have to be warm and friendly and extroverted with clients necessarily. It simply means that clients have to believe that you care and that you’re actually there to try to benefit them and help them. Your warmth means they feel that you’re warm towards them and want to actually help them get better outcomes. But Herman’s research found that warmth alone is not enough. If clients are going to trust your advice, they also have to believe you’re actually competent in the first place and that you really know what you’re talking about, and that you can give them advice that they should trust based on your expertise.
As Herman showed, there are plenty of industries and firms (and particularly in financial services) where we’re actually doing pretty good on the perceived competency, just we have no perceived warmth. Probably not big news in the financial service industry, but there are a lot of folks that feel that financial services firms are not out for the clients’ best interest. Many feel that firms are just out for itself and its shareholders and it’s all about the money and not the clients.
But I think sometimes we underestimate how much consumer trust in financial advisors has also been damaged by our low competency standards. Because again, you can hold out as a financial advisor and be responsible for someone’s entire life savings with little more than a high school diploma and a three-hour Series licensing exam, and the Series exam doesn’t actually test anything about your competency in financial advice, it just tests the regulations, and a high school diploma is actually optional.
So for the subset of us that voluntarily aspire towards what we need to know to actually be more competent in our advice to the clients by getting voluntary designations like the CFP marks, that’s a wonderful and huge step forward, but bear in mind barely a 30% of all financial advisors have CFP certification, which means more than 70% do not. And while a few might have some reasonably comparable education designation like the ChFC or the PFS as a CPA, the majority of financial advisors don’t have any substantive education or designations in the subject of financial advice.
Now, many that are experienced have learned a great deal from call it the “school of hard knocks” in working with clients, and that still means a lot of advisors simply don’t have the education and competency to really be comprehensive advisors, despite what it says in their business cards. And even a lot of the ones who do may have learned through experience and unfortunately probably gave some not-so-great advice to the clients in their early years when they were learning, which isn’t a good thing for clients as well.
I’m still appalled that when I started in the industry I got to give advice to clients with basically no training and education in what I was talking about, and, you know, fortunately, didn’t cause any dramatic lasting harm. But I look back on some of the recommendations that I gave early on and I just had no idea what I was talking about. There was no requirement that I had to know. And if you just look at some of the public comment sections for consumer media articles about advisors to see the kind of negativity that a lot of consumers have towards us based on prior bad experiences or outright harm that’s come from financial advisors that didn’t have the knowledge to give the right advice, even if they were well-intentioned and meant to.
Future-Proofing Your Career As A Financial Advisor [Time – 13:09]
And so that’s why I think it’s such a big deal that Australia is now rolling out a financial advisor competency standard, because it’s important to lift the quality of advice and trust in financial advisors, which actually makes it easier for us to get clients. It wasn’t necessarily needed in a world where most financial advisors were primarily selling insurance and investment products. Then you really just needed to be competent in the products you were selling, but now most of us are still being regulated like product salespeople and not advisors, even though the whole industry in the U.S., Australia, UK, and worldwide are shifting from a product focus to becoming actual advisors where competency and advice matters – both to give good advice, and to know what good advice would be and to improve consumer trust in financial advisors.
And so while Australia may be the first to formally lift the financial advisor competency standards, I don’t think they’ll be the last. Just as they were one of the first to propose a fiduciary rule and they were certainly not the last. Which means, if you’re a financial advisor that wants to “future-proof” your own career, you really should be looking at how you’re going to reinvest into advancing your education with marks like CFP certification. Because as Australia has shown, there will probably be some grace period, some transition period, which means maybe if you’re 5 to 10 years from retirement already, you’re probably safe to just ride out the status quo, but if you’re younger than that and have a longer time horizon in the business, there is an increasing risk that once the first round of fiduciary rule to act on client’s best interest is done, the next round is going to be about competency standards. That will be the battle of the 2020s.
And I’m sure a lot of you are thinking, “It can’t happen here and it won’t happen here,” Australia made the change even though fewer than 25% of advisors have the CFP marks. Which means the fact that we’re approaching 30% of advisors with the CFP marks in the U.S means, in theory, it would be easier to do it here in the U.S. than what they already did in Australia. And I think that’s both a real warning to the 70% of advisors here in the U.S. that don’t have the CFP marks or something equivalent and are concerned about how to future-proof their career, I’d be working on that sooner rather than later.
And if you are a CFP certificant, don’t rest on your laurels and use that to differentiate yourself, because when the other 70% of advisors are required to get CFP certification as well, your CFP marks don’t differentiate you. Just as a lot of advisors are now finding that marketing as a fiduciary is not such a good differentiator in the world of DoL fiduciary where everyone is a fiduciary. The regulators lifting the standards eliminate these as differentiators. And that’s why I talk so often about the importance ofbuilding towards a niche or a specialization or some kind of post-CFP education so that you stay one step ahead.
But I hope this helps a little as food for thought around the current trends of regulation for financial planners around the world and outside of the U.S. This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays. Thanks for joining us, everyone, and have a great day!
So what do you think? Will competency standards be the next big battle in the financial advisory industry? What should competency standards be? What should advisors be thinking about doing to “future-proof” their careers? Please share your thoughts in the comments below!