Tag: Financial Consulting’

Why Aren’t Checklists A Financial Planning Standard?

Why Aren’t Checklists A Financial Planning Standard?

Executive Summary

As financial planning for clients grows more and more complex, it becomes increasingly difficult for planners to recognize every planning issue, opportunity, and concern from memory alone. As a result, there is an rising risk that planners commit malpractice and make a mistake – albeit by accident – in the struggle of trying to apply everything they have learned to an incredibly wide range of client situations.

However, the reality is that this challenge is not unique to financial planning. Many professions face a similar struggle, where the sheer amount of knowledge required, and the incredible number of client/customer/patient situations make it almost impossible to remember everything that’s necessary at the exact time it’s needed, mean a rising risk of mistakes, negligence, and ineptitude.

So what’s the solution to address this challenge? As it turns out, there’s a remarkably simple one: checklists. While it may seem absurd that such a basic device could enhance client outcomes – in fact, as professionals we often bristle at the thought that a checklist could tell us something we don’t already know – it turns out that checklists may be an excellent means to deal with the simple fact that we are all fallible humans.

Unfortunately, though, few checklists currently exist in the world of financial planning, especially outside of the operational aspects of an advisory firm. Nonetheless, it is perhaps time to give checklists the recognition they deserve, as a potentially critical step to ensure that we apply the proper due diligence to each and every complex financial planning situation, and that nothing accidentally slips through the cracks.

The Checklist Manifesto by Atul GawandeThe inspiration for today’s blog post is the book “Checklist Manifesto” by Atul Gawande, a doctor who was the primary driver behind the World Health Organization’s “Safe Surgery Checklist” and who makes a compelling case that checklists should probably be adopted more broadly in all industries and professional services – including financial planning – as a way to deal with the incredible complexity that we face as practitioners.

Ignorance Vs Ineptitude

It’s important to recognize that in many situations, professionals fail simply because the task at hand was beyond saving; we may have tremendous intelligence and technology available to us, but we are not omniscient or all-powerful, and some fallibility is inevitable. However, Gawande notes research by Gorovitz and MacIntyre who find in the medical context that in situations where success or failure is within our control, there are two primary drivers that lead to failure: ignorance, and ineptitude.

Ignorance has been the driving force for failure for most of medical history. Up until just the past few decades, we simply didn’t know what the true causes were for many diseases and maladies, much less how to treat them or fix the underlying causes. For instance, Gawande notes that as recent as the 1950s, we still had no idea what actually caused heart attacks or how to treat them, and even if we’d been aware of contributing factors like high blood pressure, we wouldn’t have known how to treat that, either. If someone had a heart attack and died at the time, it was our collective ignorance of the underlying problems that led to the “failure” to save the patient.

By contrast, in today’s environment, we have developed numerous drugs to treat high blood pressure, as well as heart attacks themselves. We “know” how to fix an astonishing range of maladies. If an ineffective (or even harmful) treatment is applied now, we don’t simply let the professional off the hook on the basis of “well, we didn’t really know what to do, anyway.” In other words, our collective ignorance of how to treat a problem is often no longer an acceptable answer when there is an unfortunate outcome; instead, a failure of the professional is an “error” and a sign of ineptitude.

Of course, the caveat is that many of the professional situations today are of a highly complex nature. While we might understand far more about the body and how to treat it than in the past, it is still remarkably complex, and many “failures” of a medical practitioner still walk a fine line between ignorance, ineptitude, and a situation that was never really able to be saved in the first place. As a result, Gawande notes that we’re more likely to address such situations by encouraging more training and experience for the practitioner, rather than to punish failure, as long as outright negligence was not involved. Unfortunately, though, it’s not clear if more experience and training alone are necessarily sufficient; as our knowledge increases, so too does the complexity of applying it correctly, to the point where we may be reaching our human capacity to apply such a depth of knowledge to such a breadth of situations in a consistent manner. We are still only human ourselves, after all.

Managing Through Complexity With Checklists

So what’s the best way to manage through such an incredible depth of complexity? Gawande notes that the World Health Organization’s classification of diseases now categorizes more than 13,000 ailments, and one study of 41,000 trauma patients in Pennsylvania found that doctors had to contend with 1,224 different injury-related diagnoses in 32,261 unique combinations. To say the least, the difficulty of providing 32,261 different diagnoses in 32,261 different situations is a challenge of enormous complexity for the human brain. So what’s the solution? Checklists, to at least ensure the big things don’t slip through the cracks.

Initially, Gawande notes that the idea of checklists was soundly rejected in the medical world. Given the complexity of the problems involved, how could a single checklist or a series of them possibly have much of an impact? Yet it turns out that even relatively routine checklists can have a remarkably material effect, for the simple reason that as human beings, we don’t always remember to do every single step in a process the exact same way every time, especially when most of the time it doesn’t really matter. For instance, one early study applying a simple checklist to implant a central line (a catheter placed into a large vein to deliver important medication) to patients: 1) wash hands; 2) clean patient’s skin; 3) put sterile drapes over patient; 4) wear mask, hat, gown, and gloves; and 5) put sterile dressing over insertion site after completion – was found to drop an 11% infection rate down to nearly 0%. It turned out, the doctors were mostly consistent in executing all of the steps, but they occasionally skipped a step for any number of accidental or well-intentioned reasons; nonetheless, being accountable to a simple checklist eliminated virtually all the complications, for what was actually a very simple series of steps. That doesn’t mean patients didn’t still have complex health problems, difficult diagnoses, and adverse outcomes; nonetheless, over a two year span, the initial study estimated that in one hospital alone, the checklist had prevented 43 infections, 8 deaths, and saved $2 million dollars!

And notably, the application of checklists is already widespread in other professional contexts. They are a staple of the airline industry, ensuring that even well-trained pilots never miss a single step in the proper execution of flying the plane; notably, such checklists include important guidance about how to quickly handle a wide range of emergency situations where, even if the pilots are trained, it may be difficult to recall, unassisted, the exact proper steps to execute in the heat of a high-stress moment with adrenaline rushing. Similarly, the construction industry also relies heavily on checklists to ensure that buildings are made properly, and that crucial steps aren’t missed that could result in an utter catastrophe. In addition, Gawande points out that an important ancillary benefit of using checklists in such situations is that, when the checklist requires duties of multiple individuals – and everyone is held accountable to ensure all steps of the checklist are completed – teams end out communicating better, which prevents even more unfavorable outcomes.

Creating Your Financial Planning Checklists

Granted, in the financial planning world, the client situations that present themselves are rarely as dire as landing a plane in an emergency or determining what drugs to administer to a patient who may die in minutes or hours if not properly treated. Nonetheless, the fundamental problem remains: financial planning for individuals with a nearly infinite range of situations entails tremendous complexity, to the point where it’s not clear if anyone could really remember every possible question to ask or step to take; at least, not without the assistance of a financial planning checklist.

One version of a quasi-checklist that financial planners already use is the data gathering form, which through its wide range of blanks to fill in amongst various categories, ensures a fairly thorough review of all the client’s potential financial concerns. If you don’t think checklists can be useful, imagine how effective your financial planning process would be if you had to remember, off the top of your head, to ask every question necessary to capture every single bit of information that’s requested on a thorough data-gathering form. Even those who begin using an agenda to guide client meetings often report they help – as a form of checklist – to ensure that all the key issues are covered in the meeting, and that nothing is overlooked in the midst of a potentially complex client conversation.

Similarly, many technical areas in financial planning require not only specialized knowledge, but an awareness of rare-but-potential circumstances that may arise that provide for unique planning opportunities. For instance, with respect to Social Security alone, how often do you ask an unmarried client over the age of 62 if he/she had a former marriage that lasted at least 10 years (potential divorced spouse benefits), or ask retirees over age 62 if there are they still have any children under the age of 18 (extra retirement benefits for children), or ask if the client had a prior (or current) job where he/she did not participate in the Social Security system (future retirement benefits potentially reduced under the Windfall Elimination Provision). While none of these situations are necessarily common, they do occur from time to time – frequent enough to matter, but not frequent enough to necessarily remember to ask every time. The same is true in a wide range of other planning situations, from whether the beneficiary of an inherited IRA might be eligible for an Income In Respect Of A Decent deduction, to whether a non-qualified annuity was originally funded via a 1035 exchange (which means the cost basis is not merely the premiums paid), to whether a term insurance policy is still convertible (or ever was).

In other words, having a financial planning checklist in each of the various areas of financial planning can serve as a type of “due diligence” process, to ensure that all the important planning issues and opportunities are covered. It doesn’t make the planner smarter or more skilled, but does help to ensure that the planner maximizes the knowledge and skill he/she already has. Arguably, at some point in the future, these might even be codified into a more extensive series of Practice Standards for financial planners – as in the case of doctors, this can ultimately help to distinguish between situations where an unfavorable outcome was due to an error or “ineptitude” mistake of the planner, or was simply a situation too complex to possibly be saved. In practice, effective due diligence checklists might also be integrated into a firm’s CRM software.

Atul Gawande Checklist Manifesto

Unfortunately, though, the greatest challenge is simply that we need to build our financial planning checklists – a challenging and time-intensive process. Yet perhaps this is an opportunity for the financial planning community to band together and build something collectively. Have you built any checklists in your firm that you would be willing to share? Would you volunteer time and effort to try to help create a series of financial planning checklists for all practitioners to use? Please respond in the comments if you’re interested, and perhaps we can begin this process together. In the meantime, though, it would probably be a good idea to start building some checklists for the most common challenges that arise in your own financial planning firm!

And if you’re still not convinced of the value of a financial planning checklist (or having a series of them!), I’d strongly encourage you to read “Checklist Manifesto” yourself; if you are convinced, you may also find the book provides helpful inspiration on the kinds of checklists that may be useful in your practice and with your clients.

Comment Letter To CFP Board On Its Proposed Fiduciary Standards Of Conduct

Comment Letter To CFP Board On Its Proposed Fiduciary Standards Of Conduct


In December of 2015, the CFP Board announced that it was beginning a process to update its Standards of Professional Conduct for all CFP certificants, the first such update since the last set of changes took effect in the middle of 2008. And on this past June 20th, the CFP Board published proposed changes (including an expanded fiduciary duty) to its Standards of Conduct, with a public comment period that would last until August 21st.

And so as the CFP Board’s Public Comment period closes today, I have published here in full my own comment letter to the CFP Board. And as you will see in the Comment Letter, I am overall very supportive of the CFP Board advancing the fiduciary standard of care for CFP professionals, and view this as a positive step forward for the financial planning profession.

However, the CFP Board’s proposed changes do introduce numerous new questions and concerns, from key definitions that (in my humble opinion) still need to be clarified further, to new wrinkles in what does and does not constitute a fee-only advice relationship (and whether and to what extent certain types of compensation must be disclosed), to uncertainties about how CFP professionals are expected to navigate important conflicts of interest, and how CFP professionals should interpret the 29(!) instances where the CFP Board’s new standards are based on “reasonableness”… with no explanation of how “reasonable” is determined, and a non-public CFP Board Disciplinary and Ethics Commission that doesn’t even allow CFP professionals to rely on prior case histories for precedence.

Ultimately, I am hopeful that the CFP Board will end up moving forward with its proposed changes to expand the scope of fiduciary duty for CFP certificants, but only after publishing another round of the proposal for a second comment period, given the substantive nature of both the changes themselves, and the concerns that remain.

In the meantime, I hope you find this public comment letter helpful food for thought. And if you haven’t yet, remember that you too can submit your own Public Comment letter to the CFP Board by emailingComments@CFPBoard.org – but today (August 21st) is the last day to submit!

Comment Letter To CFP Board On Its Proposed Fiduciary Standards Of Conduct

In December of 2015, the CFP Board announced that it was beginning a process to update its Standards of Professional Conduct for all CFP certificants, the first such update since the last set of changes took effect in the middle of 2008. And on this past June 20th, the CFP Board published proposed changes (including an expanded fiduciary duty) to its Standards of Conduct, with a public comment period that would last until August 21st.

And so as the CFP Board’s Public Comment period closes today, I have published here in full my own comment letter to the CFP Board. And as you will see in the Comment Letter, I am overall very supportive of the CFP Board advancing the fiduciary standard of care for CFP professionals, and view this as a positive step forward for the financial planning profession.

However, the CFP Board’s proposed changes do introduce numerous new questions and concerns, from key definitions that (in my humble opinion) still need to be clarified further, to new wrinkles in what does and does not constitute a fee-only advice relationship (and whether and to what extent certain types of compensation must be disclosed), to uncertainties about how CFP professionals are expected to navigate important conflicts of interest, and how CFP professionals should interpret the 29(!) instances where the CFP Board’s new standards are based on “reasonableness”… with no explanation of how “reasonable” is determined, and a non-public CFP Board Disciplinary and Ethics Commission that doesn’t even allow CFP professionals to rely on prior case histories for precedence.

Ultimately, I am hopeful that the CFP Board will end up moving forward with its proposed changes to expand the scope of fiduciary duty for CFP certificants, but only after publishing another round of the proposal for a second comment period, given the substantive nature of both the changes themselves, and the concerns that remain.

In the meantime, I hope you find this public comment letter helpful food for thought. And if you haven’t yet, remember that you too can submit your own Public Comment letter to the CFP Board by emailingComments@CFPBoard.org – but today (August 21st) is the last day to submit!

Narrowing The Definition Of “Family Member”

The Related Party rules under the proposed Standards of Conduct include a rebuttable presumption that any family members, or business entities that family members control, will be treated as a “Related Party” for the purposes of both compensation disclosures, and the potential determination of the CFP Professional’s status as being “Fee-Only”.

However, “Family Member” is simply defined as:

A member of the CFP® professional’s family and any business entity that the family or members of the family control.

In practice, this raises numerous questions.

First and foremost, to what depth in the “family tree” is it necessary to look to determine “member of the family” status. Parents, siblings, and children? Grandparents and grandchildren? What about aunts, uncles, nieces, and nephews? Do cousins count? Only 1st cousins? What about 2nd or 3rdcousins? Do the family members of the CFP spouse’s family count, if the spouse is not themselves a CFP professional (such that the family members are “only in-laws”)?

Similarly, what constitutes “family control” of an entity? Must it be controlled by a single family member? What if multiple family members each own a minority share, but their combined ownership constitutes a majority ownership? Does “control” mean ownership of voting shares that actually control the entity? Does that mean a CFP professional could avoid “Related Party” status by owning a 99% limited partnership interest in the entity but NOT the 1% controlling general partner interest? (And does that distort the original intent of these Related Party rules, since the CFP professional would not control the entity, but would receive the bulk of the financial benefits of the entity?)

Notably, Internal Revenue Code Section 318 provides substantial guidance about where these dividing lines are drawn with respect to family members, family attribution, and constructive ownership of stock, and may serve as a guiding template for the CFP Board.

But the nature and scope of “family” and “control” must be clarified further, lest CFP professionals simply direct (without being required to fully disclose) a substantial portion of their compensation to entities in which they own 99% limited partner interests but no controlling interests to avoid the Related Party rules!

Key Point: Clarify the scope of “family member” (how much of the family tree counts?), what constitutes “control” of a business entity as a Related Party, and whether a non-controlling but majority financial interest should also be deemed a Related Party.

Disclosing How An Advisor Is Compensated, or What An Advisor Is Compensated?

A key aspect of the fiduciary duty is to fully disclose conflicts of interest to the client (to the extent they cannot be avoided), and is articulated as such in the CFP Board’s required Duty of Loyalty to clients.

However, the actual disclosures required in Sections 10 and 11 (Introductory Information to the Prospect, and Disclosure Information to the Client) regarding compensation merely require that the advisor disclose “how the Client pays, and how the CFP professional and the CFP Professional’s Firm are compensated, for providing services and products.” Notably absent is a requirement to disclose what, exactly, the CFP professional and his/her firm will be compensated for providing services and products.

This may have simply been an unintended error of wording, but sections 10(b)(ii) and 11(a)(ii) of the final rules should be updated to clearly require the CFP professional to not merely disclose how they are compensated – e.g., “with fees” or “with commission” or “by my company” – but disclosewhat the CFP professional is compensated: i.e., disclosing to the client theactual compensation arrangements for what, exactly, the CFP professional is compensated (and not merely “how”).

Notably, if/when compensation disclosures are required that explain what, exactly, the CFP Professional and the CFP Professionals firm are paid, an additional distinction may need to be made between what the CFP Professional is paid, and what the CFP Professional’s Firm is paid, given that not all CFP Professionals are privy to the details of all revenue sources of their Firms (particularly in the case of a broker-dealer, if a broker-dealer is deemed the CFP professional’s “firm”). This may include (for firms) revenue-sharing or shelf-space agreements, 12b-1 or sub-TA fees, conference sponsorships based on sales volume, commission overrides (in the case of certain annuity and insurance products), etc. Consider whether additional clarifications are needed to specify the exact scope of compensation disclosures for the CFP profession as distinct from the CFP Professional’s Firm, especially given the breadth of some firm’s overall business models.

Key Point: Does the CFP Board expect the CFP professional to merely disclose how they are compensated (fees or commissions or both?), orwhat they are compensated (disclosure of actual compensation arrangements)? And to what extent must the CFP Professional determine the prospective compensation relationships of the CFP Professional’s Firm?

Financial Advice Outside The Scope Of A Financial Plan

In the glossary, Financial Advice is defined as follows:

A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client take or refrain from taking a particular course of action with respect to:

  1. The development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a Client’s personal or financial circumstances;

Technically, this would suggest that any suggestion that a client take or refrain from a particular course of action not pursuant to a [comprehensive] financial plan would not be deemed advice. In other words, if the CFP professional simply gives direct advice to the client regarding budgeting, risk, wealth, taxes, retirement, etc., but not specifically pursuant to the “development or implementation of a financial plan”, it would not be financial advice subject to a fiduciary duty (unless captured in one of the other subclauses of Financial Advice regarding the investment of Financial Assets or the selection of other professionals).

Given that many forms of financial advice are given more modularly, and not necessarily as a part of a comprehensive financial plan (nor is what constitutes a “financial plan” even defined in the proposed Standards), this section should be modified to simply recognize that the subjects themselves are what trigger financial advice, not specifically the creation of a financial plan.

The most straightforward resolution would simply be to remove the words “development or implementation of a financial plan addressing”, such that the section would simply read:

A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client take or refrain from taking a particular course of action with respect to:

  1. The goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a Client’s personal or financial circumstances;

Notably, in the context of this change, the word “goals” should be also modified, to stipulate “financial goals” (as otherwise, even advice about a client’s “goal to lose weight” could be treated as a financial advice goal under this definition!), or alternatively the final clause could be adjusted to state “…or other relevant financial elements of a Client’s personal or financial circumstances”).

In addition, advice regarding loans, debt, and other mortgages (or more generally, “liabilities”) should be included in the list of topics which are treated as “financial advice” in this section (as the remaining subsections defining Financial Advice all pertain to a client’s Financial Assets, and not his/her Financial Liabilities).

Key Point: The delivery of financial planning advice should be treated as financial advice, regardless of whether it is actually delivered pursuant to a financial plan.

New Issues Created By Proposed Compensation Disclosure Rules

Beyond the aforementioned definitional issues regarding the Proposed Standards, a number of unique new issues arise in the CFP Board’s new approach to compensation definitions, including its “negative framing” approach to fee-only (where a “fee-only” advisor is not one who “only” receives fees, but one who does not receive any form of Sales-Related Compensation), the labels that advisors use (or may potentially use in the future) to describe their compensation methodologies.


Section 14(b) of the Proposed Standards defines Sales-Related Compensation, which is stated as:

Sales-Related Compensation is more than a de minimis economic benefit for purchasing, holding for purposes other than providing Financial Advice, or selling a Client’s Financial Assets, or for the referral of a Client to any person or entity. Sales-Related Compensation includes, for example, commissions, trailing commissions, 12(b)1 fees, spreads, charges, revenue sharing, referral fees, or similar consideration.

The fact that revenue-sharing and referral fees, along with any other kind of compensation for the referral of a Client to any person or entity, constitutes “Sales-Related Compensation”, presents substantial potential difficulties for a number of common investment arrangements that would otherwise, to an objective observer, appear to constitute a Fee-Only advisory relationship (were it not for this new compensation definition).

For instance, many financial-planning-centric CFP professionals choose to outsource their investment management implementation, rather than hiring a CFA to assist with it internally. If the advisor wants to retain operational responsibilities and “just” have a third party help with investment models and implementation, the advisor might use a Separately Managed Account. However, for advisors who want to fully outsource investment management responsibilities, it is common to use a TAMP (Turnkey Asset Management Platform), which handles both the investment management and other operational tasks of the investment portfolio, including billing.

In some cases, TAMPs will apply two tiers of fees to the advisory account – one for the TAMP’s portion of investment responsibilities, and the other for the CFP Professional’s fees. But more commonly, the TAMP will simply conduct the entire fee sweep, and then remit a portion back to the CFP professional in the form of either a revenue-sharing or solicitor fee.

The end result of this arrangement is that the CFP Professional that uses a TAMP for investments in order to focus on financial planning would be deemed to receive sales-related compensation and not be fee-only (due to the fact that the TAMP swept the fees and remitted them to the advisor), whereas if the advisor retained billing responsibility and remitted a portion of the advisor’s fee to the TAMP as an expense, he/she would be treated as fee-only. This seems to create a substantial distinction in compensation disclosure arrangements, without any actual substantive difference in what the client pays, or the nature of any conflicts of interest (particularly where the advisor retains advisory authority to hire/fire/change the TAMP manager).

Furthermore, the irony is that if the CFP professional was not independent, and instead worked for the TAMP, and was paid compensation directly by the firm for which he/she worked (even if it was a percentage of revenue), the compensation disclosure rules would (correctly) recognize that the client is paying only a fee to the CFP professional and his/her firm. Thus, an independent CFP professional who objectively chooses a third-party TAMP (for which the TAMP handles billing and shares the CFP professional’s share of the fee back to him/her) is treated as receiving sales-related compensation, yet an employee of the TAMP who only solicits for that TAMP, and receives a share of the fee revenue (a classic salesperson arrangement) would not be sales-related compensation (because as an employee, the employee’s compensation within the firm is not treated as revenue-sharing, even though it functionally is).

In other words, the CFP Board’s Proposed Standards have (perhaps unwittingly) created a substantial distinction between “first-party” revenue-sharing (CFP professional is internal to a firm), and “third-party” revenue sharing (CFP professional is external from the firm), even though the actual services rendered, fees paid by the client, and compensation paid to the CFP professional, are exactly the same… and in fact, the external advisor would be more independent and less prone to sales-related conflicts of interest!

While in theory, it might be ideal to try to “require” all advisors to structure third-party investment management agreements in certain ways – such as requiring that the advisor’s fee and the TAMP’s fee always be billed separately, or that the advisor always sweep fees and remit the TAMP’s portion to the TAMP, rather than the other way around – from a practical perspective, such changes would be substantial operational changes for many TAMPs, and not feasible to implement in a timely manner in accordance with the CFP Board’s Proposed Rules. Even though, again, the end result to the client is still that he/she is paying only fees and no actual sales-related compensation.

Accordingly, the CFP Board should consider amendments to this definition of “Sales-Related Compensation”, to more accurately reflect the underlying substance and economic reality of the arrangement for the client, and not recharacterize fees as sales-related compensation simply due to operational implementation decisions.

Reasonable safe harbors to further modify this rule might include:

– If the CFP professional receives a referral or solicitor fee from another firm, and that firm itself receives no sales-related compensation in connection with services rendered to the client, then the CFP professional’s participation in a portion of the fee-only relationship does not convert it to sales-related compensation (i.e., participating in a portion of the fees in a fee-only relationship is still a fee-only relationship);

– In order to be deemed a permissible fee-only revenue-sharing agreement, the CFP professional should retain discretion to hire or fire the third-party manager (to affirm that the CFP professional is in an independent relationship, and not operating as a captive salesperson); and

– In order to not be deemed Sales-Related Compensation for participating in the sharing of a client fee, the CFP Professional’s share of the compensation should not materially vary by the assets of the client or total assets of the relationship (to avoid sales incentives for directing client investment fees towards a particular provider)

Key Point: Treat CFP professionals who outsource to third-party managers the same as CFP professionals whose firms hire internal investment staff, if the client is actually paying the same fees either way.


Continuing the prior theme, it’s also notable that all forms of “Sales-Related Compensation” implicitly assume that payments will come fromthird parties, without recognizing that for advisors who work directly for product manufacturers, “sales-related compensation” comes in the form of direct bonuses from their employer for certain levels of sales production.

In other words, when an independent advisor is paid to sell a third-party product, sales-related compensation is typically in the form of a commission. When a captive advisor is paid to sell his/her company’s ownproprietary product, sales-related compensation is typically in the form of bonuses (which firms assign based on sales targets, the profitability of products, etc.). Yet the CFP Board’s current definition of compensation would not characterize the compensation of the latter as sales-related compensation, even if the bulk of the advisor’s compensation actually was tied directly to sales (and paid in the form of employee bonuses, rather than product commissions).

Accordingly, CFP Board’s definitions for sales-related compensation need to consider the types of internal compensation bonuses paid to employees for business development and production, including common practices such as paying advisors a percentage of revenue they bring in (an indirect form of solicitor fee), and paying bonuses based on total products implemented (an indirect form of commissions). And to the extent such compensation arrangements would be deemed sales-related compensation in a third-party independent context, they should be reflected as sales-related compensation in a first-party context as well.

Otherwise, a firm could operate entirely as “fee-only” simply by manufacturing all of its own proprietary products, and rather than paying commissions to third-party advisors, simply pay its own CFP professionals a salary plus bonus (or a share of revenue) to sell its products (even though the nature of the advisor’s role is purely sales).

Key Point: Treat RIA solicitors of a fee-only firm the same as employees of a fee-only firm, given that both may be paid the exact same way (a percentage of revenue). And recognize for captive employees of firms that manufacturer proprietary product, even salary and bonus compensation can constitute sales-related compensation (even if there are no direct commissions, because the company is distributing its product directly through its own salaried salespeople).


One of the greatest challenges that may arise from the proposed definitions for fee-only and sales-related compensation is for advisors who wish to change to become fee-only, even though they previously operated as a commission-and-fee advisor who received sales-related compensation.

The reason is that, under the proposed definitions, a fee-only CFP professional cannot hold out as such if they receive any “sales-related compensation”, including trailing commissions and 12b-1 fees, even if 100% of the CFP professional’s ongoing relationships with new clients involve no new sales-related compensation. In other words, any CFP professional who wantsto operate on a fee-only basis in the future still cannot actually be fee-only unless they terminate all ongoing 12b-1 and other trailing commission payments to themselves.

Yet from a practical perspective, this is neither positive for the client, nor the advisor. To the extent the client has already purchased a commission-based product in the past, with a 12b-1 or other commission trail built into the existing pricing of the product, even if the advisor terminates the trailing commission relationship, the client will still pay the trail anyway. It will simply be collected by the product manufacturer as a “house account”, instead of being paid to the original CFP professional who sold it.

In addition, a CFP professional who terminates their commission trail relationship is required to remove themselves from being the broker-of-record or agent-of-record on the investment or insurance product, which eliminates the advisor’s ability to actually provide basic service, and answer ongoing financial planning questions, of the client.

All of which means compelling newly-fee-only CFP professionals to actually terminate their trailing commissions and 12b-1 fees results in a decrease in the ability of the advisor to service the client and address their financial planning needs, without even saving the client the cost of those trailing commissions or 12b-1 fees in the first place!

And notably, even the SEC characterizes a 12b-1 fee as a combination of a “distribution fee” (i.e., a commission, of up to 0.75%/year), and a “shareholder servicing fee” (which FINRA caps at 0.25%/year). In other words, a 12b-1 fee of up to 0.25%/year isn’t actually even “sales-related compensation” in the first place; it’s a servicing fee. (The same is true for many insurance commission trails as well, though the split between [levelized] commissions and servicing trails are not always delineated explicitly.)

Thus, given that ongoing 12b-1 and commission trails are typically for servicing anyway, and advisors who retain servicing relationships with products previously sold to clients maintain better ability to render financial planning advice on those products, a more appropriate definition of “fee-only” (or limitation on sales-related compensation” would recognize a distinction between receiving servicing 12b-1 fees and commission trails on prior transactions, from new commissions generated from new transactions (which would clearly be sales-related compensation).

Accordingly, the CFP Board should consider adding an additional exclusionary condition under Section 14(b) of its proposed rules (i.e., a new paragraph iv), which stipulates that the mere presence of 12b-1 servicing fees (in an amount no more than the FINRA-capped 0.25%), and ongoing commission trails (for servicing previously sold products), will not be treated as sales-related compensation, as long as no new sales-related compensation is introduced going forward.

Conversely, though, the CFP Board should also consider amending the rules to stipulate that if an advisor’s compensation status changes, all prospective and existing clients must be notified of the change. Otherwise, the limitations on “sales-related compensation” and the definition of “fee-only” also risks being rendered moot by an advisor who claims to be “fee-only”, then “temporarily” changes their compensation to be commission-and-fee for one client (who does a purchase of a large commission-based product), and then switches “back” to fee-only after the purchase has occurred. In other words, CFP Board needs to consider introducing some provision to clarify whether or how quickly an advisor can change their status to/from fee-only, to minimize any risk of routine “hat-switching” from one client to the next. (A notification requirement to all clients of the change in compensation methodology would likely be sufficient to reduce any advisor incentive for making regular client-by-client changes.)

Key Point: Provide clear guidance about how CFP professionals who previously received sales-related compensation, and still receive ongoing 12b-1 servicing fees and insurance commission trails for servicing, can transition to fee-only status, without being required to terminate their broker-of-record and agent-of-record affiliations that are necessary to ensure previously-sold contracts can be properly serviced by the advisor.


One of the “unintended consequences” of the changes to compensation disclosures in the last update to the CFP Standards of Conduct was that, once the definition of “fee-only” became more clearly defined, advisors who wanted to market on a “similar” basis began to adopt the label “fee-based” instead.

To address this issue, the CFP Board’s new rules would require, in Section 14(a)(ii), that:

A CFP® professional who represents that his or her compensation method is “fee-based” must: a) Not use the term in a manner that suggests the CFP® professional or the CFP® Professional’s Firm is fee-only; and b) Clearly state that either the CFP® professional earns fees and commissions, or the CFP® professional is not fee-only.

While this is a reasonable way to address the concern of CFP professionals who use the label “fee-based” to imply something similar to “fee-only”, it fails to recognize the underlying challenge: that given currently favorable media coverage of the “fee-only” label, there is a substantial marketing advantage for non-fee-only advisors who can come up with a fee-only-like similar label.

Which means even if the CFP Board cracks down on “fee-based”, it’s only a matter of time before a new, alternative term arises instead. Advisors who receive fees and commissions, but want to accentuate the fee aspect of their advisory relationships, may simply instead adopt terms like “fee-oriented” or “fee-compensated” or “fee-for-service” (without acknowledging they’re also commission-compensated). Which leaves the CFP Board in the unenviable position needing to update its compensation disclosure rules every few years just to try to crack down on the latest “innovative” fee-related marketing term.

The alternative, which the CFP Board should seriously consider instead, is to standardize the terminology in compensation disclosures – a path the organization had started down previously with its 2013 “Notice To CFP Professionals” regarding compensation disclosures, with its specific disclosure types of “fee-only”, “commission-and-fee”, and “commission-only”.

In a world where those options are the only options that advisors are permitted to use – or at least, where those disclosure types must be statedfirst, before any other compensation labels – there is little risk of alternative compensation labels arising. Or at a minimum, if a CFP professional chooses in the future to call themselves “fee-oriented” or “fee-compensated” or “fee-for-service” but first must acknowledge they are commission-and-fee advisors, the risk of consumer confusion over compensation labels is greatly diminished.

Notably, though, the one caveat of this approach is that in practice, it means most advisors will end out in the “middle” category of being commission-and-fee, and that advisors will be in that category regardless of whether they receive 99% of their compensation in commissions, or 99% of their compensation in fees (even though, in practice, those are substantively different business models, with substantively different potential conflicts of interest to disclose to the client). Accordingly, to avoid rendering the “commission-and-fee” label meaningless (even as it’s used by the majority of CFP Professionals), CFP Board might consider at least adjusting to four categories: fee-only, fee-and-commission, commission-and-fee, and commission-only (where the difference between fee-and-commission versus commission-and-fee is determined based on which compensation type formed the majority of the advisor’s compensation over the prior calendar year, or some other stipulated measuring period).

Nonetheless, the fundamental point is simply this: in order to prevent the “creative” use of potentially misleading compensation labels, the CFP Board needs to standardize a fixed nomenclature of compensation models (as it has for “fee-only”, but including all the other possible categories as well), and require those labels of the first/primary explanation of compensation for the CFP professional. Anything less simply invites a never-ending oversight challenge of adapting new rules to ever-changing terms and labels in the marketplace.

Key Point: Standardize a series of required compensation disclosures, rather than merely defining “fee-only” and limiting “fee-based”, or the advisory community will simply keep coming up with new terms that may or may not be deemed misleading in the future. A standard nomenclature – such as fee-only, commission-and-fee, fee-and-commission, and commission-only – eliminates any room for innovating new questionable terms.

Limiting An Advice Engagement To A Compensated Engagement

One of the biggest practical caveats to enforcing a fiduciary duty for any professional service provider is being clear about when a professional service engagement actually begins. This helps to ensure not only that “general education” is not unwittingly treated as a fiduciary professional service, but also that “free” services (which may or may not constitute a formal professional services engagement) aren’t subject to professional standards when they shouldn’t be.

Fortunately, the flush language of the definition of “Financial Advice” in the Glossary of the proposed standards does clearly state that “…the provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable person would not view as Financial Advice, does not constitute Financial Advice.” This helps to limit any concern that a practitioner would have that general financial education will not constitute fiduciary financial advice.

However, Section 1 of the Standards still require that a fiduciary duty applies to any “Client”, where a Client is defined as “any person… to whom the CFP professional renders Professional Services pursuant to an Engagement”, and an “Engagement” is defined as “a written or oral agreement, arrangement, or understanding”. Yet at no point is there an actual requirement that such an engagement be a formal businessrelationship for compensation.

As a result, the delivery of “free financial advice” – e.g., on a pro bono basis, in an informal relationship with a friend or colleague, or even just ad hoc in a conversation with a stranger – could potentially constitute a fiduciary financial advice relationship. The conversation merely needs to start with an informal statement “Hey, let me ask your advice about something…” and if the advisor responds, an oral understanding that advice is about to be delivered exists, which attaches the advisor’s fiduciary duty.

Notably, such an (investment) advice relationship would not exist for that advisor under the Investment Advisors Act of 1940, because Section 202(a)(11) of that law stipulates that one is only an investment adviser if he/she engages in the business of advising others for compensation. Similarly, the Department of Labor’s recently introduced fiduciary rule also limits the scope of fiduciary duty to situations where the advisor “renders investment advice for a fee or other compensation…”

Accordingly, the CFP Board should adjust its definitions to clarify that “free” advice, or other non-compensated informal advice arrangements, do not (and cannot) rise to the level of being fiduciary financial advice, if the advice is not provided for consideration (i.e., for compensation). Practically speaking, this is probably best handled by adjusting the definition of a Client to be:

Client: Any person, including a natural person, business organization, or legal entity, to whom the CFP® professional renders Professional Services for compensation pursuant to an Engagement.

Key Point: A financial planning “engagement” should be limited to one where the CFP professional renders professional services for compensation, to avoid the risk that “free advice” is deemed an advice relationship.

What Does It Mean To “Manage” Conflicts Of Interest

One of the fundamental principles of a fiduciary duty is the recognition that advisors have a duty of loyalty to their clients, to act in their clients’ best interests, such that conflicts of interest must be managed, and unmanageable conflicts of interest must be avoided altogether.

Accordingly, the Investment Advisers Act of 1940 (and subsequent SEC guidance over the years) provides an extensive series of rules regarding what kinds of conflicts of interest are prohibited for investment advisers. Similarly, the Department of Labor’s new fiduciary rule (and the prior/existing rules under ERISA) prohibit a wide range of unmanageably-conflicted activities, subject to various Prohibited Transaction Exemptions if certain safe harbor stipulations are met.

When it comes to the CFP Board’s requirements, though, Section 9 of the Proposed Standards merely requires CFP professionals to disclose conflicts of interest, with a brief paragraph (out of a 17-page document) directing that “a CFP® professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability to act in the Client’s best interests.” And while Section 1(a)(ii) does go a bit further in stating that a CFP professional should “Seek to avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict”, this still constitutes the entire guidance of the Proposed Standards of Conduct.

Thus, the questions arise: what, exactly, are CFP professionals expected todo to manage their conflicts of interest, what constitutes an “insufficient” business practice that fails to reasonably prevent Materials Conflicts of Interest from compromising the CFP professional, and what types of conflicts are CFP professionals actually expected to “avoid” versus merely “manage”? Will the CFP Board publish a list of prohibited transactions, akin to the Department of Labor, or create further regulations limiting CFP professionals from certain (highly conflicted) activities (as the SEC does)?

Without any guidance from the CFP Board, the risk to the CFP professional is that they will be found “guilty” of failing to manage their conflicts of interest, in a ruling from the Disciplinary and Ethics Commission that only explains what was “impermissible” behavior after the fact.

CFP professionals should not be left to wonder what will turn out, after the fact, to have been deemed an unacceptable or improperly managed conflict of interest. At a minimum, the CFP Board needs to provide additional, supplemental guidance. And the CFP Board should seriously consider whether certain especially-conflicted arrangements with clients are “so conflicted” that the Standards of Conduct should simply bar them altogether (as the Department of Labor did with its fiduciary rule).

Key Point: Provide further clarity about what it really means to “manage” conflicts of interest, and what types of conflicts the CFP Board expects CFP professionals to avoid. Don’t force CFP professionals to find out what is deemed unacceptable after the fact with an adverse DEC ruling.

Navigating Conflicting Duties Of Loyalty Between CFP Professionals And Their Broker-Dealer Or Insurance Company

The first requirement of the CFP professional’s Duty of Loyalty in the proposed Standards of Conduct is that the CFP professional must “Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm”.

Yet the reality is that for a substantial number of CFP professionals, they operate as a registered representative of a broker-dealer, or an agent of an insurance company, and legally have an obligation (a bona fide agency relationship) to represent the CFP professional’s firm first and foremost, and not the client.

Clearly, it is often “good business” for firms to act in the best interests of their clients, regardless of the scope of relationship, but CFP Board’s proposed Standards of Conduct are nonetheless placing a large subset of CFP professionals in a potentially untenable conflict between the requirements of the Standards, and their legal employment agreement and relationship to the Professional’s firm.

At a minimum, the CFP Board should provide additional guidance about how, realistically, CFP professionals are expected to navigate this particular conflict of interest, and in what situations a CFP professional is expected to decline a business opportunity, or outright terminate their employment relationship, if a conflict of interest emerges where the CFP professional cannot effectively fulfill both his/her duty of loyalty to the client, and his/her agency relationship and employment agreement with the firm.

Key Point: With an explicit duty of loyalty to the client for the CFP professional, clarify how CFP professionals working at a broker-dealer or insurance company, where the CFP professional has a legal employment contract that requires him/her to operate as an agent of the company and represent the company (not the client), is expected to navigate prospective conflicts of interest.

Anonymous Case Histories And Setting Precedents For Reasonableness

The final concern worth recognizing in the CFP Board’s Proposed Standards is the fact that substantial portions of the rules are based on subjective standards – beyond just the question of what is a “manageable” conflict of interest vs one to avoid – such that CFP professionals may not even know which behaviors and actions are safe and appropriate until it’s too late.

For instance, the word “reasonable” or “reasonably” is used a whopping 29 times in the Proposed Standards, pertaining to the everything from the aforementioned issue of whether a conflict of interest is Material (based on whether a “reasonable” client would have considered the information material), to whether a related party is related based on whether a “reasonable” CFP professional would interpret it that way, to requirements that CFP professionals diligently respond to “reasonable” client inquiries, follow all “reasonable” and lawful directions of the client, avoid accepting gifts that “reasonably” could be expected to compromise objectivity, and provide introductory information disclosures to prospects the CFP professional “reasonably” anticipates providing subsequent financial advice to. In addition, the entire application of the rules themselves depend on the CFP Board’s “determination” of whether Financial Advice was provided (which triggers the fiduciary obligation for CFP professionals), and CFP professionals with Material conflicts of interest will or will not be found guilty of violating their fiduciary duty based on the CFP Board’s “determination” of whether the client really gave informed consent or not.

In other words, the CFP Board’s new Standards of Conduct leave a lot of room for the Disciplinary and Ethics Commission to make a final (after-the-fact) subjective assessment of what is and isn’t reasonable in literally several dozen instances of the rules.

Of course, the reality is that it’s always the case that regulators and legislators write the rules, and the courts interpret them in the adjudication process. And using “reasonableness” as a standard actually helps to reduce the risk that a CFP professional is found guilty of something that is “reasonably” what another CFP professional would have done in the same situation. “Reasonableness” standards actually are peer-based professional standards, which is what you’d want for the evaluation of a professional.

However, when courts interpret laws and regulations, they do so in a public manner, which allows everyone else to see how the court interpreted the rule, and provides crucial guidance for everyone who follows thereafter. Because once the court interprets whether a certain action or approach is or isn’t permitted, it provides a legal precedent that everyone in the future can rely upon. Except in the case of the CFP Board’s Standards of Conduct, because the CFP Board’s disciplinary process is not public in the first place!

Which means even as the DEC adjudicates 29 instances of “reasonableness”, no one will know what the DEC decided, nor the criteria it used… which means there’s a risk that the DEC won’t even honor its own precedents, and that rulings will be inconsistent. And even if the DEC is internally consistent, CFP professionals won’t know how to apply the rules safely to themselves until they’re already in front of the DEC trying to defend themselves!

Fortunately, since 2010 the CFP Board has been providing a limited number of “Anonymous Case Histories” to provide some guidance on prior DEC rulings. However, the CFP Board’s current Anonymous Case History (ACH) database is still limited (it’s not all cases), and the database does not allow CFP professionals (or their legal counsel) any way to do even the most basic keyword searches OF the existing case histories (instead, you have to search via a limiting number of pre-selected keywords, or by certain enumerated practice standards… which won’t even be a relevant search format once the newly proposed Standards replace the prior format!).

Which means if the CFP Board is serious about moving forward with the new Conduct Standards, including the application of a fiduciary duty and a few dozen instances of “reasonableness” to determine whether the CFP professional met that duty, it’s absolutely crucial that the Commission on Standards require a concomitant expansion of the CFP Board’s Anonymous Case Histories database to include a full listing of all cases (after all, we don’t always know what will turn out to be an important precedent until after the fact!), made available in a manner that is fully indexed and able to be fully searched (not just using a small subset of pre-selected keywords and search criteria).

In addition, the CFP Board should further formalize an additional structure to provide periodic guidance to CFP professionals – akin to the Notice to CFP Professionals issued in 2013 regarding compensation disclosure, but on a more regular basis – to allow for a further fleshing out of the CFP Board’s views of what constitutes “reasonableness” in various areas, so that CFP professionals don’t have to solely rely on after-the-fact adjudication to understand how best to navigate the 29 instances where “reasonableness” is the essential criterion for determining whether the standards were met.

Key Point: With 29 instances of “reasonable” or “reasonably” in the proposed Standards, CFP professionals need further guidance on what constitutes “reasonableness” in a wide variety of situations. Establish a mechanism for providing proactive ongoing guidance, and expand the framework of Anonymous Case Histories to include all case histories, in a searchable and properly indexed archive, so CFP professionals (and the DEC itself) can have a growing body of case law that can be properly cited and reasonably relied upon for precedence. 

Thank you for providing us as CFP professionals and stakeholders the opportunity to provide public comments regarding the CFP Board’s Proposed Standards of Conduct, and I look forward to seeing how the next version of the proposed changes will address the substantive concerns raised here!

– Michael Kitces

For CFP Professionals who are interested in submitting their own comments, the official comment period closes today (August 21st), but there’s still time!

You can submit your feedback directly through the CFP Board website here, or by emailing comments@cfpboard.org. Comments and public forum feedback will then be used to re-issue a final version of the standards of conduct (or even re-proposed if the Commission on Standards deems it necessary to have another round of feedback) later this year.

And for those who want to read through a fully annotated version of the proposed Standards of Conduct themselves, the CFP Board has made a version available on their website here, and/or you can review our prior in-depth commentary about the proposed changes here.

So what do you think? Do you favor the CFP Board’s proposed Standards of Conduct moving forward in their current form? Do you see any potential issues or loopholes? Please share your thoughts in the comments below!


The Challenges Of Integrating Advisory Fee Schedules And Billing During A Merger Or Acquisition

The Challenges Of Integrating Advisory Fee Schedules And Billing During A Merger Or Acquisition

Executive Summary

There are many challenges in navigating a successful advisory firm merger or acquisition, from ensuring that the firms align on investment, financial planning, and service philosophies, to finding an agreeable valuation and terms to the transaction, and navigating the post-transaction integration process. Yet in practice one of the biggest blocking points is simply figuring out how to effectively align the advisory fee schedules and fee calculations of the two firms – for instance, when one advisory firm charges substantially more or less than the other – to the point that one of the biggest blocking points of an otherwise-well-aligned merger or acquisition is simply whether it’s feasible to integrate their billing processes (especially when the firms have differences in their underlying business model, such as an AUM firm acquiring a retainer-fee firm).

In this week’s, we discuss the major issues to consider when integrating advisory fee schedules and billing processes, from strategies to adjust when one firm has an advisory fee schedule that charges more (or less) than the other, to reconciling differences in billing timing (i.e., billing in advance versus in arrears), and the unique acquisition problems that arise when trying to acquire retainer-fee firms.

For most, though, the biggest challenge is simply reconciling differences in fee schedules between the two firms. In situations where the acquirer charges more than the firm being acquired, there’s typically a desire to lift the newly acquired clients up to the fee schedule of the existing firm – which can make the transaction a strategically positive deal for the acquirer, if it can generate more revenue from the same clients, but also increases the risk that clients will reject the new fee schedule and not transition at all (which means it may be a good idea to leave the original fee schedule in place for a year or two, to allow clients the time to adjust, and build a relationship with the new firm). On the other hand, when the acquirer charges less than the firm being acquired, it gets even messier, as if the acquirer pays “full price” for the new firm’s revenue and then immediately cuts their fee schedule, the acquirer faces a substantial loss on the transaction (unless they can bring down costs in the merger business by even more than the loss in revenue!).

Even where advisory firms reasonably align on fee schedules, though, it’s also necessary to consider whether they have the same billing timing – in particular, whether both firms consistently bill in arrears or in advance. Because differences between the two firms in their billing process can lead to substantial disruptions in cash flow for either the acquirer, or the newly acquired clients! After all, if the acquirer needs to switch the new firm from billing in advance to billing in arrears, the firm could be forced to wait up to six months without receiving any new revenue from the new clients! And if the acquirer needs to switch in the other direction – from billing in arrears to billing in advance – then the first invoice to the clients may have to be a “double-billing” of the last arrears fee and the first advance fee all at once (which increases the transition risk for the acquiring firm!). In fact, even differences in the billing calculation process – such as when one firm bills on end-of-quarter balance, and the other uses average daily balance – can create billing gaps between expected and actual revenues!

And of course, this all assumes that both the acquiring and selling firms were both charging AUM fees in the first place. In the case where the acquiring firm charges AUM fees but the acquired firm charged retainers, it can be even more challenging to transition the retainer clients onto the AUM firm’s fee schedule (especially since many retainer-based firms proactively “sell against” the disadvantages of AUM fees, which effectively chases away potential buyers who may want to convert the business to their own AUM fee schedule). In turn, this means the marketplace of potential acquirers for retainer fee firms is drastically smaller, and retainer fee firms may have more difficulty finding an acquirer that will pay them a “fair” price – particularly for firms that charge retainer fees to clients who do have assets and “could” pay AUM fees (as the situation is different when using retainer fees to serve younger clients, or other “non-AUM” types of clientele).

Ultimately, though, the key point is simply to recognize how important differences in advisory fee schedules and billing processes can be when you’re looking at a potential merger or acquisition. As a result, doing detailed due diligence on advisory fee schedules is crucial. In particular, advisors should be evaluating any differences in the level of fees charged to clients, the timing of those fees, how those fees are calculated, and whether two firms have fundamentally different approaches to billing altogether. Of course, fee schedules don’t need to be identical in order to successfully navigate a merger, but approaching a merger with a clear understanding of the potential risks and opportunities involved is crucial!

Billing In Advance Vs Arrears (and on Daily Balance vs End-Of-Quarter Values)

Now, the second area that advisors need to watch when it comes to merging advisory fee schedules is the actual billing process. Because there are two issues that can crop here, one big and one a little bit smaller. The really big one is whether you bill in advance or in arrears. In other words, when a client starts with you, is their first quarterly billing for the prior partial quarter that they were with you or is their first billing in advance for the upcoming quarter, and if they decide to terminate the next quarter, do you refund them a pro rata portion of their fees?

Now, some firms just prefer to bill in arrears and they have a philosophy, “We’re not going to bill our clients until we’ve started doing the work,” other firms I know say, “I have a strong preference for billing in advance, that way I never have any accounts receivable, and I never have to collect from clients. I just refund pro rata if someone terminates, and not many people do because I’ve got a good retention.” On an ongoing basis, most firms don’t even think about this. You just bill your clients quarterly, whether it’s in arrears or in advance. After the first billing, no one really cares unless they’re going to terminate you and then you have to figure out if you will pro rata portion the last fee back if you billed them in advance.

But in a merger or an acquisition, this matters a lot, because if you bill in arrears and you acquire a firm that bills in advance, then when you buy them, you immediately take on the liability of refunding any clients who terminate in the quarter right after you’ve billed them. Unless you immediately convert the clients to arrears billing, you also have this potential liability in the future. But if you want to convert the clients, this gets even messier.

Imagine I bill in arrears and I acquire a firm that bills in advance. We’re in negotiations now, the deal closes in October, shortly after fourth quarter billing has happened at the end of September 30th. So the clients of the firm I just bought have already paid for Q4, they paid it in advance, which means if I want to bill them in arrears, my next billing isn’t going to happen for five months, until the end of Q1, March 31st, when I can bill them in arrears for the first billing as the acquired firm.

If I bought the firm in October, I don’t get any revenue at the end of the fourth quarter. There’s no Q4 billing in arrears because the firm already billed Q4 before they sold it to me. That seller has that money gone with it. And if I don’t bill in advance, I can’t bill them for Q1 at the end of the year. Instead, I have to wait three months into Q1. So you have to be cognizant of whether there were gaps between the firms billing in advance and in arrears.

And unfortunately, it’s not much better going the other direction. If the acquiring firm bills in advance and the firm being acquired bills in arrears, then the only way to true-up clients is that as the acquirer, you have to double-bill them. So in my earlier example, if you buy a firm in October that bills in arrears when you bill in advance, and at the end of Q4, on December 31st, you’re going to bill Q4 in arrears, because the clients haven’t paid for that yet, and you’re going to bill Q1 in advance because that’s what you do on an ongoing basis. And so the clients are going to get hit with two bills to get them on track the first time you do billing with them as the acquirer.

Now, it’s worth noting that you’re not cheating them or anything here. You’re not like literally double-charging them. They’re paying the Q4 fees because services were rendered in Q4, and you’re billing them in advance for Q1 because that’s what you do with all of all your clients, and if they terminate you you partially refund. But it does mean you have to be prepared to communicate that to transition them from arrears into an advance, there has to be a double-billing that occurs. You have to go two-quarters of fees to get an arrears closed out and an advance set up going forward. And so that’s a real risk, a real transition risk if you’re an acquirer, and you have to convince clients to stick around when the first thing you’re going to do is bill them for two-quarters when they’re still getting to know you. Now, it can be done. I know firms that have done it and they were able to get through it, and they were able to have retention. But at a minimum, it’s a really sensitive issue.

The other piece that goes along with these sort of mundane billing processes is you need to be aware of whether there’s alignment in how the fees are calculated. Specifically, when you do that billing, whether it’s in advance or in arrears, do you calculate based on end of quarter balance, or do you calculate based on average daily balance? Now, in theory, on average, these things average out, but not always. If your clients are net savers, end of quarter balances tend to be higher than average daily balances within the quarter because clients keep contributing lifting up the balance so that the end of quarter tends to be the highest one because it’s got all the contributions.

But if you’re mostly working with retirees, it may be the other way around. Average daily balances tend to be higher than end of quarter balances because at the end of the quarter all the withdrawals have occurred. And then, of course, in any particular quarter, you can get big gaps if the market moved sharply in the last couple of weeks in either direction and the end of quarter balance is very different than the average daily balance. In general, this adjustment tends to be more administrative (particularly in the quarter where the transition is occurring), but you need to know that the billing process is going to change. First, because you have to communicate it, second, because you probably need to reflect it in an updated advisory agreement, but you also need to consider whether there’s a risk that it may distort revenue in the first billing period after you acquire.

The Acquisition Problem With Retainer Fees In Lieu Of AUM Fees

Before I wrap up, there’s actually one other important dynamic I want to note here as well, and it’s the unique challenges that crop up when you’re trying to merge advisory firms where their fee schedule isn’t AUM fees in the first place, it’s retainer fees. Now, we know from industry research that the overall majority of advisory firms are still AUM-centric. And in fact, that the larger the advisory firm, the more affluent their clients, the more likely they are to charge AUM fees. Which means, on average, most buyers of retainer firms are still going to be AUM firms. And AUM firms acquire other firms to get more AUM. That’s what they do.

But what that means is that when an AUM acquires a retainer firm of clients who actually have assets, there’s usually a plan to convert those retainer clients over to an AUM fee structure. Except, unfortunately, that’s often very difficult because the firms that use retainer fees, particularly for affluent clients, tend to aggressively sell against AUM fees to convince their clients that the retainer model is superior, which means you effectively poison the well for most of your acquirers.

And this is one of the major drawbacks to pivoting from AUM to retainer fees that I find very rarely ever comes up in conversation (although I know a number of advisors who switched to retainer fees years ago and now want to retire and can’t find anyone to buy their firm because most firms charging retainer fees are relatively small, don’t have great margins, and don’t have the size and scale and cash flow to buy…while the AUM firms who’ve got dollars to buy, don’t want to buy retainer fee firms where the clients have been told that the AUM model is bad).

This isn’t necessarily an issue for those who are doing retainer fees for younger clients who don’t have assets, because the truth is, no AUM buyer is going to be acquiring a practice of clients who don’t have assets (or if they do, they’re going to acquire because they want to actually do the retainer model the way the retainer model is being executed). But if you’re a firm that works with affluent clients who have assets and simply charges retainer fees, this gets a lot harder to find prospective buyers because the AUM buyers want to convert but are afraid of the risk, and there aren’t very many non-AUM buyers. You risk drastically reducing the appeal for the bulk of prospective buyers.

And in fact, even other retainer firms often have trouble acquiring those who do complexity-based retainer fees because different firms characterize complexity differently. And so, even two firms doing annual retainer fees for affluent clients might charge very differently for some of those clients. Which means if you’re the acquirer, this is a really messy, one-client-at-a-time process of figuring out what each acquired client would be charged under the new firm’s model, and whether it’s more or less than what the old firm was charging.

Indirectly, this is actually one of the reasons why the AUM model happens to work so well because, by its nature, it’s actually a really systematized billing model. At worse, you have to change a few rates or break points on your AUM fee schedule, but there’s a standard fee structure for all clients. And that’s often not the case with retainer firms. And so, it can make the billing process much harder to reconcile for an acquiring firm. Sometimes so difficult that it may narrow the number of buyers, which means you have to spend more time trying to sell your firm and have fewer bidders competing and hopefully bidding up your price, which is not good news if you hope to be a seller some day. So do understand that most firms tend to get acquired by those who have comparable billing styles or business models, and make sure you know that you’re going to have buyers if you’re making business model decisions.

But anyway, the bottom line is just to recognize how important it is when you’re looking at a potential merger or an acquisition to do this kind of detailed due diligence on the advisory fee schedules and the billing processes. Do the firms have the same fee schedule? If not, who’s higher and lower all the way up and down the spectrum? Do they both bill in arrears or in advance, or is there a gap? Do they both bill on quarter and/or average daily balance or is there another gap? And if the firm charges retainer fees or separate planning fees (or a blended AUM plus retainer), are those fee structures and the way the fees are set consistent across the firms? Because, if they’re not, those kind of manually assigned retainer fees and planning fees are often the hardest parts to line up.

So be aware of that, and particularly if you’re thinking about moving away from AUM fees and towards the emerging range of “non-traditional” fee structures, as you may limit the potential market for buyers. It doesn’t necessarily mean it’s a bad thing to do if you think you can grow the business well enough in that direction. You may grow up on more than enough to make up for the fact that you’ve got a smaller market, but it’s really hard to find firms that will want to acquire you because of all these challenges in integrating fee schedules and billing if you use a substantially different fee model than everybody else.

I hope that’s helpful as some food for thought.

So what do you think? Are differences in fee schedules a potential problem when looking at mergers and acquisitions? Have you been in a similar situation? How did you manage the transition from one fee schedule to another? Please share your thoughts in the comments below!

Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?

Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?

Executive Summary

While the standard rule-of-thumb is that financial advisors charge 1% AUM fees, the reality is that as with most of the investment management industry, financial advisor fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50% than 1%.

Yet at the same time, the total all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds that most financial advisors still use, not to mention transaction costs, and various platform fees. Accordingly, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%!

On the other hand, with growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversified asset allocated portfolio. Instead, the standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning).

The end result is that comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Instead, costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented, such that advisory fees must really be broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee.

From this perspective, the reality is that the portion of a financial advisor’s fees allocable to investment management is actually not that different from robo-advisors now, suggesting there may not be much investment management fee compression on the horizon. At the same time, though, financial advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as financial advisors increasingly shift more of their advisory fee value proposition to financial planning and wealth management services, advisors are still struggling to demonstrate why financial planning services should command a pricing premium in the marketplace.

How Much Do Financial Advisors Charge As Portfolios Grow?

One of the biggest criticisms of the AUM business model is that when financial advisor fees are 1% (or some other percentage) of the portfolio, that the advisor will get paid twice as much money to manage a $2M portfolio than a $1M portfolio. Despite the reality that it won’t likely take twice as much time and effort and work to serve the $2M client compared to the $1M client. To some extent, there may be a little more complexity involved for the more affluent client, and it may be a little harder to market and get the $2M client, and there may be some greater liability exposure (given the larger dollar amounts involved if something goes wrong), but not necessarily at a 2:1 ratio for the client with double the account size.

Yet traditionally, the AUM business has long been a “volume-based” business, where larger portfolios reach “breakpoints” where the marginal fees get lower as the dollar amounts get bigger. For instance, the advisor who charges 1% on the first $1M, but “only” 0.50% on the next $1M, such that the with double the assets does pay 50% more (in recognition of the costs to market, additional service complexity, and the liability exposure), but not double.

However, this means that the “typical financial advisor fee” of 1% is somewhat misleading, as while it may be true that the average financial advisory fee is 1% for a particular portfolio size, the fact that fees tend to decline as account balances grow (and may be higher for smaller accounts) means the commonly cited 1% fee fails to convey the true sense of the typical graduated fee schedule of a financial advisor.

Fortunately, though, recent research by Bob Veres’ Inside Information, in a survey of nearly 1,000 advisors, shines a fresh light on how financial advisors typically set their AUM fee schedules, not just at the mid-point, but up and down the scale for both smaller and larger account balances.  And as Veres’ research finds, the median advisory fee up to $1M of assets under management really is 1%. However, many advisors charge more than 1% (especially on “smaller” account balances), and often substantially less for larger dollar amounts, with most advisors incrementing fees by 0.25% at a time (e.g., 1.25%, 1.00%, 0.75%, and 0.50%), as shown in the chart below.

Comparison Of Financial Advisor Fee Levels By Portfolio Size

More generally, though, Veres’ research affirms that the median AUM fee really does decline as assets rise. At the lower end of the spectrum, the typical financial advisory fee is 1% all the way up to $1M (although notably, a substantial number of advisors charge more than 1%, particularly for clients with portfolios of less than $250k, where the median fee is almost 1.25%). However, the median fee drops to 0.85% for those with portfolios over $

1M. And as the dollar amounts rise further, the median investment management fee declines further, to 0.75% over $2M, 0.65% over $3M, and 0.50% for over $5M (with more than 10% of advisors charging just 0.25% or less).

Notably, because these are the stated advisory fees at specific breakpoints, the blended fees of financial advisors at these dollar amounts would still be slightly higher. For instance, the median advisory fee at $2M might be 0.85%, but if the advisor really charged 1.25% on the first $250k, 1% on the next $750k, and 0.85% on the next $1M after that, the blended fee on a $2M portfolio would actually be 0.96% at $2M.

Nonetheless, the point remains: as portfolio account balances grow, advisory fees decline, and the “typical” 1% AUM fee is really just a typical (marginal) fee for portfolios around a size of $1M. Those who work with smaller clients tend to charge more, and those who work with larger clients tend to charge less.

Median AUM Fee Schedules Based On Portfolio AUM

How Much Do Financial Advisors Cost In All-In Fees?

The caveat to this analysis, though, is that it doesn’t actually include the underlying expense ratios of the investment vehicles being purchased by financial advisors on behalf of their clients.

Of course, for those who purchase individual stocks and bonds, there are no underlying wrapper fees for the underlying investments. However, the recent FPA 2017 Trends In Investments Survey of Financial Advisors finds that the overwhelming majority of financial advisors use at least some mutual funds or ETFs in their client portfolios (at 88% and 80%, respectively), which would entail additional costs beyond just the advisory fee itself.

Advisor Use Of Investment Products With Clients Over Time

Fortunately, though, the Veres study did survey not only advisors’ own AUM fee schedules, but also the expense ratios of the underlying investments they used to construct their portfolios. And as the results reveal, the underlying expense ratios add a non-trivial total all-in cost to the typical financial advisory fee, with the bulk of blended expense ratios coming in between 0.20% and 0.75% (and a median of 0.50%).

Average Blended Expense Ratio Of Investments Used By Financial Advisors

Of course, when it comes to ETFs, as well as the advisors who trade individual stocks and bonds, there are also underlying transaction costs to consider. Fortunately, given the size of typical advisor portfolios, and the ever-declining ticket charges for stock and ETF trades, the cumulative impact is fairly modest. Still, while most advisors estimated their trading costs at just 0.05%/year or so, with almost 15% at 0.02% or less, there were another 18% of advisors with trading costs of 0.10%/year, almost 10% up to 0.20%/year, and 6% that trade more actively (or have smaller typical client account sizes where fixed ticket charges consume a larger portion of the account) and estimate cumulative transaction costs even higher than 0.20%/year.

In addition, the reality is that a number of financial advisors work with advisory platforms that separately charge a platform fee, which in some cases covers both technology and platform services and also an all-in wrap fee on trading costs (and/or access to a No-Transaction-Fee [NTF] platform with a platform wrapper cost). Amongst the more-than-20% of advisors who reported paying such fees (either directly or charged to their clients), the median fee was 0.20%/year.

Accordingly, once all of these various underlying costs are packaged together, it turns out that the all-in costs for financial advisors – even and including fee-only advisors, which comprised the majority of Veres’ data set – including the total cost of AUM fees, plus underlying expense ratios, plus trading and/or platform fees, are a good bit higher than the commonly reported 1% fee.

For instance, the median all-in cost of a financial advisor serving under-$250k portfolios was actually 1.85%, dropping to 1.75% for portfolios up to $500k, 1.65% up to $1M, and 1.5% for portfolios over $1M, dropping to $1.4% over $2M, 1.3% over $3M, and 1.2% over $5M.

All-In Total Cost Of Financial Advisor AUM Fees By Portfolio Size

Notably, though, the decline in all-in costs as assets rise moves remarkably in-line with the advisor’s underlying fee schedule, suggesting that the advisor’s “underlying” investments and platform fee are actually remarkably stable across the spectrum.

For instance, the median all-in cost for “small” clients was 1.85% versus an AUM fee of 1% (although the median fee was “almost” 1.25% in Veres’ data) for a difference of 0.60% – 0.85%, larger clients over $1M face an all-in cost of 1.5% versus an AUM fee of 0.85% (a difference of 0.65%), and even for $5M+ the typical total all-in cost was 1.2% versus a median AUM fee of 0.5% (a difference of 0.70%). Which means the total cost of underlying – trading fees, expense ratios, and the rest – is relatively static, at around 0.60% to 0.70% for advisors across the spectrum!

Median All-In AUM Fees Of Financial Advisers (By Portfolio Size)

On the one hand, it’s somewhat surprising that as client account sizes grow, advisors reduce their fees, but platform fees and underlying expense ratios do not decrease. On the other hand, it is perhaps not so surprising given that most mutual funds and ETFs don’t actually have expense ratio breakpoints based on the amount invested, especially as an increasing number of low-cost no-load and institutional-class shares are available to RIAs (and soon, “clean shares” for broker-dealers) regardless of asset size.

It’s also notable that at least some advisor platforms do indirectly “rebate” back a portion of platform and underlying fees, in the form of better payouts (for broker-dealers), soft dollar concessions (for RIAs), and other indirect financial benefits (e.g., discounted or free software, higher tier service teams, access to conferences, etc.) that reduces the advisor’s costs and allows the advisor to reduce their AUM fees. Which means indirectly, platforms fees likely do get at least a little cheaper as account sizes rise (or at least, as the overall size of the advisory firm rises). It’s simply expressed as a full platform charge, with a portion of the cost rebated to the advisor, which in turn allows the advisor to pass through the discount by reducing their own AUM fee successfully.

Financial Advisor Fee Schedules: Investment Management Fees Or Financial Planning Fees?

One of the other notable trends of financial advisory fees in recent years is that financial advisors have been compelled to do more and more to justify their fees, resulting in a deepening in the amount of financial planning services provided to clients for that same AUM fee, and a concomitant decline in the profit margins of advisory firms.

To clarify how financial advisors position their AUM fees, the Veres study also surveyed how advisors allocate their own AUM fees between investment management and non-investment-management (i.e., financial planning, wealth management, and other) services.

Not surprisingly, barely 5% of financial advisors reported that their entire AUM fee is really just an investment management fee for the portfolio, and 80% of advisors who reported that at least 90% of their AUM fee was “only” for investment management stated it was simply because they were charging a separate financial planning fee anyway.

For most advisors who do bundle together financial planning and investment management, though, the Veres study found that most commonly advisors claim their AUM fee is an even split between investment management services, and non-investment services that are simply paid for via an AUM fee. In other words, the typical 1% AUM fee is really more of a 0.50% investment management fee, plus a 0.50% financial planning fee.

Self-Reported Percentage Of Advisor's AUM Fee Actually Paying For Investment Management

Perhaps most striking, though, is that there’s almost no common consensus or industry standard about how much of an advisor’s AUM fee should really be an investment management fee versus not, despite the common use of a wide range of labels like “financial advisor”, “financial planner”, “wealth manager”, etc.

As noted earlier, in part this may be because a subset of those advisors in the Veres study are simply charging separately for financial planning, which increases the percentage-of-AUM-fee-for-just-investment-management allocation (since the planning is covered by the planning fee). Nonetheless, the fact that 90% of advisors still claim their AUM fees are no-more-than-90% allocable to investment management services suggests the majority of advisors package at least some non-investment value-adds into their investment management fee. Yet how much is packaged in and bundled together varies tremendously!

More broadly, though, this ambiguity about whether or how much value financial advisors provide, beyond investment management, for a single AUM fee, is not unique to the Veres study. For instance, last year’s 2016 Fidelity RIA Benchmarking Study found that there is virtually no relationship between an advisor’s fees for a $1M client, and the breadth of services the advisor actually offers to that client! In theory, as the breadth of services to the client rises, the advisory fee should rise as well to support those additional value-adds. Instead, though, the Fidelity study found that the median advisory fee of 1% remains throughout, regardless of whether the advisor just offers wealth management, or bundles together 5 or even 9 other supporting services!

Self-Reported Advisory Fees On $1M Portfolio, By Number Of Bundled Services

The Future Of Financial Advisor Fee Compression: Investment Management, Financial Planning, Products, And Platforms

Overall, what the Veres study suggests is that the typical all-in AUM fee to work with a financial advisor is actually broken up into several component parts. For a total-cost AUM fee of 1.65% for a portfolio up to $1M, this includes an advisory fee of 1% (which in turn is split between financial planning and investment management), plus another 0.65% of underlying expenses (which is split between the underlying investment products and platform). Which means a financial advisor’s all-in costs really need to be considered across all four domains: investment management, financial planning, products, and platform fees.

Breakdown Of Typical Financial Advisor's All-In Costs

Notably, how the underlying costs come together may vary significantly from one advisor to the next. Some may use lower-cost ETFs, but have slightly higher trading fees (given ETF ticket charges) from their platforms. Others may use mutual funds that have no transaction costs, but indirectly pay a 0.25% platform fee (in the form of 12b-1 fees paid to the platform). Some may use more expensive mutual funds, but trim their own advisory fees. Others may manage individual stocks and bonds, but charge more for their investment management services. A TAMP may combine together the platform and product fees.

Overall, though, the Veres data reveals that the breadth of all-in costs is even wider than the breadth of AUM fees, suggesting that financial advisors are finding more consumer sensitivity to their advisory fees, and less sensitivity to the underlying platform and product costs. On the other hand, the rising trend of financial advisors using ETFs to actively manage portfolios suggests that advisors are trying to combat any sensitivity to their advisory fees by squeezing the costs out of their underlying portfolios instead (i.e., by using lower-cost ETFs instead of actively managed mutual funds, and taking over the investment management fee of the mutual fund manager themselves).

In turn, we can consider the potential implications of fee compression by looking across each of the core domains: investment management, financial planning, and what is typically a combination of products and platform fees.

When it comes to investment management fees, the fact that the typical financial advisor already allocates only half of their advisory fee to investment management (albeit with a wide variance), suggests that there may actually not be much fee compression looming for financial advisors. After all, if the advisor’s typical AUM fee is 1% but only half of that – or 0.50% – is for investment management, then the fee isn’t that far off from many of the recently launched robo-advisors, including TD Ameritrade Essential Portfolios (0.30% AUM fee), Fidelity Go (0.35% AUM fee), and Merrill Lynch Guided Edge (0.45% AUM fee). At worst, the fee compression risk for pure investment management services may “only” be 20 basis points anyway. And for larger clients – where the fee schedule is falling to 0.50% anyway, and the investment management portion would be only 0.25% – financial advisors have already converged on “robo” pricing.

On the other hand, with the financial planning portion of fees, there appears to be little fee compression at all. In fact, as the Fidelity benchmarking study shows, consumers (and advisors) appear to be struggling greatly to assign a clear value to financial planning services at all. Not to say that financial planning services aren’t valuable, but that there’s no clear consensus on how to value them effectively, such that firms provide a wildly different range of supporting financial planning services for substantially similar fees. Until consumers can more clearly identify and understand the differences in financial planning services between advisors, and then “comparison shop” those prices, it’s difficult for financial planning fee compression to take hold.

By contrast, fee compression for the combination of platforms and the underlying product expenses appears to be most ripe for disruption. And arguably, the ongoing shift of financial advisors towards lower cost product solutions suggests that this trend is already well underway, such that even as advisory firms continue to grow, the asset management industry in the aggregate saw a decline in both revenues and profits in 2016. And the trend may only accelerate if increasingly sophisticated rebalancing and model management software begins to create “Indexing 2.0” solutions that make it feasible to eliminate the ETF and mutual fund fee layer altogether. Similarly, the trend of financial advisors from broker-dealers to RIAs suggests that the total cost layer of broker-dealer platforms is also under pressure. And TAMPs that can’t get their all-in pricing below the 0.65% platform-plus-product fee will likely also face growing pressure.

All-In Fee Component Susceptibility To Financial Advisory Fee Compression

Notably, though, these trends also help to reveal the growing pressure for fiduciary regulation of financial advisors – because as the investment management and product/platform fees continue to shrink, and the relative contribution of financial planning services grow, the core of what a financial advisor “does” to earn their fees is changing. Despite the fact that our financial advisor regulation is based primarily on the underlying investment products and services (and not fee-for-service financial planning advice).

Nonetheless, the point remains that financial advisor fee compression is at best a more nuanced story than is commonly told in the media today. To the extent financial advisors are feeling fee pressure, it appears to be resulting in a shift in the advisor value proposition to earn their 1% fee, and a drive to bring down the underlying costs of products and platforms to defend the advisor’s fee by trimming (other) components of the all-in cost instead. Though at the same time, the data suggests that consumers are less sensitive to all-in costs than “just” the advisor’s fee… raising the question of whether analyzing all-in costs for financial advice may become the next battleground issue for financial advisors that seek to differentiate their costs and value.

In the meantime, for any financial advisors who want to access a copy of Veres’ White Paper on Advisory Fees and survey results, you can sign up here to order a copy.

So what do you think? Do you think financial advisors’ investment management fees are pretty much in line with robo advisors already? Is fee compression more nuanced than typically believed? Please share your thoughts in the comments below!

The 4-step strategy to raising your fees

The 4-step strategy to raising your fees

Lately it’s been popular to talk about fee decreases and whether advisory firms are going to have to make cuts to compete with robos and new technology.

But when we look at the actual industry benchmarking studies, the median advisory fee hasn’t actually dropped at all in the past six years. And in fact, for some higher-net-worth clientele — folks with a couple million dollars — the median advisory fee is actually going up. Not a lot, but it’s moved up a little bit.

As competitive demands rise, and as we have to do more and more for our clients to justify our fees, I’m starting to see more advisory firms come back to the table with this question: “Well, if I’m doing this much more for my clients, maybe I need to actually charge a little bit more. But how do I communicate a fee increase? How do I put one through?”

First and foremost, it’s worth recognizing that there are better and worse times to communicate a fee increase.

In general, you want to do it when markets are up, income is up, net worth is up — basically, when times are good and people are feeling good about their money.

If times are bad and the client is feeling very cash-flow–constrained, it isn’t likely to go well. Not only because most people rationally want to cut expenses when times are bad, but also because there’s a behavioral finance phenomenon called the bottom dollar effect — whereby consumers disproportionately apply blame for their financial woes to their last flexible dollar. That means that if you discuss fees when they’re feeling financially constrained, you draw not-so-positive attention to them.

For most of us, now is a pretty good time to have this conversation. Portfolios are up. Net worths are up. Income is up. Most clients are feeling at least relatively good about their financial situation — at least better than they were a number of years ago.

If now is the time, the question still arises: How exactly do you break the news? I’ve actually seen a lot of advisory firms go in the exact opposite directions on this. Some just state it matter-of-factly in an email or a letter to clients:

“Dear clients, we’ve enjoyed working with you on your financial planning journey. But due to the increasing cost of doing business, we are raising our fees at the end of the year. The new fee schedule will be such and such. Thank you for your continued business. Please let us know if you have any questions.”

That’s it.

Now, other advisers I know prefer to do this in person and sit down across from the client and have that conversation:

“You know, Jim, we’ve been working together for many years now. Your portfolio is up almost 70% since we started working together and we’ve had more than 20 meetings on various planning issues. We’re still charging you the same fee that we did when you first joined the firm. Since then, we’ve expanded our investment team to better watch over your portfolio. We’ve expanded our planning team by hiring young Charlie here, the paraplanner, to help serve you better. And we’ve decided that we need to adjust our fee schedule to recognize the full breadth of value we’re now providing you. And so, beginning next year, we’re going to be adopting a new fee schedule, such and such. Do you have any new questions about the new fee structure that I can answer?”

Either way, the message is pretty much the same. There are basically four key elements:

1. Starting with the positive. “I’ve enjoyed working with you. We’ve accomplished a lot together.” Over the years, clients forget all the stuff that we do for them. I feel this all the time sitting down with some of our longstanding clients at the firm. I have to kind of remind them, “Do you realize how much stuff we’ve actually done together over the years? Do you remember where you were a couple of years ago and where you are now? We’ve come a long way.” And so there’s nothing wrong with starting out with a good reminder of that. It helps reinforce your value for what’s coming next.

2. Explain why you’re going to raise fees, because people are going to ask. Ideally, you’re adding new services or new team members to give clients more value. It could just be an acknowledgment that costs have gone up and you need to charge more to do what you do. People don’t like cost inflation, but they do understand it. Just be prepared when they want to know why. Put the best foot forward, but answer the “Why?” question.

3. State that you’re increasing fees in the future. It doesn’t have to be the distant future, but no one likes an immediate fee increase. Clients are likely to question whether you’re still valuable and decide whether they’re going to terminate you now, before the increase hits. Don’t put them on the spot. State the fee increase will be coming next quarter or in six months. Frankly, since we’re halfway through the year, I would just say, “It’s going to take effect in 2018.”

The good news is that this gives clients time to evaluate your value without pressure. Pressure can make a fee increase feel more negative. Psychologically, our brains discount future costs more dramatically. You can use behavioral finance to your benefit. A fee increase now makes clients feel as though money is out of their pocket now. A fee increase later is like, “I’ve can deal with it later.”

And you know what happens when later comes? They are still working with you. They enjoy working with you. It’s too much of a pain to fire you, because you give them good value on an ongoing basis. And they stick right through the fee increase.

4. State the new fee. Don’t beat around the bush. If it’s a new retainer fee, “The new fee is this many dollars.” If it’s a new fee schedule, “Here’s the new AUM fee schedule.”

“If you’re not sure if the client will accept it, they probably won’t.”

If you act embarrassed, like you’re not comfortable with the new fee or you’re not sure if the client will accept it, they probably won’t. If you’re wavering, they’re going to press you on it.

If you don’t act confident in your own value, your clients aren’t likely to think you’re worth it either.The single greatest driver of a successful fee increase isn’t even about the value to the client. It’s about you. It’s about your confidence in your value. When you confidently communicate to the client that you’re worth it, and you back it up with some reasonable value that you’re providing, they tend to believe you’re worth it.

It’s crucial to recognize that most of the fear you have about a fee increase is in your head.

It takes a pretty drastic increase to make a happy, satisfied client so unhappy that they fire you. If you are not confident about your fee increase and your value when you suggest that maybe this fee increase won’t stick, they’re going to challenge it.

I’ve actually seen this play out with new advisers as well. When most of us start, we cut deals. We discount left and right because we’re just trying to get our first clients and, in some cases, because we’ll just do whatever deal it takes to get those first few. But most of the time, it’s actually because we’re not confident in our own value proposition. Only as we get more skills and experience and confidence in our abilities do we start to charge more.

This seems to crop up the most at firms that charge hourly and retainer fees, because all the value proposition is on you to demonstrate the value of your time. I’ve seen a lot of firms that raise their fees 20%, 50% or even 100% in their first year or two. They launch their firm charging around $1,000 for a plan. And within 12 or 24 months, they’re charging $2,000 or $2,500 for a plan. And it’s not because they got twice as valuable with two years of experience. It’s because they became twice as confident in the value they’re already providing, and maybe got a little bit better with some experience.

It’s crucial to recognize that most of the fear you have about a fee increase is in your head.

But it’s crucial to recognize that most of the fear you have about a fee increase is in your head. It’s not actually about what the clients are going to do. It’s your confidence or lack of confidence in your own value proposition.

This lack of confidence actually has a name: the imposter syndrome. It presumes that we often question our own value. If we start questioning our own value along the lines of, “Why would clients pay me $100 an hour or $150 or $200 or more?” we show we’re not confident in our value — which means clients aren’t confident in our value either, and then they don’t want to pay.

All this being said, it’s worth noting you still may lose a client or two if you raise fees. Some client relationship is always going to be on the line: They were already a little dissatisfied, and your news of a fee increase will put them over the line. But it’s crucial to recognize that’s not necessarily a bad thing, even from a pure business perspective.

If you don’t act confident in your own value, your clients aren’t likely to think you’re worth it either.

Let’s say you’ve been doing basic planning and you’ve been charging clients $150 a month — for $1,800 a year — and you find out that you’ve become more experienced and specialized. You want to raise your fees to $200 a month. And it turns out when you break the news, 10% of your clients say, “Eh, sorry. Thanks, but no thanks.”

Now, for most advisers, losing 10% of their clients all at once would be pretty traumatic. But you know what happens when you raise your fees from $150 a month to $200 a month? That’s a 33% increase in fees.

Your revenue is still up over 20%. You made more in higher fees than you lost in clients. And you know what the better news is? Your revenue is up and you don’t have to do as much work because you just got rid of 10% of your clients who don’t value what you do. You raise your fees, lose some clients and make more money doing less work.

I’m sure a few of you are thinking, “Jeez, are you just trying to rip off clients by taking more money for doing less work?” But again, this is the imposter syndrome. I’m not talking about trying to make more money for doing less work. I’m talking about getting paid full value for what you do and not doing busywork for people who don’t value your time.

And so the bottom line simply is this: If you’ve been wondering about a fee increase and are really concerned about the impact, ask yourself, “Is the risk really that clients won’t value what you do, or is the risk that don’t have confidence that you’re worth the new fee?”

And if confidence is issue for you, then yes, it’s fair to take a hard look at your business and make sure you’re really providing value. But I’d also encourage you to go back, listen to Carl Richards’ podcast on the imposter syndrome and think a little bit about how much of this is a value problem and how much of this is in your head, in your own views, about your value.

So what do you think? Do you need to raise your fees? Have you successfully raised fees in the past? What is the best way to raise fees? Please share your thoughts in the comments below.

Home Office Vs Outside Office Space And Credibility As A Startup Financial Planner

Home Office Vs Outside Office Space And Credibility As A Startup Financial Planner

Executive Summary

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week’s article, we look at a question about whether it’s important and necessary to have a physical office space when you’re starting your financial planning practice, or if it’s just a waste of money. Can any advisor really establish trust and credibility with clients with only a digital presence, or is that limited to just younger advisors serving younger clientele?

Question/Comment: The key concern starting out is credibility. While some generation “Y” advisors are targeting a demographic that is open to virtual meetings, conference by phone, email and text everything, etc… I wonder how NOT having a physical office has affected their growth. Is there a plan to get one in the future? Is the decision to get an office heavily dependent on the type of client? Any feedback would be greatly appreciated.

What an interesting issue you’ve raised here! The question of office space for a newer (or any?) advisor is a challenging one. I’ve known planners who truly span the entire spectrum of views (and implementation) of this physical office question.

On the one end, as you note, there’s the truly virtual financial planner, and we’ve had one or two highlight how they set up their (virtual) practices previously on this blog. Clearly in that context, a home office works just fine. Your credibility will be judged by your virtual presence – website and similar digital materials – as well as what the client sees from your electronic communication, and perhaps your video chats. But no one will ever visit the actual office, so it’s really not a credibility marker. All you really need for a nice looking “office” is a good web camera, a nice shirt, and a background that won’t be embarrassing if clients happen to glance at the few feet of space beyond you that they can see to either side of your camera image!

The next step would be advisors who have physical client meetings and work from their home office. In my experience, this certainly isn’t the majority of advisors, but it occurs more commonly than you might think. From a practical perspective, it’s a low cost way to start up a newer advisory practice (you can rent a “real” office when there’s revenue to pay for it!). And frankly, for some advisors I think this is just part of the reflection of their practice and their personality. I knew of one advisor who was also into horticulture and had a beautiful rose garden (that her home office overlooked), and clients actually had to walk through the rose garden to reach her; while I suspect that turned off a few clients, it connected especially well with others, and she has a great practice. I’ve seen other advisors who advocate a frugal lifestyle and live/embody it for their clients with a frugal home office. And there are others who simply make the point that if doctor’s offices and dental practices can be run professionally from a home with a reasonable separation between living and work space, the same can be done for their advisory practice as well, especially if the general flow/layout of the house/yard is conducive to having clients/guests park and visit. And of course, you have to be comfortable actually working and being productive in your home; some people are fine with that, but I know others who really feel they need to be “out” of the house to really focus and put themselves into a “professional” state of mind (or the demands of children and family make an outside office space a necessity just to stay focused on work at all).

For those who don’t want to see clients in their home – for any number of reasons, from professionalism and credibility to simply because they don’t feel they can work productively at home due to distractions – the next common strategy is temporary office space. I’ve talked to many planners who rented out space in an executive office suite like Regus; when the practice is just starting and there are few clients and you really only need physical office space to see them a few days a month, it can be a very economical way to have “formal” office space. Some of these facilities provide additional office support as well, such as a formal (non-personal/residential) business address for client correspondence and business matters. Other planners might work out a deal to work out of the space of a fellow advisor’s firm if they have a spare office anyway (especially if it’s possible to easily make a separate entrance), as this can often be done very inexpensively (especially if the advisor’s only other option is that the office space just remains vacant anyway and they’ve already paid for the lease!).

As advisory firms ramp up from there, the next option usually becomes a more substantive deal for a sustained office presence. This might just be ramping up the number of hours at the executive suite, but usually there’s a process of finding a space to lease. Depending on your area, space can be pretty expensive for a newer practice, so a lot of advisors will find another advisor in a similar situation and split the cost of an office lease (and perhaps the cost of an administrative assistant to be at the front desk to greet clients and handle some supporting work duties); a lot of advisor “partnerships” are formed this way, where the advisors essentially run two silo independent practices but partner together to split the overhead of office space and some administrative staff support.

Eventually, as the practice goes, most advisors take on a lease for a more substantive space – especially as the hiring ramps up – but that’s often many years down the road, so not necessarily something I’d worry about now. On the other hand, I’ve seen plenty of advisors who never felt the need to leave their initial home office environment either; after all, if their initial clients were willing to meet there and they could grow the practice that way, why change now? In other situations, I’ve seen advisors try to get into a more formal office space as quickly as they could, especially if they felt it was necessarily for their target clientele; realistically, if you’re working with multi-millionaires and business owners who are accustomed to working with their professionals in formal office spaces, you may feel the pressure to do the same.

On the other hand, I remember talking to one advisor in the mid-west who works with farmers and noted that if he ever showed up in a suit or had an office with fancy wood paneling, he’d instantly LOSE credibility with his clients, who included a lot of millionaire-next-door types with a Midwest mentality that wealth should not be flaunted. He said an astonishing amount of his business got done over a pool table at the local bar wearing jeans and drinking beers. Another advisor I knew works primarily with surgeons, and the reality was that the only way he ever could meet with his clients was to find a quiet space to meet at the hospital, to the point where eventually he gave up on having an office at all because he never actually met his clients there. Which I guess is a nice way of saying that in the end, decisions about office space really, truly come down to knowing how to fit in with the clients you’re trying to reach.

But again, from the practical perspective, the most common starting points I see are to either work from a home office, or rent an executive suite to get access to an office/conference room for a limited number of days per month (the rest of the time you can work from home, as it’s just emails, phone calls, or going OUT to networking meetings to find more prospective clients anyway). Then as the business grows from there, splitting an office with another advisor to share overhead (especially if they want more control than an executive office suite and/or it’s getting expensive because they’re using it so much), and only finally deciding to take down a full office space of their own when it’s time to start hiring support staff (when the firm needs an office not for the advisor but the support staff, though in a world of advisors getting virtual assistants, that may be less of a driver in the future as well?).

And in terms of credibility… ultimately, I think the bottom line is that that depends entirely on the clientele you’re aiming to work with in the first place. It may be crucial, unnecessary, irrelevant, or outright unfavorable, depending on what’s important to them.

So what was your arrangement for office space when you started your practice? And how has it evolved since then? Please reply to this post down below.

Optimal Design Of A Financial Advisor’s Office: Insights from the Financial Planning Performance Lab

Optimal Design Of A Financial Advisor’s Office: Insights from the Financial Planning Performance Lab

Executive Summary

The traditional financial advisor’s office is setup with a desk that the advisor sits behind, and chairs for clients to sit across. Alternatively, many financial advisors use an office conference room to meet with clients, but the arrangement is similar: a large conference room table, with the financial advisor sitting on one side, and clients sitting on the other. To the extent that any further thought goes into the office design, it’s mostly focused on which type of furniture to buy, what paintings should go on the wall, and other classic elements of office interior design.

Except as it turns out, the look of a financial advisor’s office goes far beyond just setting the interior design decor, and establishing a sense of perceived professionalism for clients. In this  post, we will be examining Dr. John Grable of the University of Georgia thoughts, ideas, and research on how to best design a financial advisory office… all the way down to some specifics on the use of light, sound, smell, texture, and temperature to create a more comfortable atmosphere for clients that is conducive to helping them make good financial decisions!

Because it turns out the reality is that how an advisor’s office is arranged really does impact their ability and comfort level to make decisions. In fact, everything from the color of the walls, to the kinds of artwork that hang on the walls, and even the type and configuration of office furniture, has been found to have an impact on client stress levels, which in turn can adversely affect their willingness to make a decision!

So whether you’ve given a lot of thought to your office environment as a tool in the planning process, or none at all (but now realize that perhaps you should have!), I hope Dr. Grable’s exploration of some of the scientific evidence can help guide you to design (or update) your advisory office environment… and that, in turn, can help you make your office more comfortable to clients, allowing them to make better financial decisions, and increase client satisfaction!

Designing A Financial Advisory Office

Researchers working in the field of psychotherapy have, for more than 50 years, attempted to document what are known as significant moments of change during which a client’s attitudes and behaviors undergo transformation. Financial counseling and planning and planning, as a sister profession to psychotherapy and the mental health field, has adopted many of the insights gleaned from these studies. Consider the acceptance of therapeutic interventions and models. Today, it is common for financial advisors to conceptualize the manner in which someone is willing to change behavior as a process. This process is best conceptualized in the transtheoretical model of change, in which people move through five stages starting with precontemplation and ending with behavioral maintenance. The adoption of cognitive-behavioral interventions is another example of the way financial counseling and planning and planning, as an emerging profession, has adapted clinically validated approaches used in the mental health field to the purposes of helping people better manage their household financial situation.

Interestingly, however, it has only been within the last decade that financial advisors have taken an interest in the way the planning environment may impact client outcomes. Some of the earliest work dealing with this topic was published by Sonya Britt and John Grable. In a 2012 article in the AFCPE publication The Standard, Britt and Grable showed that the physiological response of clients undergoing financial counseling and planning and planning was significantly influenced by the physical environment where the client and advisor met. More specifically, Britt and Grable noted that financial advisors who use a therapeutic office setup (i.e., one with flexible seating), as compared to a more traditional financial planning arrangement (i.e., the use of desk), are able to solicit more information from clients, while at the same time reducing client stress.

The acknowledgment by financial advisors that the planning environment likely does have a potentially large impact in shaping a client’s willingness to change attitudes and behaviors creates an important practice management question: How should an office environment be structured to positively affect clients psychologically, emotionally, and physically? The following discussion highlights findings from the literature that provide insights into answering this important question.

The Office Environment: A Reflection of the Financial Advisor

Financial advisors are rarely taught about ways to utilize their office environment as a tool to manage the financial planning process. Nearly all financial education focuses on the nuts-and-bolts of specific financial interventions or on the process of counseling and planning and planning, with an emphasis on communication and counseling and planning and planning theory. While these are obviously at the root of any successful financial advisory practice, it is important to note that an advisor’s office environment also plays an important role in shaping the experiences of clients.

The importance of the office environment is universal. This means that a financial advisor should spend time to create an environment that facilitates client financial health, regardless if the advisor is working out of their home, has a small office in a suburban center, or owns a suite of offices in a large building.

A financial advisor’s office environment consists of three dimensions: (a) physical, (b) mental, and (c) emotional. The physical dimension includes things such as how warm a room is and how light or dark the lights are during a session. The mental dimension includes the messages sent by an advisor to a client. Messages can be conveyed through pictures and personal objects in a room. The emotional dimension includes the elements in the environment that shape the way clients feel, including the use of colors and textures.

A financial advisor’s office communicates cues of safety, comfort, diligence, and competence. Eight elements constitute the counseling and planning and planning environment: (a) office accessories, (b) color, (c) design and furniture, (d) lighting, (e) smell, (f) sound, (g) texture, and (h) temperature. According to Levitt and her associates, an advisor’s office environment is a projection of the person providing the service. As such, taking care when choosing the objects in meeting rooms, the comfort of meeting areas, and even the sights and sounds heard during sessions become important elements that should be controlled during the financial counseling and planning and planning process. A description of the most important environmental elements is presented below.

Environmental Accessories

Environmental accessories include things such as live plants, artwork, and personal objects (e.g., family photographs and mementos). If used appropriately, accessories relay meaning and the personality of the advisor to clients. There is a downside to the use of accessories as well. These elements generally require upkeep in terms of dusting, maintenance, and with plants, watering. The following are important takeaways when thinking about accessories in the counseling and planning and planning environment:

First, the financial advisor should choose accessories that appeal to the advisor. It is important for the advisor to take ownership of the environment because those who are “unhappy in their environments may inadvertently exhibit less positive attitudes and behaviors toward clients, and their judgments may be tainted by their dissatisfaction.”

Second, when maintenance can be ensured, the office environment should include live green plants. Plants represent renewed life and growth. Many clients also find plants soothing.

Third, advisor offices should include artwork. The consensus is that hung pictures should be texturally complex, representing natural scenes. Financial advisory clients typically find abstract art, urban scenes, and pictures of people to be stressful.

Fourth, cues of status and credibility should be used whenever possible. Clients often need reassurance that the person they are working with is competent. One way to signal competency is to display credentials, such as diplomas and certifications, in direct sight of clients.

Environmental Color

The choice and use of colors in the advisory environment can often lead to unexpected outcomes. In general, people respond positively to light colors and negatively to dark colors. However, responses can be skewed by the age and gender of a client. For example, young men report liking greens and browns, whereas young women prefer yellows and purples. Older women also like purples and grey to black hues. Older men have a dampened response to these colors. Physiologically, red and orange colors tend to increase blood pressure, pulse, and respiration. It is not surprising that fast food chains use these colors to speed up the time customers spend in restaurants. These colors should be avoided in most advisory environments. Instead, if color is to be used, blues and violets should be considered because these colors have been shown to reduce blood pressure and physiological reactions; however, others have reported that blue-violet combinations prompt sadness and fatigue among clients.

As this summary indicates, the choice of colors for an office environment can be complex. Given that financial counseling and planning appeals to older (not youths) males and females, and often couples, the following recommendations are presented as guidelines for choosing office colors:

First, the color chosen should match what the financial advisor finds pleasing. After all, the financial advisor will be working in the office environment daily, and as such, the color should be pleasing to the advisor and staff.

Second, the use of neutral wall colors is a good choice (e.g., off white, beige, light gray) for most environments. Color can then be added back to the room with art, plants, and furniture.

Third, if and when a non-neutral color is selected, blues and violets should be chosen over bright arousing colors.

Environmental Design and Furniture

The design of a room and the furniture in the room define a client’s ability to move around spatially. Furniture also creates visible and implied barriers and boundaries. For example, a chair without armrests can make a client feel vulnerable because they may feel that they have no personal space. Also, a desk in a room may signal a power relationship with the advisor “being in charge” and the client being in a weaker position.

Much of the research involving environmental design and furniture use has revolved around the concept of individual body buffer zones or what is known as interaction distances. Everyone has an interaction preference, which is the distance between two or more people that should exist before discomfort sets in. Among US financial advisory clients, this distance is between 48 and 60 inches. Gender and cultural differences have an impact on these benchmarks. For instance, women are more comfortable with smaller buffer zones, whereas men prefer a larger interaction distance. When a client and financial advisor are of the opposite sex, clients tend to prefer a wider buffer zone. It is important to note that clients from what are known as ‘contact cultures’ (e.g., those from South America and France) often prefer a small buffer zone.

Having a rudimentary understanding of buffer zones is important when choosing how an office, where client meetings are held, is arranged. Office space can be described as either traditional or therapeutic. Figure 1 illustrates a traditional office environment. In Figure 1, the financial advisor sits behind a desk with the client sitting on the other side of the desk. This office environment facilitates the sharing of paper and provides a zone of familiarity for the client.

Traditional Financial Advisor Office Space

A therapeutic office environment is shown in Figure 2. In this office, the desk has been replaced with a small table that can be used to layout paperwork and sign documents, if needed. The emphasis in the space, however, is the couch for the client and the chair for the advisor. This environment facilitates discussion and sharing of ideas.

Therapeutic Financial Advisors Office Space

Although nearly all financial advisors prefer an environment like that shown in Figure 1, clients generally find the space shown in Figure 2 to be preferable. Essentially, the desk in Figure 1 represents, figuratively and practically, a barrier between the client and advisor. Clients find advisors to be more accessible and friendly when the ‘barrier’ is eliminated. Interestingly, research suggests that clients do not find the use or lack of a desk to impact advisor credibility, although women advisors are sometimes perceived as more competent when using a desk. Perceptions of competency for male advisors, on the other hand, have been reported to be higher in therapeutic office environments.

The following points highlight the research on environmental design and furniture use:

First, the placement of office furniture should follow the needs of clients. If the intent of a financial advisor’s practice is to create a trusted relationship with clients as a means to change attitudes and behaviors over time, then a therapeutic office environment should be considered (Figure 2). If, on the other hand, a financial advisor’s primary objective is to facilitate a limited number of client outcomes in a short period of time (e.g., creation of a budget or the establishment of a debt repayment plan) then a traditional office space is likely more appropriate.

Second, instead of purchasing heavy difficult to move furniture, a financial advisor should consider using movable chairs and small tables for writing and sharing information. Additionally, it is important to provide clients with seating alternatives, such as a simple chair or a love seat/couch. This approach allows a client to establish their preferred buffer zone. If advisory services continue over several sessions, it is likely that the financial advisor will find that the interaction distance selected by the client will shrink over time. For example, at the first meeting the client may choose to sit at the end of a couch with the advisor in a chair several feet away. By the third or fourth meeting the client may purposely sit closer to the advisor, thus reducing the buffer zone and increasing disclosure and generating a stronger working alliance.

Third, it goes without saying, but the office environment where clients are met should always be clean and neat. A dirty office signals sloppiness.


Environmental lighting helps create client impressions about a financial advisor’s practice. Lighting is known to shape perceptions of spaciousness, privacy, and competence. In general, the literature suggests that financial advisors should employ full-spectrum lighting in combination with natural lighting when possible. The strict use of fluorescent lighting, for example, should be avoided because this source of light tends to create a washed out environment that clients sometimes associate with uncomfortable clinical settings. The more natural light the better. Natural light reduces depressive symptoms and facilitates open dialog. It is important to remember, however, that client seating should always be situated so that the client does not face a window. Allowing a client to see outside during an advisory session can result in disengagement and distraction on the part of the client.


It is not surprising, but the psychotherapy literature clearly indicates that “exposure to specific odors affects various psychological processes such as mood, cognition, person perception, health, sexual behavior, and ingestive functions” (Levitt et al., p. 79). Financial advisors, like mental health professionals, should avoid the use of colognes and perfume. They should also ensure that their breath smells fresh during client meetings and that they do not have body odor. A simple strategy regarding office smells involves purchasing a plug-in room deodorizer. Preferred smells include scents of baked foods and fruit fragrances.


Sound Making Device

External sounds during counseling and planning sessions are known to reduce advisor task performance and reduce sharing of information on the part of clients. Clients often assume that if they can hear sounds occurring outside of the room in which they are meeting with an advisor, others can hear their discussion. This can trigger an unexpected fracture in client-advisor dialog. This is the reason that nearly all psychotherapists recommend and use a sound masking device when working with clients. Figure 3 shows a typical device that sits on the floor outside of the counseling and planning room. This particular device creates swirling wind sound. Other devices can produce wave sounds and light music, both of which can also be effective in dampening outside noises.


Texture is a concept that touches nearly every aspect of a financial advisor’s office environment. Clients perceive texture through sight and touch. Nearly everything that a client interacts within a financial advisor’s office (e.g., flooring, furniture, brochures, etc.) has some degree of texture. The general recommendation is that the office environment should be built around soft materials and textured surfaces that absorb sound. Using this approach reduces the ‘clinical’ feel of an office space and creates a more inviting environment.


The final element associated with the physical office environment involves the temperature of the office and the space where the advisor and client meet. Issues to consider include placement of seating in relation to air vents and sources of heat, cold, and drafts (e.g., doors and windows). Generally, people prefer rooms that have an average ambient temperature between 69 and 80 degrees Fahrenheit, with 30 to 60 percent humidity. Rather than allow a client to set the temperature, the financial advisor should set a comfortable temperature and make periodical changes throughout the day or as requested by a client.

Interior Office Design For Financial Advisors: Summary

As this discussion has highlighted, the environmental space in which a financial advisor works can play an important role in shaping client attitudes and behaviors. This is true across financial counseling and planning methodologies—the single office practitioner to the multi-staff counseling and planning practice. The office environment is something that all financial advisors should work to manage in ways that prompt client sharing of information and implementation of recommendations. While there is no “one best” approach for all financial advisors, the following are general guidelines that can be used by financial advisors when thinking about ways to optimize an environmental space:

  • The financial advisor (or firm) should create an office space that appeals first and foremost to the advisor (staff advisors).
  • Office spaces should convey a message of who the advisor is as an individual and professional through the use of plants, art, mementos, and certifications.
  • When art is used, it should be texturally complex but not abstract.
  • Given the diverse reactions to color, a neutral color scheme should be used with splashes of color added via furnishing and objects.
  • For those interested in reducing stress among clients, blues and violets can be used in room designs.
  • The use of a therapeutic office space should be considered for those wishing to enhance client communication, increase client disclosure, and promote a strong client-advisor working alliance. At a minimum, office furniture should be flexible and movable in a way that allows clients to choose the seating arrangement that best matches their buffer zone.
  • Attention should be paid to the use of light, sound, smell, texture, and temperature. Natural light is the best option, if available, followed by full-spectrum lighting. Effort should be taken to mask outside sounds and annoyances. It goes without saying, but obnoxious smells should be avoided and controlled. The overall counseling and planning environment should be one that communicates professionalism and privacy. This can be accomplished by using soft sound deadening materials. Finally, financial advisors should monitor the temperature of their office environment to ensure that the air temperature and humidity are appropriate.

So what do you think? Have you thought about the science behind your office design? Do you use a “traditional” setup with a conference table, or a more “casual” environment? Do you plan to make any updates to your office in the future?  Please share your comments.