Aunt Bea Testifies: "I AM ANGRY. I FEEL BETRAYED" (A Tale of Fiduciary Woe)

Jan. 2014 update - I repost this, my most popular blog post of the last two years. True stories like this resonate with advisors and individual investors, and highlight the insidious nature of many conflicts of interest and the lax enforcement of a bona fide fiduciary standard by the SEC.

This is a sad tale, as so many tales of individual investors are today.

About Aunt Bea

Having retired about a decade ago from a Fortune 500 company, Aunt Bea (a real person, although for confidentiality reasons this is not her real name) was faced with taking a lump sum distribution from her defined benefit plan, to be rolled over into an IRA. In addition, Aunt Bea had other savings. Together with future receipt of social security benefits, this seemed more than enough to handle her financial needs in retirement – which could last 40 or 50 years, based on her good health and life expectancy upon her retirement.

Aunt Bea did all the right things. She asked around – family and friends – for financial advisors to interview. She interviewed several. In the end, she chose one of the largest “wealth management” firms and a team of “financial advisors” with fancy titles, such as “Senior VP – Wealth Management.” She received the firm’s Form ADV Part II (now known as Part 2A), and she was recommended a broad variety of investments.

“How much do I pay in fees?” – Aunt Bea inquired of her current financial advisors. “0.85% each year” was the answer, which according to Aunt Bea was the answer provided to her on several different occasions, with no elaboration and no caveats.

Aunt Bea was happy. She was, in fact, represented by “investment advisers” bound to act in her best interests, so she understood. Yet, it did not seem her portfolio was growing as fast as the overall market, especially in recent years.

That’s where I came in. Aunt Bea was about to provide testimony to Congressional staff on her experiences with her fiduciary advisors. The non-profit organization which had invited her to participate on the panel (which was advocating for the fiduciary standard), became a bit suspicious when Aunt Bea described her experiences. I was also scheduled to participate on the panel, and with Aunt Bea’s consent the non-profit organization asked me to review her monthly portfolio statement and report back to her the results of my analsysis.

Two Days of Reviewing Disclosure Documents.

Over the course of the two days available to me to undertake the analysis, I poured through the monthly statement, nearly 60 pages. As I undertook my analysis, I reviewed the large firm’s current Form ADV, Part 2A. I searched the web (including at times the SEC’s Edgar database) and reviewed an additional 40 other disclosure documents, including fund prospectuses, statements of additional information, a variable annuity prospectus, and occasional fund annual reports. I also obtained summary data from Morningstar.

Most of the documents I reviewed were between 30 and 150 pages in length. Fortunately, I knew where to look to access the data I needed. As a professor teaching advanced courses in investment planning, retirement planning, and insurance, I possess a very good understanding of all of these documents, and the terminology utilized. As a tax and securities law attorney, I understand the legal structure of the documents. I was hence able to obtain much of the data I needed, from these disclosure documents, in a very rapid manner – relative to most financial advisors (I suspect). And certainly a great deal faster than 99% of individual investors.

What was the result of my analysis? Here’s where the tale begins to turn ugly.

The Fees and Cost Analysis

First, understand that the vast portion of Aunt Bea’s portfolio (over 80%) were in two IRA accounts – both managed under investment advisory programs. (This is where the 0.85% annual investment advisory fee was assessed.) Aunt Bea had two other brokerage accounts with this dual registrant firm (i.e., both as a broker-dealer and as an investment adviser), which were also reflected in her consolidated monthly statement.

Second, I found that 24% of Aunt Bea’s account was invested in a variable annuity possessing total fees and costs of 3.75% annually. (The investment advisory fee was not applied against this investment.) While the variable annuity had a stepped-up death benefit guarantee, and a guaranteed minimum income benefit rider, I concluded that the high costs of the product and the limited nature of the benefits of these riders would yield benefits to Aunt Bea which, in my view, were largely illusory in nature.

Third, the broker-dealer, and its financial advisors, received way more compensation than the 0.85% annual amount they stated to Aunt Bea. They received “revenue-sharing payments” in the form of 12b-1 fees. Most of the mutual funds in the investment advisory accounts had 12b-1 fees in the range of 0.25% to 0.15% annually. One mutual fund in the brokerage account had a 12b-1 fee of 1% annually. While I cannot be certain that all of these 12b-1 fees were passed on by the funds to the broker-dealer firm, a frequently quoted statistic is that 80% of 12b-1 fees are, in fact, paid to broker-dealers.

Other revenue sharing payments noted in the funds’ prospectuses, including payments for shelf space. These are payments by fund complexes for “preferred marketing opportunities,” often paid by the fund’s manager from a portion of the management fees charged by the fund's investment advisor. The existence of such payments provides a disincentive to the fund’s manager to not lower management fees, even as economies of scale are achieved as the size of the fund increases. Again, it was not possible to discern if revenue-sharing payments were actually made, but Form ADV Part 2A of the dual registrant firm noted that the firm “receives other compensation from certain distributors or advisors of mutual funds” and that “revenue sharing compensation will not be rebated or credited” to its clients.

It was also noted that many of the mutual funds provided “additional compensation to registered representatives of dealers in the form of travel expenses, meals, and lodging associated with training and educational meetings sponsored.” Whether these particular benefits were actually received by these particular "financial advisors" is not known, although such practices remain fairly common in the broker-dealer industry.

Also, for trading of securities within the fund, many of the funds paid brokerage commissions back to the dual registrant firm at which Aunt Bea held her investment advisory accounts. The generally high portfolio turnover of these funds resulted in a relatively high amount of brokerage commissions (and other transaction costs within the funds, such as principal mark-ups and mark-downs, bid-asked spreads, market impact costs, and opportunity costs due to delayed or canceled trades). Additionally, the amount of brokerage commissions in many of the funds was higher than would be expected, due to the payment of higher brokerage commissions by the funds in return for research from the broker-dealer firm – a practice known as payment of “soft dollars.”

The dual registrant also had Aunt Bea invest in one of its proprietary funds. Of course, this fund had high fees and costs, as well. I could not discern if any of the management or other fees were rebated to the client.

In summary, I found that Aunt Bea was paying above 2% in “total fees and costs.” With another day or two of analysis, to better discern and analyze the data on transaction and opportunity costs (including those relating to cash holdings in the funds, which were above average in many cases), I would likely find that the total fees and costs ranged somewhere between 2.1% and 2.5%, and perhaps even higher.

To provide some context, let me only inform the reader that the average investment advisory fee paid for an overall investment portfolio of this size would be slightly below 1% a year. And, with the fiduciary advisor avoiding additional compensation and utilizing both low-cost and tax-efficient (where appropriate) investments, the additional fees and costs would be quite modest. In essence, Aunt Bea was paying about twice what she should have been paying, in total fees and costs. (And there are, as I pointed out to Aunt Bea, many financial / investment advisors who charge fees well below industry averages, and who also recommend very-low-cost mutual funds or ETFs to their clients.)

Contrary to the understanding of many individual investors that "expensive investment products must be good," the high total fees and costs incurred by Aunt Bea were certain to drag down the performance of her portfolio over time, and by a large amount (due to the effects of compounding of annual fee payments, and its affect on the resulting end values of a retiree's portfolio)..

Tax Efficiency: Not Present

Other aspects of Aunt Bea’s portfolio were troubling. The overall portfolio was not designed in a manner for long-term tax-efficiency. The location of assets, as between taxable and tax-deferred accounts, did not appear to reflect any long-term tax minimization strategy.

By way of explanation, as a general rule taxable accounts should hold assets which will secure long-term capital gain treatment upon their sale, such as tax-efficient, tax-aware or tax-managed stock mutual funds. Also, international stock fund allocations to taxable accounts can result in income tax credits; these tax credits are not available for international funds held in IRA accounts. In tax-deferred accounts fixed income investments should initially be allocated. In the Roth IRA account, which grows tax free, should be held the asset class with the greatest long-term expected returns, such as “U.S. small cap value stocks.” These are general rules, only, and there are some exceptions to these rules (none of which appeared applicable here).

However, since the bulk of Aunt Bea's overall investment portfolio was in IRA accounts, the effects of this inattentiveness to tax-efficient investing were somewhat ameliorated. If the investor had possessed a somewhat larger percentage of the portfolio in taxable accounts, the concerns expressed herein as to tax-efficiency would be much greater.

Investment Strategy: Was There One?

In the review of the investment portfolio I did not ascertain any overall strategy. Perhaps the overall investment strategy is contained in a separate document. Probably not, however, as Form ADV, Part 2A of the dual registrant firm expressly excluded from the investment advisory programs in which Aunt Bea was enrolled.

As to the equities (stocks, stock funds), there does not appear to be, overall, nor within the funds surveyed, a commitment to the utilization of investment strategies which have withstood academic scrutiny. These include utilization of the value and small cap effects (part of the Fama-French 3-factor model), momentum strategies, and the use of low-cost passive investment strategies.

Instead, within the portfolio was an emphasis on individual stock selection, or “active management.” As the academic research has shown, active investment strategies underperform, on average, passive investment strategies over long periods of time. (For a good explanation of this issue, without needing a heavy dose of statistics, see Rick Ferri’s recent article at http://www.forbes.com/sites/rickferri/2013/04/04/index-fund-returns-get-better-with-age/).

The portfolio had a great many different funds, but this did not mean that proper diversification was achieved. (It is possible to achieve a very high level of diversification from a handful of funds, if properly selected.)

I would note that two-thirds of Aunt Bea’s portfolio was invested in fixed income securities of some form. While this might sound conservative, the presence of number of high-yield bonds in the various funds, a floating note fund, and a structured fund investing in mortgage-backed securities of dubious quality (the fund was the subject of a class action settlement, in this regard, in 2009), presented obvious risks to Aunt Bea.

Aunt Bea was withdrawing 3.5% from her investment portfolio annually, and she expected this rate of withdrawal to continue. Yet, given the high fees and costs of the overall investment portfolio, and its present asset allocation, I projected that the portfolio would likely only sustain (with its current asset allocation) a rate of withdrawal of approximately half the current amount. In other words, Aunt Bea was likely to outlive this portfolio, the way it was currently structured, and given its high fees and costs.

I would note, however, that I did not know many facts which, if I were Aunt Bea’s advisor, I would like to know to complete my analysis and to provide recommendations to her. I did not sit with her for hours to explore her lifetime financial goals, values, history of reliance on professionals for advice, and many aspects of her financial situation. I did not review her personal expenditures budget, other assets and debt, and other risks to which she might be exposed in all aspects of her financial life. Hence, the focus of my analysis was limited (a fact noted in my report to Aunt Bea).

Additionally, since I was only provided a “snapshot” of Aunt Bea’s portfolio, I could not see the changes to the portfolio made over time. However, based on the purchase dates of many of the investments -  stretching back years – it did not appear that a great deal of changes had been made to the investment portfolio over time.

Yet, even with these limitations, I was able to discern that Aunt Bea was being harmed, by a high level of fees and costs, a questionable asset allocation, and a somewhat tax inefficient portfolio. And, while the precise amount of additional compensation paid to the dual registrant firm and its “wealth managers” will likely never be known, it is certain that insidious conflicts of interest were present – which no doubt affected the quality of the “advice” being provided.

Aunt Bea Goes to Congress

Shortly after I presented my 30-page analysis to Aunt Bea (not her real name, by the way), I found myself in a panel presentation in an overflowing committee room, providing information to Congressional staffers about the fiduciary standard of conduct and the importance of its potential application by the SEC and DOL.

Aunt Bea was the second-to-last panelist to speak that day. (I was the last.) Despite the fact that she is extremely self-confident and articulate, her voice was cracking as she related her experiences. “I feel … betrayed.” She related that she had often confirmed the fees which she was paying, by asking her “financial advisors,” and that she was repeatedly informed of a figure which was far less than what she was actually paying.

Aunt Bea continued, and with sad eyes, and anger apparent in her voice, she related to those present: “I trusted my financial advisors. I thought they were looking out after my best interests. I was wrong.”

When Aunt Bea finished her comments, it was my turn. Rather than exploring aspects of the fiduciary standard, as I had planned, I instead decided to ask Aunt Bea some impromptu questions. “Aunt Bea, if I may call you that … did you receive the Form ADV, Part 2 from the firm, and over the years did you receive the mutual fund prospectuses and annual reports? Did you read them and did you understand them?

Aunt Bea was a little taken aback by my question, at first. But, only a moment passed as she thought about it, and succinctly answered, “Yes, and no.” As we explored what she meant, it became obvious that she had received the documents. Despite her level of education (well above the average of most individual investors), she did not understand them.

Aunt Bea continued. “I trusted my financial advisors. They were supposed to be honest with me. I asked them direct questions. At no time did they explain to me that either they or their firm received additional fees.”

I then related, as a panelist, to those Congressional staff present, that Aunt Bea’s tale is by no means an isolated one. The financial services industry is full of "financial advisors" and "wealth managers" and "investment consultants" and "financial planners" who possess multiple layers of conflicts of interest. In fact, I estimate that 95% of “financial advisors” don’t avoid nearly all conflicts of interest, as they should. And the disclosures of conflicts of interest, when made by dual registrant firms and their employees, are often “casual” in nature, are not read by investors, and even if read are very seldom understood.

The panel discussion continued, and we answered a great many questions from the interested staffers there. We explored how plan sponsors (small and large business owners) are being increasingly sued for breach of their fiduciary duties (imposed by ERISA) after receiving conflicted advice from non-fiduciary “retirement plan consultants” and providing only high-cost funds in the qualified retirement plan sponsors. We further discussed the all-important decision of whether to roll out of a defined contribution plan upon retirement, and how much marketing by large financial services firms was directed at this life event.

The panel concluded, but Aunt Bea was not yet finished. She spoke up, stating, “Don’t let what happened to me keep happening to others. It’s up to all of you … make certain each and every financial advisor out there acts in the best interests of their clients.”

My Own Roller-Coaster of Emotions These Past Few Days

Over the past few days, as I worked through the analysis and uncovered conflict of interest upon conflict of interest, I myself became both angry – and sad.

We know that “dual registration” (i.e., registration as both a broker-dealer firm and as a registered investment adviser firm) has become increasingly common. We also know that about 88% of investment adviser representatives are also registered representatives of broker-dealer firms. (Of the remaining 12%, many of them also possess insurance licenses.)

I know that Aunt Bea’s “wealth management” firm possessed fiduciary obligations to her. As did the team of “financial advisors” working for that firm.

But … is this what the fiduciary standard has come to? Has it now become permissible to not candidly discuss with clients all of the compensation either the financial advisor or firm receives – especially when asked? Why do firms rely upon complex written disclosures (even then, “casual disclosures” which don’t quantify compensation amounts received) – when we have substantial academic evidence that investors don’t read the disclosures (due to many behavioral biases, which have long been studied and discerned by academia)? Even those that try to read disclosure statements, like Aunt Bea, rarely understand them?

I woke up this morning to find SIFMA (Wall Street’s lobbying arm) again touting a “new federal fiduciary standard.” Yet, as evidenced by SIFMA’s statements, this is nothing like the true fiduciary standard found under ERISA’s “sole interests” strict standard, or even the modestly less strict “best interests” fiduciary standard found in the jurisprudence of the Advisers Act. (As I recently explained, on behalf of The Committee for the Fiduciary Standard, in a July 5, 2013 comment letter submitted to the SEC. See http://www.sec.gov/comments/4-606/4606-3132.pdf).

How do I feel today, after these past few days of experiences?

I am embarrassed – to call the “financial advisors” advised by Aunt Bea as my “colleagues.”

I am angry – that we permit such harm to come to hundreds of millions of our fellow Americans, by not applying the fiduciary standard properly.

I am distressed – that, in the face of huge amounts of cash flowing to Congress from Wall Street – and other sources of influence exerted upon both legislators and (some) agencies and their staffs – that the prospects for a bona fide fiduciary standard appear so dim.

I am saddened – that we are unlikely to see, in my lifetime, if the current course holds true, the application (and enforcement) of a bona fide fiduciary standard upon all providers of personalized investment advice and financial planning advice.

I am disappointed – that I will likely not be able to hold my head high someday and say, “I am a member of the honorable financial advisory profession. We provide expert personalized financial and investment advice which in our clients’ best interests at all times. We receive professional-level compensation, as should be afforded to our high level of expertise. We serve our clients with value-added services. More importantly, we promote, though the trust placed in our services by our clients, capital formation and the resulting U.S. economic growth which follows. As members of a true profession, we answer to a higher calling. We serve the public interest.”

I was asked today to speak to reporters, especially about what clients should do now – to ensure that they are being properly served. I’m just not in the mood to take these calls.

(I refer consumers, however, to my recent blog post on selecting financial advisors: “How to Choose a Financial Advisor: A Checklist for Consumers” – at http://scholarfp.blogspot.com/2013/05/how-to-choose-financialinvestment.html.)

What Now?

I think about the profession, and where we might be headed, a great deal.

Is it worth the ongoing battle to try to counter the huge amount of lobbying Wall Street undertakes in the halls of Congress, and at the SEC? Is it worth trying to effect a fiduciary standard for all providers of personalized financial advice which is not “watered down” by Wall Street to some type of “casual disclosure only” standard (which is not - in any way, shape or form - a true fiduciary standard at all).

I wonder if we should instead, at some point, turn our efforts to develop our own professional standards of conduct? Why should we rely upon regulators – most of whom have never served individual investors under a true fiduciary standard – to define fiduciary standards for us? Should we, instead, formulate a voluntary set of true fiduciary standards, and see who is willing to adhere to same? (Bob Veres wrote about this recently … see a link to his article, found at http://scholarfp.blogspot.com/2013/07/bob-veres-opines-re-new-professional.html.)

In Conclusion: My Recent Days of Frustration

In the end, I am frustrated, confused, and – to an extent – demoralized. What if, after all these efforts, over the past decade, by many well-meaning leaders of our emerging profession, we end up with a “new federal fiduciary standard” which is nothing more than the extraordinarily low suitability standard with some additional disclosures (casually made in a non-affirmative manner, designed to ensure that clients don’t understand the disclosures, and found hidden away within some long disclosure document or in a dark corner of some web site which consumers must search out, discover, read, and seek to comprehend)?

The late, great Justice Benjamin Cardoza – and many other jurists - will roll over in their graves if, as I suspect might occur, SIFMA’s “new federal fiduciary standard” is adopted by regulators. The “particular exceptions” of which Justice Cardoza so eloquently warned will swallow up the substance of the standard itself, leaving us with continued consumer confusion and disgust

What are the consequences if Wall Street "wins" and our fellow Americans - and our clients - lose these battles?

Won’t the financial and retirement security of my fellow Americans continue to be denied through Wall Street’s extraordinarily high extraction of rents? Won’t this continue to result in large burdens upon our governments, as they seek to provide essential services to our Americans who are so poorly prepared for retirement, precisely at the time when governments can ill-afford such burdens?

Will not the failure to limit Wall Street’s excessive diversion of the returns of the capital markets, away from the true intended beneficiaries of those returns – American investors – continue to constitute a huge drag upon much-needed capital formation, increasing the cost of capital to all U.S. business, and acting as the dragging anchor that slows the progress of the ship which is our nation’s economy?

What will happen to the Aunt Beas of the world?  Who will finish Aunt Bea's tale? Will this tale continue down the path of a Shakesperian tragedy?

What will happen to the “profession”? Will it become a true profession, or just an excuse to fleece consumers?

WHO WILL STAND UP - NOW - AT THIS CRITICAL TIME ... Who will join with many others, and say to Congress, the DOL, and the SEC – “We must have a true, bona fide fiduciary standard for all providers of personalized investment advice. We must restore trust in our financial system. We must achieve a true profession, founded upon and informed by the highest standard of conduct under the law, which serves not Wall Street but instead, properly, the public interest?” WILL THIS BE YOU? 

Ron A. Rhoades, JD, CFP® serves as Asst. Professor and Program Coordinator for the Financial Planning Program at Alfred State College, Alfred, New York. He currently serves as Chair of the Steering Committee for The Committee for the Fiduciary Standard, and he frequently speaks at conferences and in presentations to policy makers in Washington, DC on the fiduciary standard. In 2013, Ron was named one of NAPFA's "30 Most Influential" persons in NAPFA's 30-year history. He is an academic member of NAPFA and of the Financial Planning Association. Ron Rhoades is the author of several books and many articles on topics relating to investments and financial planning. He received the "Tamar Frankel Fiduciary of the Year" award in 2011, and also was named as one of the "Top 25 Most Influential" by Investment Advisor magazine in 2011.

To follow Ron’s blog posts, please follow him on Twitter (@140ltd) or link to him via LinkedIn.

Please undertake inquiries of an academic research, advocacy or media nature directly to RhoadeRA@AlfredState.edu.

If you are a consumer interested in learning more about financial and investment advisory services from Prof. Rhoades and his fee-only investment advisory firm, ScholarFi, Inc. - please e-mail Cathy@ScholarFi.com, or call Cathy Rhoades, Director of Client Services, at 607-247-5008.

Paths to Becoming an Excellent Financial Planner

DEMAND FOR NEW FINANCIAL PLANNERS SOARS

It is no secret that the demand for financial advice is increasing as Baby Boomers continue to enter retirement. Nor is it a secret that the average age of financial advisors is 50 years (or older, depending upon the survey). Less than 5% of the existing 316,000 financial advisors in the country are under age 30, according to Cerulli Associates. The Bureau of Labor Statistics reports that job growth for financial advisors will far outpace the average job growth in the U.S. over the next several years.

Does this mean huge opportunities for graduates of undergraduate financial planning programs? Yes … but with some caveats.

A GREAT CAREER

Financial planning is a hugely enjoyable career. Financial planners report high levels of job satisfaction as their careers progress. Many experienced financial planners, with established practices, work just a few days a week. Others travel extensively, connecting with clients and their home offices with technology. There is certainly a tremendous opportunity for a great lifestyle – for the experienced financial planner.

I was an estate and tax planning attorney (which I enjoyed tremendously) for fifteen years. Yet, when I chose to become a financial advisor I found new heights of pleasure in counseling others. I possessed even stronger, deeper relationships with my clients. And I was able to guide them in all aspects of their financial lives. For me (and many others who chose to become financial advisors), there are immense personal rewards in seeing individuals achieve their goals in life.

In order to truly enjoy being a financial planner, you must truly enjoy helping other people. It's often said, by experienced financial planners, that they should have secured a minor in psychology. Certainly financial planning today is a lot of discerning a client's true feelings and emotional obstacles, and advising in such a manner that the client actually makes changes to their behavior.

THE PREREQUISITES: KNOWLEDGE + EXPERIENCE

The keys to becoming an excellent financial are … getting the knowledge, and then gaining the experience.

I like to tell my undergraduate students that I can turn anyone into a good investment counselor within a year (the time it takes to truly understand how to implement and manage an investment strategy based on Fama-French multi-factor models and passive investment strategies). (Note - to become a skilled active manager of investment portfolios will take much, much longer.)

But, providing comprehensive financial advice, takes many years to master. There is simply a great deal to know. Both the breadth and depth of the knowledge base are large. Federal tax laws. State tax laws. Planning for retirement. Planning during retirement. Insurance needs analysis and policy analysis of all shapes and sizes. Estate planning. Investment product due diligence. And so much more.

It's not just "book mastery." It is also the application of these concepts to many varied types of client situations. The answer for one client may be quite different than the answer for a similar client - simple because a few circumstances are changed. 

And, just as important, one needs the ability to “connect the dots” – i.e., to see how one financial decision might affect another financial decision (or goal, or strategy). While some of this can be obtained in college, much more of this is obtained through actual real-world experience.

In other words, becoming a good financial advisor is about gaining not only a great deal of knowledge, but also experience.

GAINING CERTIFICATIONS

And let’s not forget certifications. While not required to practice as a financial planner, proper certifications indicate to prospective clients that you have invested in a foundational body of knowledge and that you are committed to the profession.

By far the most recognized, by consumers, is the Certified Financial Planner™ certification. But there are many others. The Chartered Financial Analyst (CFA) designation is perhaps the most respected, within the industry, especially if you desire to undertake active portfolio management. The CPA/PFS  (Personal Financial Specialist) designation is widely respected – and many Certified Public Accountants become financial advisors (especially later in their careers) and gain this designation.

It takes a strong effort (i.e., lots of time and study) to get these certifications and/or designations. But any one of these certifications is well worth it.

(Hundreds of other certifications exist, which I don’t mention herein; some are good, others are not.)

So, the reality is – anyone entering financial planning as a career needs to gain a great deal of experience. How? And - in what type of environment will such experience be obtained?

BUSINESS MODELS: ADVICE VS. SALES

This leads us to discuss different business models.

As I’ve often written about, there are two basic forms of business relationships. One is the sales relationship – between a product salesperson and a customer. This form of relationship continues to dominate the financial services industry today.

The other form of business relationship is between a fiduciary and her or his client. This is a pure advisory relationship. Fee-only financial advisors, who receive no commission-based or other product sales compensation, and who get paid only by their clients, practice in this manner.

And then there are many hybrid forms of business models. In some models a comprehensive financial plan is prepared in a fiduciary (advisor-based) engagement, and then the relationship changes and the customer is sold financial products. In other models both advice and product sales occur at the same time.

Most of the disputes within our industry, regarding what duties a financial planner owes to her or his clients, involve these hybrid business models. In reality, there is no such thing as “pure sales” relationships in financial services anymore – nearly everyone offers advice as part of what they do. Nor are most “pure” fee-only financial planners free from all conflicts of interest – recommendations (such as relating to the use of funds to pay down debt, rather than invest) can affect the advisor’s future compensation. We could argue for years whether these developments should be permitted to continue, or not. However, the subject of the fiduciary standard, and its applicability, is far beyond the scope of this article.

Let’s just conclude with the observation that, regardless of what type of firm you go to work for, you will be providing financial advice in some fashion.

LICENSURE(S) REQUIRED

Regardless of business model, you will also need licenses to practice. There are three main licenses, associated with the three main types of financial salespeople / advisors today.

Registered representative of a broker-dealer firm. This requires Series 6 (mutual funds) or Series 7 (general securities) licensing. To pass these tests often takes 2-4 weeks of hard studying, then a 3-hour exam at a testing center. A brokerage firm must sponsor you for the test. A Series 63 test (state securities laws) is also required to be passed.

Life/annuity sales license. This is a state (not federal) examination. Most study for a week or more, then take the test. Most states require taking some form of class. Many states require a life insurance company to sponsor you, in order to take the test.

Investment adviser representative of a registered investment adviser firm. This requires passing the Series 65 exam (or Series 66, if you already possess the Series 63). Most investment advisory firms will sponsor their new employees for this exam, which takes about 3-5 weeks of hard studying followed by a 3-hour exam at a testing center. Unlike the other licenses, a person can file a Form U-10 (which can now be done online) and take this test, prior to being hired by a financial services firm.

While “fee-only” financial advisors typically only possess the latter (Series 65) licensure, many financial advisors who work in hybrid sales/advice environments possess all three licenses. Often employers will seek to have their employees gain one license, then another license several months later, and the other license some time thereafter.

GAINING THE FOUNDATIONAL KNOWLEDGE

So – how does a new entrant into the financial planning field obtain both knowledge and experience?

First, realize that there are now well over 100 undergraduate financial planning programs in the United States that have been certified by the Certified Financial Planner Board of Standards, Inc. All of these programs offer courses designed for graduates to gain a background in the subject areas covered by the CFP® examination. And many programs offer many additional courses, as well. Students going through these programs will be exposed to a variety of hypothetical case studies that are designed to assist students as they enter the real world. And many programs offer exposure and training to various software programs commonly utilized in financial planning firms.

If a prospective or current undergraduate student has an interest in helping others – i.e., counseling others – and an interest (or aptitude) in investments, taxes, business, etc. – they should check out these programs. (Here’s my plug for Alfred State’s program – a four-year residential college environment in upstate New York, within a long days’ drive of the majority of the U.S. population. And excellent professors in its Business Department and Financial Planning Program, all with substantial real-world experience. We also require students to take a full-semester, full-time internship in their last year - thereby enabling substantial real-world experience to be gained.)

But – before you rush in to the financial planning field – I suggest that you take some personality tests. I’ve had students in other majors tell me they want to transfer into Alfred State's Financial Planning Program; I always require them to take some career path (personality) tests first. Why? While most end up transferring into financial planning, others will find that their true aptitude (and love) involves a completely different field – from engineering to computer science to becoming a chef. Hence, always invest a little time in uncovering your aptitude and talents, before you change majors! Realize that most people excel doing what they love (and don’t excel in areas in which they lack aptitude).

Second, if you already possess a four-year college degree, there are many good Master’s Programs out there which offer a 1-year graduate-level course of study, enabling you to then sit for the Certified Financial Planner™ exam. And there are many, many certificate programs which offer the seven courses leading to a certificate, which also enables you (with a 4-year college degree in any other field) to sit for the CFP® exam. Many of these certificate programs offer online courses; others are based at colleges and universities around the country.

GAINING EXPERIENCE – YOUR FIRST JOB

The prior discussion focused on gaining the requisite baseline level of knowledge to enter the profession. But how about gaining experience? Here’s where it can get tough.

"True" Financial Planning Firms.

For most of the graduates in the top half of my graduating classes (G.P.A. of 3.0 or better, usually, although other personal attributes are important), jobs are available in what I call “true financial planning” firms. In other words, these students will usually land a position in which they do much more comprehensive financial planning (or the support for same), rather than selling investments or insurance products. Even in the limited job market of western New York State, such jobs are available. And, nationwide, many, many jobs are available for qualified applicants, and their is employer competition for the top talent coming out of undergraduate financial planning programs.

Jobs with true financial planning firms involve hard work, but rarely more than 45-50 hours a week. Of course, such firms expect their new employees to be studying to obtain their CFP® certification and/or various licenses or other designations. And, many of such firms desire their new employees to join and actively participate in various community organizations – i.e., start networking. So, the 45-50 hour work-week, at least during the first few years, is really a misnomer. Expect to lead an active life, as you continue to invest in yourself.

The career path in such true financial planning firms is often well-planned. As experience is gained new employees move, over time, from purely supporting roles to that of a “junior advisor” (often mentored by a senior advisor), then on to a senior advisor. In larger practices various specialist positions may exist. Often the opportunity exists to become an equity owner of the firm. In this regard, the career path is often 5-10 years in duration. And, as experienced financial planners will tell you – it takes that long (with lots of exposure to a lot of different financial planning issues and clients) to become a truly excellent and experienced financial planner.

"Sales" Firms - Where Financial Planning is Only Incidental.

Some top graduates, and most students who graduate in the lower half of each class (as ranked by GPA), will migrate to sales-type jobs. Often these new employees receive a base salary during an initial training period (and may, in some cases, thereafter). But the major part of their compensation comes from sales of financial products and/or insurance.

This tends to be a higher-pressure environment. Some firms literally suggest to new employees that they work 70- to 80-hour workweeks. (Other firms don’t require such long hours.) Those who are successful at sales often become – at least initially – the most highly compensated financial planners in the 2-5 year time frame after they graduate. And, along the way, the financial advisors in their firms learn valuable insights into dealing with clients, and they acquire experience in many aspects of financial planning.

Some firms offer exceptional mentoring and a clear path to becoming a good financial planner. But other firms hire with the view that they will keep only those select few who turn out to be great salespeople. (While the number of such firms is decreasing, they still exist.)

The number of jobs in sales-oriented firms continues to be greater than the number of jobs in what I call true "financial planning"-focused firms. Over time this is changing, as the industry evolves to  more advisory-focused business models; but the transition will continue to occur over many years to come.

TRANSITIONING TO BECOME YOUR OWN BOSS

Like law and accounting, once experience is gained it is easy to hang up your own shingle. And, as any business professor will tell you, if you really want to make serious money, own your own firm.

Not everyone should seek to own their own firm. Why? First, your current firm may provide excellent opportunities for advancement and/or equity ownership - why leave a good thing? Second, entrepreneurship skills are not possessed by everyone. (However, even then, partners might be found who do possess the traits needed to move a firm forward, structure and conduct its operations, etc.)

So, some financial planners – especially after gaining a few years’ (or more) of experience – will likely go “out on their own” and start their own firms. They will relish the independence and reap the long-term rewards which usually result from such a career path.

SHOULD YOU BECOME YOUR OWN BOSS – AT THE OUTSET?

What about starting your own practice, right upon entry into the financial planning profession?

Of course, nearly every one of my students would shrink away from such a career path. They will point out that one cannot gain experience, without making a ton of mistakes along the way, unless one works under an experienced financial advisor?

Yet, it is possible. How? By reaching out to other professionals within various organizations, such as NAPFA (www.napfa.org) - which has a variety of resources for new fee-only financial advisors and a great and active online discussion board. Other worthwhile organizations to check out include the Alliance of Cambridge Advisors (www.acaplanners.com), the Garrett Planning Network (www.garrettplanningnetwork.com), and the Financial Planning Association (www.fpanet.org); each organization offers various forms of support for its members, especially new financial planners.

Another path exists, as well. Some firms will hire you and provide you with complete back-office support, including reviews of any financial plans you create by experienced advisors, training, marketing support, etc. One of these firms is Garrett Investment Advisors (www.garrettinvestmentadvisors.com), which financial planners from around the country utilize for a broad variety of back-office support and guidance. It’s an interesting business model this firm offers to new entrants into fee-only financial planning, and one that will surely appeal to more and more new entrants into the profession as the years progress.

IN CONCLUSION

Like any profession, it takes time to "earn your stripes" and truly be able to practice with a high degree of excellent.

And, like any profession, there exist two major “barriers to entry” to becoming an excellent financial planner – knowledge and experience. Knowledge can be acquired with the appropriate personal investment in course work (undergraduate or graduate work, certificate programs) and also through the course work required to obtain certain recognized certifications.

Experience, on the other hand, is obtained in diverse ways. Some firms offer a professional atmosphere, with reasonable work hours (but, nevertheless, an expectation of new financial planners that evenings will be spent mastering the substantial knowledge base of financial planning and/or networking). At the other end of the spectrum are sales-oriented, pure-commission-based firms, with an “eat what you kill” mindset and a quick exit for those who don't sell enough. In between there are a large number of business models, many with a sales emphasis. Some new entrants will thrive in this sales environment, while others will not.

What I tell my students is this. Whatever type of position you take as an intern, and upon graduation, learn as much as you can. Seek out a great mentor, both within your firm and outside of it (the Financial Planning Association, in particular, does a good job of matching new financial planners with mentors). Attend meetings of your local Financial Planning Association Chapter or NAPFA Study Group or other professional association meetings, to gain exposure to others in the profession and other types of business models. Attend (in-person) industry conferences, such as those put on by the Financial Planning Association, NAPFA, AICPA (PFS section), or others, to gain further insights into all of the diverse business models and practice techniques utilized today. Read, read, read – financial planning magazines, news postings, and blogs.

Regard the first two or three years as a period where you continue to invest heavily in yourself. Then, as opportunities present themselves to you, you will be able to make an informed decision about your future. And, in the process, you’ll gain the all-important financial planning experience needed to become an excellent financial planner.

The Magical Guiding Stone

A fifty-acre wood and stream beckoned the young boy. Treasures awaited discovery, and many minnows, crayfish and turtles were certain to be found. As the young boy moved through the wood he traversed the stream often, lifting with his stick the occasional rock in the stream to see what wonders would be revealed. And then the young boy saw it, lying in a silent, still pool – a simple black stone, smooth, no larger than a quarter. Flattened on two sides, rounded smooth by the forces of water and time, the black stone seemingly called to the boy. Lifting the stone from the stream, the boy grasped the stone firmly in his small fist and rushed home as twilight began its approach.

The next day the boy, retrieving the stone from his pocket, asked his father what type of stone he had found. The father took the stone from the boys’ hand, cradled it in his palm, and then rotated the stone among his fingers, all while closely examining the stone with his wise eyes. After what seemed like hours, but in actuality only minutes, the father inquired where the young boy had found the smooth black stone. Upon hearing of the boys’ adventure the day before, and realizing where his son had found the stone, the father exclaimed: “You have found your ‘Guiding Stone’!” The young boy inquired as to what that meant. The father explained, “Whenever you face uncertainty in life, look to your Guiding Stone for the answer. Look hard enough and you will be rewarded."

A month passed, and each day the young boy would place the small black stone in his pocket, often feeling it between his fingers and rotating it left, right, and all around. As summer receded, the day had come for the first day of school, yet again. The young boy, ever so shy, always approached the first day of school with trepidation. Sensing his anxiety at breakfast, the boys’ mother asked: “Can I see your stone?” The obedient boy retrieved the stone from the pocket of his trousers and handed the stone to her. His mother looked at the stone and - as if drawing some magical power from it - closed her eyes and then clasped the stone in her closed hand. A few moments later, opening her eyes widely, the boys’ mother said: “Do one thing each day that scares you.”

The boy took the stone and departed, walking to school to begin the fourth grade, thinking of his mother’s revelation while grasping the stone firmly. That morning, upon arriving at school for the beginning term, the young boy engaged in an action that, at least for him, was terrifying. He walked up to another student, a young girl named Pamela. As he looked at the pretty girl with straight long black hair and large brown eyes, the young boy said, “Hi, I’m Sam. Did you have a good summer?” Pamela, smiling, thus began her first conversation with Sam, one of many more to come.

Years later Sam was attending college. Playing soccer on his college’s team had taken a lot of his time during the first half of the semester, and over the past two weeks his remaining energy was sapped by a severe cold. Sam had fallen behind in his studies, and several of his professors had recently admonished him for being unprepared for class. Sam, depressed, wonder if he should drop out of college, at least for a while. Placing his hands in his pocket, his large fingers happened upon the small black stone. He clasped the Guiding Stone hard, closed his eyes, and for over an hour thought hard about both his recent past and his future, both near and far. The stone seemed infused him with insight, and Sam decided to try harder – to never quit. Sam said aloud, to the surprise of his roommate, “I will never give up.” At the end of the semester, as grades were posted and Sam read the high scores he had secured through his perseverance and hard work, he grasped the stone and, quietly looking down at the Guiding Stone, smiled.

More time passed and Sam found himself in the hospital’s delivery room. As he cast upon his newborn child, Patricia, for the first time, Sam clutched the black stone hard, overcome with a sense of profound joy, yet now facing a world that had dramatically changed overnight. The black stone was there, however, clasped in Sam’s hand and providing, it seemed, a sense of stability for a life now infused with caring, love, and greater responsibility.

Twenty more years passed, and Sam was again at the hospital. His father, after a long illness, had just passed away. Overcome with grief, Sam found an empty corridor and sobbed. Holding the small black stone, Sam felt some comfort. The hollow feeling Sam then felt took years to subside, and never fully disappeared, but the Guiding Stone seemed, to everyone around him, to largely assuage Sam’s grief.

More time passed and Sam at one point encountered failure in his business life. One night, examining some papers, Sam realized that he made a mistake, which could negatively affect his business, his associates, and his family. Sam sought the small black stone from his pocket and grasped it tightly for several minutes. Sam decided then not to try to hide the mistake, but to be open and forthright and, to the extent possible, make amends to anyone negatively affected. As the mistake came to light and was made public, the next several weeks were difficult. Several times Sam grasped the stone in his pocket, as he grappled with the emotions of each day. Yet, with time, the incident passed, and Sam worked hard to repair the minimal damage to his business.

Thirty more years passed. Sam had just finished another one of his many journeys – this time into the upper reaches of the Amazon. He returned to his home and his wife of sixty years, Pamela, exhilarated from the adventure but tired and worn. The next morning he did not awake; his body lay still, in bed, without breath. In his closed hand, however, the family found the one object that never left in his many journeys – the small black stone.

A few days later, family, friends and former colleagues gathered at the wake for Sam, held outdoors by a lake, into which a stream from a 50-acre wood flowed. The wake was a celebration of Sam’s life of success – in business, as a community leader, as a husband, father and compassionate friend to many. Yet one question was on everyone’s mind – what would happen to Sam’s “Guiding Stone”? Would it be passed on to Pamela? Or to one of their children, Patricia or Sam Jr.?

An hour or more passed, and finally a distant cousin asked Patricia, “What will become of Sam’s Guiding Stone, with its seemingly magical powers?” Patricia replied, “Father’s Guiding Stone was with him as Father faced his fears, persevered through hardship, and encountered profound joy. The Guiding Stone was with him during times of deep despair and loss, and it was there when his integrity was called upon the most. This small black stone,” she said, as she raised it into the air, “was always by his side during his many adventures, for it shared his life and infused his passions. But it has no magic powers, save only one.”

The friends, family and colleagues who had gathered eagerly anticipated the next words, awaiting the secret of the Guiding Stone which Sam had, despite their entreaties, over many years, never revealed. Patricia continued: “My Father told me that the secret of the Guiding Stone was its power to remind him, over and over again, that life is about making choices and accepting personal responsibility. The Guiding Stone was his cue for him to look deep within himself, and then to choose to fearlessly travel down the path of integrity and truth. The Guiding Stone was his personal reminder to be ever mindful that our time on Earth is indeed limited, and in that short time one should make choices that embraced righteousness, assistance to others in need, and the illumination of life’s many mysteries.”

Upon completing the explanation, Patricia cast back her hand over her back shoulder and then threw her arm forward. The small black stone flew forth, then disappeared into the shallow mountain lake. The friends, family and colleagues at once gasped, but then remained silent for several minutes, staring out on the ripples spreading throughout the lake into time, contemplating the message and the truth of the Guiding Stone.

From the small lake poured a small stream, into a small wood, where perhaps in some future time another young child would find a small black stone.

Professor Ron A. Rhoades, JD, CFP(r) teaches Business Law, Retirement Planning, Investment Planning, Employee Benefits Planning, Money & Banking, Insurance & Risk Management, and the Personal Financial Planning Capstone courses at Alfred State College, Alfred, NY. He is an EPLP Mentor, C.R.E.A.T.E. program mentor, serves as advisor to Alfred State's Business Professionals of America club, and serves as academic advisor to dozens of students.

Professor Rhoades is the author of "CHOOSE TO SUCCEED IN COLLEGE AND IN LIFE: Continuously Improve, Persevere, and Enjoy the Journey," a 10-week program for success in college (available for $2.99 in Kindle store at Amazon.com, or in paperback for $6.99). Professor Rhoades may be reached by e-mail at: RhoadeRA@AlfredState.edu.