01

Where have we come from?

Financial planning is often referred to as an emerging profession, as well as a global profession.

But what does this really mean? And, more importantly, where is this all going?

Rather than getting bogged down in definitions of what we mean by financial planning, instead we need to look at the horizon.

For me that horizon boils down to a couple of big questions:

  • What should the profession of financial planning look like in 2030?; and
  • What does that mean for business models and practices?

In this paper, I’ll mainly focus on the UK. But if we truly want to be a global profession, then we’ll also need to look at how other jurisdictions have addressed the same challenges we face.

Looking at things through that prism, the normal conversation of ‘which country is ahead of or behind us?’ becomes more of a discussion about common ground, and agreed ways of working. And ultimately, what outcome do we want our financial planning profession to head towards?

How financial planning was born

Financial planning’s heritage stems largely from two different sectors: investment management and life insurance.

In simple terms, investment management brought with it higher educational standards and agreed protocols and methodologies around things like risk and return and diversification – a kind of toolkit for managing and growing clients’ wealth.

From the life insurance side came some of the softer skills, such as marketing and building a client base, fact-finding and establishing clients’ needs and protecting families and businesses. This background also lent itself to increasing expertise within the pensions market, especially here in the UK.

We can still see these roots today. Financial advice and planning business models quite clearly show their shared parentage. In advice and planning, perhaps we are really looking at ‘sibling professions’? That is, professions that share a heritage but are starting to grow up different from each other?

In the UK, the investment management element arguably remains dominant. Models where the life insurance/sales aspect plays a greater role are usually seen in developing countries alongside a historical commission system, although that is changing.

While there are strengths to both elements, the slightly binary nature of these business practices and the associated regulation became increasingly inappropriate.

So what happened? What caused financial planning to emerge as a separate business model?

“In advice and planning, perhaps we are looking at professions that share a heritage but are starting to grow up different from each other?”
“To deliver the six-step financial planning process, there needed to be a specific financial planning business model behind it.”

Foundation myths and the reality

The creation or foundation myth of financial planning is that small groups of advisers, frustrated by the pure sales model they were immersed in, got together and said: “There has to be a better way.”

In the US it apparently all grew from a meeting in a Chicago Airport hotel room in December 1969.

In the UK, it seems to date from 1986 (the year the Financial Services Act introduced self-regulation to the financial services industry), when a breakaway group from the Life Insurance Association – led by industry legend Paul Etheridge MBE – went on to form the Institute of Financial Planning (IFP).

To simplify slightly, and without wanting to distort the story, in the US, UK and other jurisdictions, the focus was on three main elements:

Firstly, higher standards of education for those giving advice. It seems surreal in today’s world that someone could join an insurance sales team on a Monday, and be selling insurance, savings and pension products to members of the public by Friday. But that’s the way it was. They are called the ‘bad old days’ for a reason.

Secondly, there needed to be a code of ethics. The degree to which this was or is actually enforced is the subject of some debate, but having a code of ethics in the first place was a start. Don’t forget, there was simply no meaningful regulation of advice at this time. A 'light touch’ approach to regulation had been introduced by the Financial Services Act 1986, which was implemented in 1988.

The third and final focus was a business model to underpin a holistic approach to giving advice.

Supported by cashflow and scenario modelling, a six-step financial planning process emerged:

  1. Discovery – establish the client’s goals and objectives
  2. Information gathering – create a full picture of the client’s financial position
  3. Analysis – analyse and evaluate the data and research the best options
  4. Recommendation – develop and present the financial plan and recommend actions and solutions
  5. Implementation – once the plan is agreed, implement the recommendations
  6. Review – regular monitoring, communication and future guidance and planning

To deliver this process, there needed to be a specific financial planning business model behind it. Firms needed to attract potential clients for whom their services would be suitable, and create effective and efficient processes to support planning with clients.

Businesses needed to make sure their work was profitable and that they were getting paid from step two onwards, rather than just steps five and six as had historically been the case.

Because the data gathering, analysis and the financial plan add such great value to clients, firms had to make sure their fees at each of these stages weren’t contingent on the sale of products later on.

Of course, all this had to be delivered on top of creating the financial plans themselves, and giving technically sound advice.

A timeline of the evolution of financial planning

An evolving profession

Financial planning has become a team sport. It takes a team to deliver the financial planning model effectively and profitably, and in a way that in the words of the late great David Norton (former Institute of Financial Planning chairman and president), allows clients to “cheerfully pay our fees”.

All of this sounds as obvious as daylight today, but at the time financial planning was emerging it was new and all seen as a bit ‘hippy’. Certainly, the financial planning business model wasn’t a mainstream model. In fact, the numbers of certfied financial planner (CFP) holders in the UK reflected that, with fewer than 200 for a long time.

But there were pioneers that paved the way, and the IFP punched far above its weight in terms of influence and setting standards. It’s not possible to name all the early influencers involved, but leaders such as Paul Etheridge, Julie Lord and David Norton will serve to take the glory of many others, including financial planner members and the vital secretariat that supported them.

In the US, the National Association of Personal Financial Advisers (NAPFA) and the CFP board also made great strides, setting a strong business model and educational standards respectively.

Fast forward to now, and we keep hearing that financial planning is a ‘young profession’, or at least a maturing one.

So perhaps where we’re at as a sector is the point of late teens/early adulthood. The point where we ask ourselves: what do we really want to be when we grow up?

As we reflect on where we want to go next, the key is to recognise that while regulation and business practice can be different across different regions, we must avoid the mistake of assuming that different somehow means better or worse.

It’s easy to spend time on the one per cent that separates us as a profession, and ignore the 99 per cent that unites us.

Critical self-analysis is vital in order to progress a profession, but we also shouldn’t forget how far we’ve come.

So let’s start by celebrating some of our successes.

  • There are almost 190,000 CFP accredited planners in 26 jurisdictions around the world
  • There is real and increasing recognition of financial planning as a separate discipline and profession
  • Most importantly from a consumer viewpoint, we’ve seen the widespread adoption by financial regulators around the world of the ethics, education and best practice standards that were largely pioneered by financial planners.

In short, the financial planning profession has protected and improved the lives of many clients, and indirectly those who may never have even met a financial planner.

Take a bow, all of you. You deserve it.

0

Number of CFP accredited planners in 26 jurisdictions around the world

0%

Number of IFP accredited firms that charged on an assets under management basis as at 2016

“The concept of financial planning means different things to different people.”

The big questions

But back to that point about critical self-analysis.

If we want to take the profession forward, it’s worth pausing for a bit of time to reflect and assess where we are currently, and where we’d like to get to.

In the words of a wise man: “If you don’t know where you are going, any road will take you there.” I think we are feeling the lack of this vision.

There are a couple of key questions I’m keen to tackle as part of this discussion:

  1. What does true financial planning really mean, and have we gone away from it?
  2. Is there a gap between the aspiration of true financial planning and the reality?

Let’s start with the concept of financial planning, and how it means different things to different people.

For some it means a holistic process, treating health and life equally alongside financial resources. For others, it means no product advice, and payments that aren’t facilitated via investments. Most would focus on the use of goals and objectives.

So if we we’re not totally sure what ‘true’ financial planning means, it’s hard to tell if we have got away from it or not.

The spectrum of advice

“As long as fees aren’t contingent on a product sale, I think that how firms get paid is less important than what they get paid for.”

Things do, and should, evolve.

For example, in the 1970s and 80s US-based planners moved away from commission towards a model of using independent platforms such as Charles Schwab and charging a one per cent fee on assets under influence.

As other jurisdictions adopted the CFP and financial planning standards, they also largely adopted the US business model. It’s proved to be a very robust and long lasting one. Without it, few ethical and highly competent advisers would have been able to transition away from commission to a fee for service model.

This model has often been challenged, but it still accounts for the overwhelming majority of income for financial planning firms. In fact regulatory changes, such as the Retail Distribution Reviews (RDR) in the UK and South Africa, have actually embedded and reinforced this model so that for most firms, over 85 per cent of their turnover is based on assets under management (AUM).*

At the Phil Billingham Partnership we did a survey of IFP accredited firms in 2014, 2015 and 2016, which found that 92 per cent of respondent firms charged on an AUM basis.

When this was repeated for Financial Planning Institute (FPI) approved firms in South Africa in 2017, the proportion of firms charging based on assets was 89 per cent.

So financial planners, as well as many advisers, earn most of their income from looking after the money.

I hasten to add there’s nothing inherently wrong with this charging method. Our experience is that clients understand it, and quite like it.

My personal view is that financial planning should deliver what it says on the tin.

If a firm is setting out its stall as being a financial planning firm, then they should be delivering the six-step financial process to most of its clients.

As long as its fees aren’t contingent on a product sale, I think that how firms get paid is less important than what they get paid for.

*Benchmarking survey conducted for the IFP/CISI of their 'Accredited firms' by the Phil Billingham Partnership in 2014, 2015 and 2016.

The reality gap

Turning now to that second big question, of whether a gap exists between the aspiration of true financial planning and the reality.

Unfortunately the answer, at least in my experience, is yes.

It’s been estimated that perhaps 75 per cent of CFP accredited financial planners across the globe do not carry out financial planning on a day-to-day basis.

By way of anecdotal evidence, I remember a conversation with a newly appointed chief executive of a Financial Planning Standards Board (FPSB) affiliate, who’d come from another industry. He told me his family had a CFP accredited ‘planner’. It was only when he became chief executive of a professional body that he realised his ‘planner’ had never carried out any actual financial planning – he’d simply given ethical and technically correct advice.

Arguably, many (though not all) ‘financial planners’ round the world are highly educated and ethical product distributors or wealth managers. Simply put, they do what they’re rewarded to do, which is advise on products or manage money. Particularly in growing or emerging markets, this is within some form of tied or bancassurance business model.

I’m not saying this is wrong, but it’s not consistent with having a business model designed to deliver the six-step financial planning process.

In many jurisdictions, much of the growth of CFPs has been in the form of banks using the programme to improve the education of their client-facing staff. In others, CFPs are still working for large salesforces on a commission-only basis.

I’m not for a minute suggesting this leads directly to bad advice. But it stands to reason that if you’re paying your mortgage or feeding your family by selling a product, then you will sell a product. Ethically and competently, but the sale will occur.

So financial planning has improved outcomes for many consumers, but this has often been despite the fact that many consumers may never have met an actual financial planner.

“Much of the growth of CFPs has been in the form of banks using the programme to improve the education of their client-facing staff.”

What are we heading towards?

In terms of what financial planning should look like, from a regulatory point of view the wishlist might be as follows:

No commission – it’s almost universally agreed among regulators that commission creates conflicts which lead to unsuitable advice.

Suitability trumps eligibility every time – think about the concerns raised around investments targeted at high-net-worth or sophisticated investors.

Advisers should have a fiduciary duty or a clear duty of care to their clients. Advisers are responsible for the suitability and disclosure of all risks for the products and funds they recommend.

Advisers need high levels of technical and academic qualifications, and this must be attained before giving advice.

To most financial planners, this list will be unsurprising.

For those of us working in the UK, this is part of our everyday lives, and has been for a long while now. This is also increasingly the case in South Africa and Australia.

In order to survive and thrive, the profession has learned to build practices and businesses, rather than simply branches or groups of salespeople.

The best of these practices have learned what is mission critical to delivering proper financial planning, what they should do in house, and what they should outsource.

Yet despite this, there have arguably been few large scale programmes to show potential or aspiring planners what a financial planning practice should look like, and the commercial realities behind this.

As a sector, we started the financial planning journey with an understandable focus on ethics and education. But I wonder how much beyond that we have progressed?

“There have arguably been few large scale programmes to show potential planners what a financial practice should look like, and the commercial realities behind this.”

Key questions

  • What should the profession of financial planning look like in 2030?
  • What does that mean for business models and practices?
  • What does true financial planning really mean, and have we gone away from it?
  • Is there a gap between the aspiration of true financial planning and the reality?
  • As a profession, what are we heading towards?

Actions

  • Define where on the financial advice/planning spectrum you sit.
  • Ensure you have a specific business model that supports this and check that there isn’t a reality gap.
  • As part of your business model consider whether you need a defined code of ethics.
  • Audit your fees and understand whether any element is contingent on a product sale.
  • If you are a financial ‘planner’, review your current planning process against the six-step financial planning process – is it broadly in line?
  • Scrutinise how you describe your business model and the services you offer and ensure you describe these accurately.

Next… chapter two

For adviser use only

© Nucleus Financial Services Limited 2021

Nucleus Financial Services Limited is authorised and regulated by the Financial Conduct Authority, is registered in England with company number 05629686 and has its registered office at Elder House, St Georges Business Park, Brooklands Road, Weybridge, Surrey KT13 0TS. Please note that telephone calls may be recorded in order to monitor the quality of our customer service and for training purposes.