Financial planning dictionary definition

It was October 1987, and investors would soon have much bigger concerns than an SEC staff memo's new definition of "financial planning." In vague guidance to the nascent industry and the investing public, Wall Street's regulator noted that planning "typically involves providing a variety of services, principally advisory in nature." Compared to the upheaval of Black Monday 11 days later, the memo reads as quaint, if not naive. But 35 years later, the document still stands as the best available regulatory description for an industry that now manages $128 trillion in assets .

Scott Gill
Scott Gill is the founder of Synergy RIA Compliance Solutions.

"We dug that up out of the archives," said Synergy RIA Compliance Solutions founder Scott Gill. He noted that the typewritten memo is the only formal SEC definition for financial planning that  his team has identified. "It really is one of those areas where there's so much ambiguity that advisors feel confused."

The blurriness that shrouds a precise regulatory definition of financial planning and the number of people receiving such services is more than a historical oddity. The issue matters to the tens of millions of Americans who are clients of financial planning firms and the financial advisors who serve them knowing that planning is more than stock-picking, creating a portfolio and pricey product sales. Nailing down those figures and an exact definition carries profit implications for the industry, because many planners tend to have larger practices with more revenue and more business per client. The new problem is that the SEC has been asking advisors more questions about their planning services without saying exactly what it means by "financial planning." In that vacuum, giant firms with the best marketing can make the most money without providing what the profession views as true financial planning. Without a count of planning clients and an understanding of what they're entitled to get from registered investment advisor firms, it's not always possible to tell the difference between a comprehensive planner and a stockpicker.

To examine the disconnect as part of its annual RIA Leaders issue, Financial Planning spoke to more than a half dozen advisors, compliance experts and wealth management entrepreneurs. They shared the reasons it's so difficult to count the number of planning clients and why the muddle points to the need to hire advisors for underserved clients. They also talked about the need for codification of the "financial planner" title.

A uniform template "of what our advice is supposed to look like" would remove a lot of guesswork and ramp up the necessary training to help advisors "think about what we're offering clients versus what we're doing," said Anna N'Jie-Konte of Dare to Dream Financial Planning .

Anna N'Jie-Konte of Dare to Dream Financial Planning
Financial advisor Anna N'Jie-Konte is the founder of Dare to Dream Financial Planning.

"A lot of advisors are compliant, but are they really offering a lot of value to their clients beyond making sure their portfolio doesn't go off the rails?" she said. "This can be a life-changing relationship that we have as advisors, but we have to view it that way and act accordingly."

Challenging data
Data from the SEC and state regulators on advisory practices nationwide enable only a rough calculation of the number of people who have a planning relationship with an advisor. RIA in a Box , a compliance software and consulting firm, scraped Form ADV filings on the SEC's Investment Adviser Public Disclosure database for FP's annual RIA Leaders report.

The firm identified 16,342 RIAs that indicated in their last required annual disclosure to the SEC in Form ADV that they provide planning services. That group has 23.3 million individual clients and 4.7 million planning clients, as listed by firms in sections of the document for each type of customers in an RIA's base. The number of individual and high net worth individual clients represents the retail households served by a firm, as opposed to other RIA customers like foundations, employer retirement plans, pensions or pooled investment vehicles. The number of planning clients comes below those figures in a separate item on the same page.

And therein lies a big question: Nobody knows exactly how many financial planning clients there are or what specific services they're receiving under that arrangement. That makes it impossible for many clients to distinguish planning from investment management. The best available estimates put the number at about 5 million planning clients nationwide. Experts say that Form ADV's scattered way of tallying ensures that every client appears in the count somewhere. That count displays many weaknesses, though.

The line where the form asks RIAs to indicate the number of planning clients instructs them to round the total to the nearest 500 — or to choose among various ranges below that number if they have fewer customers receiving planning services. Because the actual figure doesn't show up in Form ADV, RIA in a Box had to use the median of each range to make a calculation.

Compliance experts say that most RIAs reserve that line for clients who only get planning services from the firm. By contrast, the number of customers who receive both planning as well as asset management or any other service from the RIA usually shows up separately in the higher section for their overall number of clients.

Still, the wording of the form's query doesn't seem to suggest that there's a distinction between planning-only customers and other clients, RIA in a Box Senior Vice President of Compliance Operations Chris DiTata said in an email.

Neither the Investment Advisers Act of 1940 nor any other federal securities laws provide a definition of planning, according to DiTata, who added that firms usually just come up with client totals by tallying how many contracts specifically mention the service.

"Form ADV could conceivably differentiate between financial planning-only clients and clients who receive financial planning along with other services," DiTata said. "This is not necessarily likely to happen, so it remains up to the advisor to ensure that each client understands what services will be provided, including whether those services constitute 'financial planning' or not."

Form ADV could act as the means for regulators and the public at large to gain a better understanding of the scope of planning on an industry-wide basis.

The SEC first made Form ADV filings available online to the public in 2001, adding in 2010 the requirement for mandatory brochures detailing information like an advisory firm's owners, a client's risks and conflicts of interest. As part of its mission of investor protection, efficient markets and the facilitation of capital formation, Wall Street's regulator is tasked with giving Americans access to everything that's material to a potential client about an RIA. But compliance experts widely agree it's falling down on the job of educating the public and the industry about the scope of a multi-trillion dollar industry with the lack of precision in the SEC's definitions and counts.

Earlier this year, another compliance firm called National Regulatory Services (NRS), a ComplySci company, arrived at a similar figure for the number of planning clients of SEC-registered RIAs at the end of 2021. ComplySci owns RIA in a Box, but the firms operate independently of each other. RIA in a Box captured SEC and state-registered RIAs in its count of planning clients. NRS and the Investment Adviser Association looked only at the larger SEC-registered firms in their "Investment Adviser Industry Snapshot 2022" report. The organizations reported that there are 4.8 million planning clients .

But NRS President John Gebauer pointed out flaws with that figure, too.

"Almost every data point that's in Form ADV" displays some inaccuracy because of openings for interpretation, Gebauer said. He answered with an "unqualified yes" when asked if it's possible the SEC is undercounting the number of planning customers of RIAs. That means no one really knows how many Americans are working with a financial planner or what exactly they are getting from them – or what specifically advisory firms claim they're doing for their fees.

"There's still a little lack of clarity from the SEC," Gebauer said. "They make a point of asking it, but they don't go that far into defining it, so it's a possible area of future enhancements to Form ADV."

Representatives for the SEC didn't make any officials available for an interview or answer questions directly but provided background information in an email.

The SEC acknowledged that Form ADV contains no formal definition of financial planning clients. That's in part, it said, because advisors whose primary business is planning may not meet the threshold of $100 million in assets under management that requires them to register with the SEC. A planning client may also appear in counts of other firms' portfolio management customers, depending on whether an RIA outsources those services, it said. With the 1987 memo the best available explanation, the regulator said it's up to advisors to decide whether each client receives planning services based on the scope of the relationship and add up the number of customers accordingly.

Compliance headache
The regulator's whack at a definition of "financial planning" on the investor.gov website doesn't offer much in the way of help. As the SEC puts it, a retail client could be working with planners who "assess every aspect of your financial life" — or with the "other professionals" who "call themselves financial planners" but recommend only a "narrow range of products."

"A financial planner typically prepares financial plans for his or her clients," the SEC website states. "The kinds of services financial planners offer can vary widely." That generic explanation leaves out any specific standard services that clients should expect to receive in the course of one of life's most important financial decisions in picking an advisor.

Investor.gov's language draws from that 1987 memo. In the document, the SEC made it clear to many types of investment advisors who were popping up at the time that they were indeed RIAs required to register with Wall Street's regulator.  But the memo's explanation of planning is so broad that almost any kind of investment management could apply to it.

"Financial planning typically involves providing a variety of services, principally advisory in nature, to individuals or families regarding the management of their financial resources based upon an analysis of individual client needs," the memo said. "The program developed for the client usually includes general recommendations for a course of activity, or specific actions, to be taken by the client."

In other words, you may be providing financial planning to people simply by considering their money situation and telling them what to do. The definition contains no references to professional certifications or qualifications, and no specific, universal standards.

The technical challenge of counting clients "comes up quite often" in SEC audits of firms, when the regulator asks practices to state how many planning clients they have, said Cory Roberson, founder of FIN Compliance.

RIAs work on the assumption that Form ADV's question on the number of planning clients refers only to those getting that particular service and no others, like portfolio construction, business advice or tax strategies, Roberson said. All of the rest of the clients, including those receiving those other services in addition to planning, show up in the prior section calculating the accounts paying a fee that's usually 1% of their managed assets.

"If they receive anything else, usually they're grouped into assets under management-based service that would be under another category," Roberson said.

Some firms can easily track the total number because they use specific contracts and agreements for their planning clients, according to Gill of Synergy RIA Compliance. RIAs run into snags when counting planning clients when they only have one primary contract for investment management and everything else, he said. Common planning services revolve around topics like inheritance, health care costs, whether or not to make a withdrawal from an IRA and when to begin collecting Social Security checks. All of those traditionally fall outside the scope of investment management. So pinning down which clients are planning clients when there is only one single type of contract often proves difficult.

"Regulatory ambiguity breeds inconsistency," Gill said. "If it's not perfectly clear what processes, policies and procedures that advisors are supposed to have in place for financial planning, then it's inevitable that the count is going to be off."

Professional and business implications
The seemingly esoteric and elusive number of clients receiving planning services looms large to many advisors, who strongly believe that there are a lot of portfolio managers, salespeople and outright hucksters hanging a shingle as "planners" alongside the legitimate ones.

That has prompted the Financial Planning Association, a networking, education and advocacy organization for certified financial planners, to seek legal recognition of the "financial planner" title. CFPs must complete examinations and instruction while upholding the rules of the Certified Financial Planner Board of Standards.

2022 FPA President-elect James Lee
2022 FPA President-elect James Lee is the founder of Lee Investment Management

FPA members want to lead many stakeholders in the creation of "minimum ethical standards" for the planner title, too, 2022 President-elect James Lee of Saratoga Springs, New York-based Lee Investment Management said in an interview. The lack of a legal description for financial planning forms part of the motivation behind FPA members starting what they expect to be a multi-year quest for title protection, Lee said.

"The services that a financial planner provides are not very well-defined," he added. "The ultimate result of this effort is that we'll have a much better understanding of the number of Americans who are receiving financial planning services from a competent and ethical planner."

Nearly all of roughly 330 million Americans could benefit from one. For now, we know for sure that there aren't enough planners, according to Michael Kitces, the co-founder of the XY Planning Network, head of planning strategy with Buckingham Wealth Partners and publisher of the Nerd's Eye View blog.

Pointing out that there are about 90,000 CFPs and that most advisors can handle no more than 100 clients in "deep, meaningful financial planning relationships," Kitces offered an estimate of 9 million customers. The studies suggesting about 5 million look "a bit low to me," but not drastically so, he said in an email.

"We're not even remotely close to the number of CFP professionals it would actually take to even serve half the country," Kitces said. "The advisor talent shortage is that severe."

The number of SEC-registered RIAs that offer planning

Of course, more planners means more dollars for the industry and its professionals. At $950,000 in median annual revenue and $5,600 in median annual revenue per client, CFPs are generating at least 40% higher business than non-certified peers in each metric, according to a study by Aite-Novarica Group in 2019. The CFP Board commissioned the study, but the research firm conducted it. Since the industry's transition from asset management to planning is accelerating, firms must "place greater emphasis" on the latter, the study said.

"Firms need to get more serious about measuring and managing the quality of the advice they provide if this is the way they intend to differentiate themselves," it said. "This starts with ensuring all advisors have the training to deliver good advice."

Minneapolis-based Wealth Enhancement Group, an independent RIA, has expanded to $54 billion in client assets after dozens of private equity-backed acquisitions made with an eye on the dearth of actual financial planners, Chief Investments and Business Development Officer Jim Cahn said in an interview. "The demand for advice will just continue to grow, and the supply of advisors is shrinking," he said, referring to the advanced age of many planners.

He recalled first recognizing the gap in 2010, when his mother received a financial plan filled with high-cost funds, an annuity with a steep upfront sales charge and risky bond products. Cahn, who remarked that he doesn't know as a car buyer "whether a Ferrari or a Ford is a better car under the hood," believes some training for clients is necessary, too.

But adding more advisors to the mix won't necessarily provide more clarity for consumers and could even make it less clear.

"They don't even know what they're supposed to get, so they have no ability to evaluate whether they're getting real financial planning. That inability of the client to observe the difference makes it very hard to sell that difference," Cahn said. "That education has to happen, otherwise you're going to have more people like my mom going to financial advisors and getting terrible advice."

Beyond stockpicking
Financial advisor Kelly Klingaman first hatched a plan to launch an eponymous firm in Austin, Texas, after growing concerned about what she called the low quality and dearth of advice for "professional women who work in male-dominated spaces." Before opening her own firm in January, she worked for 12 years with Dimensional Fund Advisors, including with RIAs that use the firm's low-cost, passive products. She chose to have her own practice, rather than working for other advisors who didn't want her to go outside their traditional client base, she said.

Kelly Klingaman of Kelly Klingaman Financial Planning
Financial advisor Kelly Klingaman launched Kelly Klingaman Financial Planning earlier this year.

"We can create sounder ways to serve younger clients, we just have to be more creative," said Klingaman, who is one of many advisors opting to charge clients a flat fee for planning rather than the standard 1% AUM fee. "That can be very profitable, and it can also be very reasonable for younger clients who make great income to pay for that."

She and N'Jie-Konte of Dare to Dream also point to elements of personal finance that involve emotions and immediate worries for clients as the key areas that make investment management only one aspect of planning. Advisors who limit themselves to topics currently covered in their training such as asset allocation, risk tolerance, portfolio construction and tax location are doing "a disservice" to clients, N'Jie-Konte said.
"A lot of advisors hide behind the AUM and the investment piece and don't do as much as they could and they should on the actual planning piece," N'Jie-Konte said. "It's a training deficiency for a lot of advisors that come up in this business where we are solely focused on assets."

It all adds up to a pivotal dilemma facing the industry's future. The long-term goal among many planners to make their trade a profession in the vein of doctors, lawyers and accountants "has not happened yet," according to Lee of the FPA. That's why they're pushing to define themselves and count their clients.

"We know the impact that our work does for our clients everyday," he said. "We also believe that financial planning, if understood and widely used, could really help society in terms of financial health, peace of mind, etc. Money is an important part of every person's life."

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Wealth management Practice and client management RIAs SEC FPA RIA Leaders RIA Leaders 2022
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