Financial Planning Services

Back Ground

Financial planning is a holistic approach to personal financial management

that has flourished since the mid-1980s. Rising levels of wealth and
consumer sophistication about finances have fueled the upswing, as has
deregulation of the financial services industry. Experts predict the pace of
growth will remain vigorous and even increase, as baby boomers near
retirement and as large institutions target planning services at middle and
lower income people.

The financial planning industry has experienced a number of significant

trends. These included millions of baby boomers who were not adequately
prepared for retirement, Social Security benefits that were expected to run
out of funding by 2042, a volatile stock market, and skyrocketing health care
costs. Perhaps most significantly, the responsibility for retirement planning
was rapidly shifting to the individual and away from employers. This boded
well for financial planners, who were faced with the difficult task of helping
people from a wide range of demographic and socioeconomic backgrounds
make difficult choices about an uncertain future.

As we all know the 2008-2009 economic downturn clearly hurt many

associations that represent financial planners, investment advisers and big
brokerages other than that Membership fell about 10 percent at both the
Financial Planning Association (FPA) and the Investment Adviser Association
(IAA), and was off slightly at the Securities Industry and Financial Markets
Association. The National Association of Personal Financial Advisors (NAPFA)
also experienced a slowed membership growth as well as a loss of
conference revenues.

Job Profile

Financial planners, sometimes called advisers, analyze a person's complete

financial situation and develop a strategy to optimize personal resources and
meet life goals. They consider a number of factors, including income, assets,
present and future expenses and investments, as well as personal data such
as age, health, and number of dependents. Planners use the detailed
information they get from meeting with clients to make financial
recommendations, including advice on budgeting, saving, insurance, taxes,
investments, and retirement planning. They often assist customers by
directly managing assets. Some financial planners focus on only one
financial issue, but most work on many.

Financial planning services originated in the early 1960s. It wasn't until

1970, however, that the first fee-only planners--now a quasi-standard--
appeared. As an industry, financial planning came of age as America's
corporations gradually replaced traditional corporation-managed pension
plans with employee-managed 401k’s and other retirement savings
alternatives, forcing individuals to take on more responsibility for long-term
fiscal planning. Concerns about the viability of Social Security and Medicare,
coupled with growth in the number of small businesses and the self-
employed, have forced many individuals who had given very little thought to
retirement planning to become more knowledgeable about estate plans,
insurance, home ownership, taxes, and the multitude of new financial
products and investments.

Brisk Growth

The number of firms and individuals offering various forms of consumer

financial advice has skyrocketed since the late 1980s. Because there is
neither a single definition of what a financial planner is nor a consistent set
of boundaries between the profession and related activities such as
investment advising or accounting, estimates of the industry's size vary
considerably. A 1997 Barron'sreport pegged the count of financial planning
firms at 25,000, while more recent estimates entertain figures as high as
300,000 for the total number of professionals offering financial advice. The
number of those with formal accreditation is much smaller. The Certified
Financial Planner Board of Standards, one of the largest and most visible
professional licensure bodies for the industry, reported over 42,200 active
licensees in 2003, a figure nearly four times that of the mid-1980s. By 2007
this number had grown even more, exceeding 55,000.

The growth of the financial planning industry parallels the increasing

accumulation of assets by Americans and greater sophistication about
investments. The change in savings patterns illustrates the trend. The 61
percent of personal savings that were held in banks, savings and loans, and
credit unions during the 1970s had declined to less than 38 percent by the
mid-1990s. Through pension and mutual funds, households and businesses
increasingly participate in huge, diversified portfolios of stocks, bonds, real
estate, and even commodities. As reported in the Washington Times, pollster
Peter Hart said that it took 25 years for stock ownership among Americans to
double, from 10.4 percent in 1965 to 21.1 percent in 1990, and that it took
only seven years for stock ownership to double again. The article also
reported that by the end of 2001, 51.9 percent of American families owned
stock, marking the first time that more than half of U.S. households owned
stocks; that most of these families owned stock indirectly through their
retirement funds; and that only 21.3 percent of families owned stock
directly.

As rising wealth widened demand for financial planning, large financial

services firms jockeyed for shares of the highly fragmented market. Such
captains of finance as Citigroup and American Express launched new
financial planning services in the late 1990s and the early years of the first
decade of the 2000s, and tax preparation giant H&R Block was readying a
major retail thrust that could make planning service outlets as ubiquitous as
its tax centers. Even discount broker Charles Schwab forayed into planning-
related territory by rolling out a planner referral service for its investment
clients. Meanwhile, some smaller firms that specialized in planning began to
merge and consolidate in hopes of building a more recognizable presence in
this traditionally localized business.

Competency Concerns

Increasing apprehension over the competency and legitimacy of individuals

practicing financial advising has accompanied the industry's growth. As a
Barron's writer quipped, "Can't cut it as a hairstylist? Try financial planning."
In the absence of universal professional or legal credentials distinguishing
financial planners, several professional organizations and recent laws have
sought to impose a baseline of competency and heighten public awareness
of the meaning of a bewildering array of financial planning credentials.

Organization and Structure

Financial planning is the process of establishing financial goals and creating

a way to realize them. The process involves taking stock of all personal
resources and needs, developing a plan to manage them, and systematically
implementing the plan to achieve financial objectives. Financial planning is
an ongoing process. A plan must be monitored and reviewed periodically so
that adjustments can be made to assure that it continues to meet individual
needs.

The profession involves expertise (or access to experts) in various disciplines

such as estate planning, taxation, benefit plans, pension plans, insurance,
investments, and real estate. Thus the consumer financial planning market
has come to be fragmented across several disparate service professions in
addition to those just practicing planning, and many of these services
specialize in certain aspects of financial planning to the exclusion of others.

The Certified Financial Planner Board's Web site, www.cfp.net, provides a

wealth of information for those confused by the many definitions of "financial
planner." There were more than 55,000 certified financial planner (CFP)
licensees working in the United States in 2007. According to the CFP Board,
the following list of professions may provide financial planning services:
Accountant, Broker/Dealer, Certified Financial Planner Licensee or CFP
Practitioner, Chartered Financial Analyst (CFA), Chartered Financial
Consultant, Estate Planning Professional, Fee-based Financial Adviser, Fee-
only Financial Adviser, Financial Adviser, Financial Consultant, Financial
Counselor, Financial or Securities Analyst, Financial Planner, Insurance
Agent, Investment Adviser, Investment Adviser Representative, Investment
Consultant, Money Manager, Personal Financial Specialist, Portfolio Manager,
Real Estate Broker, Registered Investment Adviser, Registered
Representative, and Stockbroker

Adding to the confusion about the variety of financial planning services, a

CFP Board survey showed that consumers have many misconceptions about
the role of a financial planner. The survey, conducted in February 1999 by
Bruskin-Goldring Research for the CFP Board, was nationwide and included
1,016 adults. Among the misconceptions, 36 percent of those surveyed
believed that financial planners would automatically put their assets into the
best-performing stocks and mutual funds; 17 percent expected assurances
from a financial planner that they would become rich; another 16 percent
expected that they would be asked to pay up front for a financial planner's
services.

Fees and Commissions

Financial planners are paid in a variety of ways, usually depending on the

planner's affiliations. The methods are fee only, commission only, fee offset,
combination fee/commission, and salary. Ethical standards mandate that
planners disclose who pays them if they are earning commissions, but this is
not always observed.

Aside from fee only, the balance of these payment schemes imply that
financial planning is being offered in conjunction with other products or
services such as investment brokering, banking, accounting, or underwriting.
These planners are often described as product-driven, as opposed to fee-
only planners who are called process-driven. Less delicately put, critics of
financial planners who accept commissions call them salespeople, not
advisers.

Because fee-only planners are paid by the client and don't receive
commissions, they have fewer conflicts of interest when they recommend
investment vehicles and thus are sometimes considered more impartial than
other types of planners. Still, despite a major push in the industry toward
fee-only compensation, the most common pay structure among CFP
certificate holders is combination fee and commission.

The problem of identifying a planner's potential conflicts of interest is

aggravated by a dearth of openness and clarity about the compensation of
many planners. Guy Halverson, writing in the Christian Science
Monitor, described the results of a study released in 1997 by the Consumer
Federation of America and the National Association of Personal Financial
Advisors, the trade association for fee-only planners (which has trademarked
the phrase "fee only"). Of 288 Washington, D.C.-area planners and firms in a
random survey, "two-thirds claimed to offer fee-only services. Of those,
three out of five were earning commissions or other financial incentives from
undisclosed third parties, such as mutual fund companies or insurance
firms." Consumer wariness about conflicts of interest may be part of the
reason for a planner's reluctance to reveal sources of income, the study
suggested. The organization has been perhaps the most aggressive
advocate of true fee-only planning and has developed visibility programs
such as its Fiduciary Oath and the fee-only trademark to make consumers
aware of the distinction.

Regardless of the type of planner retained, fees can vary

widely. Moneymagazine, in a piece by Ruth Simon, reported that fee-only
advisers often charge a flat fee to develop a plan, typically from $500 to
$6,000, depending on complexity. Hourly fees range between $75 and $225,
and the average for certified financial planners is about $120. Some use a
sliding scale, charging more to customers with higher incomes or greater
assets. Many also charge an annual fee equal to .5 percent to 1.5 percent of
total assets to manage a portfolio.

Regulation

In part reflecting the fragmented market, government regulation of financial

planning has been uneven and complex. That, however, is changing. A law
amending federal securities laws, the National Securities Market
Improvement Act, became effective 8 July 1997 and divided regulation
between the federal government and the states. Firms with $25 million or
more in managed assets remain under the jurisdiction of the U.S. Securities
and Exchange Commission (SEC), while the remaining investment advisers,
an estimated 16,500, revert to state regulation.

In the past, some states licensed advisers. Financial planners were not
required to register with the SEC unless they recommended specific stocks
or bonds, in which case they had to be registered investment advisers. The
SEC required no test, however, with the result that registration reflected
little about the adviser's competency. Applicants simply paid a fee and
submitted a form listing their disciplinary history, educational background,
and investment philosophy. Even as many states do not require licensure of
financial planners, most state securities agencies do not regulate individuals
associated with investment of financial planning firms, whether or not those
firms are registered with the SEC or with a state agency.

Under the new regulations, the SEC retained jurisdiction within any state
that had not enacted its own regulations but had no plans for testing or
enforcing competency requirements. Many states, however, have begun to
coordinate some testing requirements for new entrants to the field. As of
June 1998, the American Institute of Certified Public Accountants reported
that 15 states had a 150-hour education requirement for planners in effect
with another 29 scheduled to follow suit on a future date; and that in
addition, 22 states prohibit commissions and contingent fees.

The states present a mixed picture. David Weidner wrote in a Wall Street
Journal report that some are adapting faster than others to the new order of
things: "Pennsylvania, along with [Connecticut and Washington], is
considered a model in dealing with the new responsibility." Like Connecticut
and Washington, Weidner said, Pennsylvania had an active regulatory
agency that worked with the SEC before the act went into effect.

Associations

Professional associations have been key to developing standards of ethics

and raising the bar for who qualifies as a financial planner. A number of
associations have emerged to promote education, expertise,
professionalism, and ethics in the field. These groups provide professional
financial planners with information and continuing education. Many will also
recommend reliable firms and individuals who are knowledgeable in financial
planning.

The Financial Planning Association (FPA), www.fpanet.org, was formed in

2000 through the merger of two of the industry's foremost associations, the
Institute of Certified Financial Planners (ICFP) and the International
Association for Financial Planning (IAFP). Although the two organizations,
which were roughly the same size, had previously disagreed on licensing and
other matters, in 1999 they agreed to merge. The ICFP had allowed only
members who held the CFP designation or were in the process of getting it,
whereas the IAFP consisted of a more diverse group. Under the merger, the
FPA was opened to non-CFP holders as well, although members were
encouraged to seek the designation.

The Association for Financial Counseling and Planning Education (AFCPE),

www.afcpe.org, headquartered in Upper Arlington, Ohio, is a nonprofit
professional organization comprised of researchers, academics, financial
counselors, and planners. The AFCPE administers certification programs for
financial counselors, including the national Accredited Financial Counselor
program, as well as certification programs for housing counselors, including
Accredited Housing Counselor and Certified Housing Counselor. It offers
education and training programs at an annual conference and publishes a
professional journal devoted to financial counseling and planning, as well as
a newsletter with a guide to resources, including Web sites, publications, and
industry trends.

The CFA Institute (formerly the Association for Investment Management and
Research), www.cfainstitute.org, had 94,588 members in 133 countries as of
2007. The organization, which grants the prestigious Chartered Financial
Analyst designation, sets the highest standards in education, ethics, and
advocacy for investment professionals, their employers, and their clients.

The Certified Financial Planner Board of Standards Inc. (CFP Board),

www.cfp.net, was founded in 1985. The CFP Board administers the CFP exam
and regulates professional behavior for holders of that credential. It creates
professional and ethical standards and disciplines CFP holders who violate its
tenets.

Members of the National Association of Independent Public Finance Advisors

(NAIPFA), www.naipfa.com, include firms that specialize in financial advice
on bond sales and financial planning to public agencies. Headquartered in
Montgomery, Illinois, the NAIPFA seeks to build credibility and recognition of
financial advisory firms and maintains high ethical and professional
standards. It maintains a board of review to ensure member compliance with
standards, provides educational materials to independent financial advisers,
and responds to legislative needs of member firms and the public agencies
they serve.

Founded in 1983, the National Association of Personal Financial Advisors

(NAPFA), www.napfa.org, is headquartered in Arlington Heights, Illinois. With
more than 1,000 members and affiliates in 50 states, it serves as a network
for fee-only planners to discuss practice management, client services, and
investment selections. The association works to encourage and advance the
practice of fee-only planning by developing the skills of members, increasing
awareness of fee-only financial planning, and fostering interaction with other
professional groups.

The Registered Financial Planners Institute (RFPI), www.rfpi.com, is

headquartered in Amherst, Ohio. The institute promotes professionalism in
financial planning for individuals and businesses. RFPI offers classroom
seminars and correspondence courses and sponsors a research program and
referral service. The institute bestows the designation of Registered Financial
Planner (RFP) on qualified members.

The Society of Financial Service Professionals (SFSP), www.asclu.org, is

headquartered in Bryn Mawr, Pennsylvania. SFSP was formerly the American
Society of CLU & ChFC. It is a national membership organization representing
23,000 financial services professionals who have earned the chartered life
underwriter or chartered financial consultant designation from the American
College, www.amercoll.edu, also located in Bryn Mawr. Members specialize
in estate planning, investments, tax planning, wealth accumulation, and life
and health insurance.
The financial planning industry faced a number of significant trends during
the late years of the first decade of the 2000s. Perhaps the most pressing
issue was that Americans were simply not saving for their golden years, or
saving enough. According to the Principal Financial Well-Being Index,
released by the Principal Financial Group and Harris Interactive, 42 percent
of adult workers in the United States save between 5 and 10 percent of their
pay for retirement, falling short of the 15 percent needed to replace 85
percent of their income after the conclusion of their working years. A mere 8
percent of workers were saving the recommended amount. Another 21
percent of eligible employees choose not to participate in their employer-
sponsored 401(k) plan at all. The top regret among working adults (45%) and
retirees (32%) was starting to save for retirement too late.

This trend was especially evident among the approximately 76 million baby
boomers who were approaching retirement age. However, due to poor
saving habits, many boomers were not adequately prepared for retirement.
According to one estimate, some 65 percent of this demographic group had
not saved sufficiently for retirement at the traditional age of 65. Additionally,
boomers were more likely to have racked up higher levels of debt than past
generations. In its July 25, 2005 issue, Business Week reported that of those
households headed by individuals aged 50 to 59, some 50 percent had
$10,000 or less in a 401(k) account.

While this was an important consideration for financial planners of all stripes,
more significant issues loomed on the horizon. In addition to Social Security
benefits that were expected to run out of funding by 2042, as well as a more
volatile stock market, the responsibility for retirement planning was rapidly
shifting to the individual and away from employers that once offered
generous pension plans. In fact, one estimate indicated that a mere 12.5
percent of employees will be guaranteed a pension by 2025.

Exacerbating the burden of individual responsibility for health care were

rising life expectancies. According to some observers, many individuals were
not cognizant of the fact that they would be living much longer than previous
generations. This poses the very real possibility of one outliving his or her
retirement savings. Faced with this challenge, financial companies were
struggling to develop investment products that provided retirees with
adequate security.

In addition to these burdens, many Baby Boomers were contending with the
need to care for and support elderly parents, and pay college tuition for their
children. Outlays such as these often put a strain on retirement savings.
Because of the significant financial impact these situations were expected to
have, many financial planners were preparing to have serious conversations
with their clients.
The need to save more for retirement was not limited only to baby boomers.
Generations X and Y, as well as the so-called Millennials, which will
constitute the majority of the U.S. workforce by 2050, also needed to save
more According to data from the Employee Benefits Research Institute, cited
in the December 1, 2006, issue of Employee Benefit News, approximately 33
percent of those aged 21 to 30 participated in their company's 401(k) plan.
The publication cited challenges such as college loan payoffs and credit card
debt, as well as a tendency to focus on immediate gratification, as
roadblocks that hindered younger people from saving for their future.

Looking ahead, the only certain thing appeared to be that, as a whole,

individuals were being challenged to assume more responsibility for and
invest more heavily in their own retirement than ever before. This boded
well for financial planners, who were faced with the difficult task of helping
people from a wide range of demographic and socioeconomic backgrounds
make difficult choices about an uncertain future.

Current Conditions

According to First Research, Inc., there were about 25,000 U.S. companies
engaged in financial planning and advising in 2009. Their combined annual
revenues were approximately $115 billion. On a global level, in March 2009,
the Financial Planning Standards Board Ltd. (FPSB) announced that the
number of CFP (certified financial planner) professionals had roughly doubled
in the previous eight years to a 2009 total of 118,506, concentrated in about
20 global territories. The majority of them (59,676), according to FPSB, were
doing business outside of the United States. Certification and/or professional
affiliation of planners and advisors is increasingly requested or demanded.

The severe rise in national unemployment in 2009, coupled with the

downturned economy stemming from a year earlier, created both problems
and business for the industry. In his December 2009 article for Financial
Planning magazine, Robert Menchaca noted that data showed the Dow Jones
Index finished 2008 down 35 percent, while the S&P 500 and Nasdaq were
off even more, nearly 40 percent. However, since the market low in March
2009, all of the major indices/indexes have been up over 50 percent. That
kind of roller-coast ride has led investors to second-guess their planners,
their plans, and their futures. The historic reliance on a portfolio heavy with
stocks and bonds, e.g., 60/40 splits, was giving way to the old but often
ignored rule of heavy diversification.

The bank failures also triggered an interest in having the industry more
regulated. In late 2008, the FPA, NAPFA, and the Certified Financial Planning
Board coalesced to lobby Congress for a more clearly-defined and regulated
financial planning industry, much opposed by securities and investment
concerns. Among issues dividing the groups was the desire for a statutory
definition of "fiduciary." Increasingly, stockbroker arbitration was being
invoked to help investors who had lost money due to ineptitude or stock
fraud on the part of financial advisors, and professional malpractice suits
were on the rise. In March 2009, investment banker Bernard ("Bernie")
Madoff pleaded guilty to essentially creating false investment accounts and
privately pocketing funds received from investors, periodically paying
returns to some of them with money received from other prospective
investors under a giant "Ponzi" scheme. He was sentenced to 150 years in
prison in June 2009. In connection with this case, the accounting firm of
Friehling & Horowitz and its partner David G. Friehling, C.P.A. were also
charged with fraud and various SEC violations for falsely representing that
they had conducted legitimate company audits of Madoff's investment firm
over the years, when in fact they had not.

Research and Technology

Beyond impersonal online advice systems that dish out recommendations

based on prefabricated problems and solutions, some planning services
companies envision a future where a majority of planners and advisors will
videoconference with customers over the Web via home personal computers
and public kiosks. Another possibility for the service would be to bring
together several specialists--say a lawyer, an accountant, and an insurance
broker--to work together with a customer instead of making the client visit
each one separately. Real-time information from the exchanges and faster
access to global markets will make the industry challenging but rewarding
for those who demand the best.

Explored by
Kartik Trivedi