Personal Financial Planning: Making the Transition

Investment professionals contemplating—or desperately seeking—a change of career may want to take a look at the field of financial planning, in which employment is growing robustly and money management skills are key to success. Within that field, however, are a number of niches, one of which is the fee-only financial planner, or what we’ll call the “PFP” or “personal financial planner.” A PFP operates solo or in a small firm, with clients whose assets under management are usually less than $1 million. The PFP position represents one of the most rapidly expanding and least well-known segments in financial planning.

THAT WAS THEN

Personal financial planning emerged as a standalone profession in the early 1970s, when a handful of investment and insurance professionals, dissatisfied with product-centered business models, began to experiment with client-centered models. Their efforts led to the founding of the College for Financial Planning in 1972. The concept of a fee-only compensation model gained traction, and in 1983 the NAPFA (National Association of Personal Financial Advisors) was established to focus on comprehensive, fee-only financial planning.

In 1985, the CFP Board (Certified Financial Planner Board of Standards) was founded as a professional regulatory organization, separate from the educational and professional societies, to determine the BOK (body of knowledge), set ethical standards, and grant the CFP certificate, today’s primary professional designation for financial planners. The industry matured and in 2000 two large professional organizations merged to form the FPA (Financial Planning Association), now the primary industry advocate, which helps the public understand the benefits of financial planning.

THIS IS NOW

Education, health, and retirement costs are increasing. Lifespans are lengthening. The pension and Social Security safety nets are fraying. This is all good news, of a sort, for those in the business of selling personal finance advice. In fact, in 2007 the BLS (Bureau of Labor Statistics) predicted that by 2016 jobs for personal financial advisors (who are similar to PFPs) will have grown 41% over 2006 levels, while financial analyst jobs—think CFA (Chartered Financial Analyst) types—will have grown 34%. While these figures predate the financial crisis, both sectors may still be able to anticipate above-average growth. The BLS forecasts that the job of personal financial advisor will rank among the top ten fastest growing occupations. What’s more, a 2007 survey conducted by the CFP Board reveals that PFPs are generally very satisfied in their careers, with over 85% of respondents reporting high satisfaction or better.

More than half of PFPs work in the finance and insurance industries. But about 30% are self-employed, most often operating small firms in urban areas (Bureau of Labor Statistics 2007). The PFP in a small or solo practice is like the medical general practitioner who handles the primary relationship and brings in specialists when necessary. The prospective size of the firm and the degree of specialization it would offer are important considerations for those contemplating a career switch.

WHO ARE THEY?

At the heart of personal financial planning is a concern that the client receive objective financial advice based on a fiduciary relationship with the planner. While the typical client does not meet the “wealth” threshold the large firms require, her needs are similar to those with more wealth. Financial planners follow a six-step process, from establishing a client–planner relationship to monitoring the recommendations implemented. The process addresses all the elements of the client’s financial life, including investments, insurance, education and retirement savings, estates, and taxes. Indeed, many PFPs will not manage money for a client without a comprehensive written financial plan.

Lewis J. Altfest, PhD, CPA, CFA, CFP, PFS, is president of LJ Altfest & Company, a fee-only planning firm in New York. He comments, “Investment management is certainly the key service in most client relationships. However, it is still only a component of the client relationship. We don’t spend a lot of time with clients on the details of their portfolios unless they want us to. They work with us because they trust us.”

In helping smaller clients plan secure futures, analytical skills are as crucial as personal commitment. PFPs will face chal- lenges including:

• Crafting retirement plans and withdrawal strategies for one or two people. 
• Resolving behavioral problems that prevent clients from sticking to their investment plans.
• Managing investments in an after-tax world. 
• Integrated investments with risk management concerns such as disability and long-term care.

Although successful PFPs can live quite comfortably, their compensation has typically been below the level of top jobs on Wall Street. As financial industry compensation models reset themselves, however, the relative returns enjoyed by PFPs may look more attractive. The profession’s historical bias has been toward charging fees for planning and asset management, while eschewing commission-based product sales. Because this fee-only model requires the planner to constantly develop new clients, many financial planners have also grown hybrid revenue streams that include insurance and securities commissions.

WHO ARE YOU?

Traditionally, there has been very little overlap between the analyst and financial planning communities. Based on the number of CFA charterholders who are also CFP certificants, it appears that relatively few investment professionals have pursued personal financial planning. A 2009 profile of CFP certificants by the CFP Board shows that a mere 2.4% of the 58,945 Certified Financial Planners hold the CFA designation. Only eighty CFPs belong to the New York Society of Security Analysts, which has over 11,500 members; and a mere dozen Chartered Financial Analysts belong to the Financial Planning Association of New York, which has an active membership of over 680. Those looking to bridge the gap must meet two fundamental criteria.

The first criterion is mastery of the financial planning BOK. The BOKs required for the CFP exam and the CFA curriculum overlap significantly, especially in the area of private wealth management. In fact, the CFP Board allows CFA charterholders to challenge the CFP exam without completing a CFP Board-registered education program. Stephen Horan, PhD, CFA, head of professional education content and private wealth at CFA Institute, suggests that anyone who has recently earned the CFA charter will already have learned much of the material related to private wealth management, with a focus that is even more analytical and international than the CFP curriculum requires. Those who earned their charters some time ago may need a refresher course.

The second criterion is perhaps more important. PFPs must develop the ability to establish trusting, profitable relationships with a wide range of individuals. Horan notes that psychological profiling and behavioral finance are part of the CFA curriculum. But there’s more to people skills than book learning, according to Lew Altfest. He looks for the “naturally affable personality” when he hires. And A. Mark Harbour, CPA, CFA, CFP, of Citi Smith Barney, agrees: “Psychological diagnostics are not trivial; success comes from good people-reading.” Anyone looking to move into personal financial planning must be able to answer the following questions in the affirmative:

• Am I passionate and sincere about wanting to help people (not just wealthy people)?  
• Do I have the marketing and interpersonal skills required to attract and retain clients? 
• Is my network of contacts broad enough for me to develop my own client base? 
• Am I really entrepreneurial or is that just my fantasy? 
• Can I be honest about my weaknesses and do I know how to offset them?

One final consideration is both crucial and promising for middle- and top-level managers looking to reposition their skill sets—maturity is a positive attribute for the PFP, with 47% of all CFPs in the over-50 crowd. More surprising is the fact that women comprise only a quarter of all CFPs. Encouragingly, however, their representation in the industry appears to be growing.

REFERENCES

Bureau of Labor Studies, United States Department of Labor, 2007 (last updated December 18, 2007). "Financial Analysts and Personal Financial Advisors." Occupational Outlook Handbook, 2008-09 Edition.

Certified Financial Planner Board of Standards, Inc. 2007. "CFP Board 2007 Certificant Survey Summary Report."

Certified Financial Planner Board of Standards, Inc. 2009. "CFP Certificant Profile."

–Dan Olson, CFA, CFP, the principal of Olson Tax & Financial Planning, LLC (www.olsontfp.com), in Forest Hills, New York, started his firm after retiring from Citigroup.

This article was originally published in the Spring 2009 issue of the Investment Professional.