Hey kids! The FP50IBD for 2014 is out, and it’s a real humdinger!
What’s that you say? You’re wondering what that nasty looking little squirt and a half of letters and numbers all strung together in that first paragraph means, are ya?
Please allow me to introduce . . . er . . . translate it for you, as we take another trip into our continuing series, Language Fail in the Land of Financial Planners, and, in doing so, hopefully help you understand how the concepts of financial planning and investment advising became so thoroughly bollixed-up and so inelegantly hotchpotted.
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In approaching this string of letters and numbers, let’s sneak up on it from behind, shall we? Yes, let’s do a reverse Julie Andrews and start at the opposite end of the very beginning: the “IBD” in “FP50IBD.”
As you might expect, lots of folks and businesses and concepts out there lay claim to an I followed by a B followed by a D. Why, it’s a veritable gimme an I, gimme a B, gimme a D free-for-all out there!
First and foremost, IBD, to most people in financial services, stands for “Investor’s Business Daily,” which is a daily financial newspaper that competes with the Wall Street Journal (which today is, I think it’s fair to say, a Rupert-Murdochian-pummelled shadow of its former self) and the Financial Times (it of the salmon-pink newsprint, and all three being raaaaather conservative to say the least).
Second, as anyone who care-took a cat well into said cat’s late teens, as I once did, IBD can also be veterinarian-speak for “pukes a lot” or, to line things up with the abbreviation itself, “irritable bowel disease” (aye, laddies and lassies, t’was some long-bygone era now, but I doth vividly remember what it was like to be care-taking Sir Pukes-A-Lot all throughout yonder day). But in all seriousness, irritable bowel disease can be a very big deal for humans as well as for beloved pets; if you’re a human being, then, you really don’t wanna have IBD and you really don’t want your pet to have it either, and, likewise, if you’re a pet, do you and your caregiver a favor and stay away if you can from IBD.
As you can guess, the IBD in use here has nothing to do with either of those things, or, for that matter, with “isolation by distance” genetic analytical tools (tools based on the idea that, the more geographically isolated one population is from another, the more different their genetic makeups will be) or with the “Independent Bike Dealers” association (which has probably fared far better than the IBookD parallel association) or with the “International Business Development” department at the Haas School of Business (my alma mater), all of which Google would have us believe are much more relevant to many more people than the IBD in play here in the FP50IBD.
In fact, the particular IBD in play here — the one having to do, as we will shortly see, with financial services — was nowhere to be found on any of the numerous search result pages I saw, even though The Google Machine’s knowledge of me presumably goes way deeper than the very easy-to-know fact that I am in financial services.
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Short numeracy detour (skip this numeracy section if you prefer to not think of the numeracy ramifications here, but please do also fold back to the last sentence of this section if you need a hint on one of the abbreviations in the first sentence of the section that follows):
The way I figure it is that (a) 26 cubed equals 17,576, and (b) 36 cubed equals 46,656, which (c) assuming that all 26 letters and all 26 letters plus all 10 single-digit numbers are equally attractive in TLA-land (a simplifying, though very wrong, assumption, yes?), means that (d) there’s plenty of room for everyone to find their own unique set of letters and numbers within the universe of three-letter abbreviations, isn’t there? I mean, can’t we all just get along? Yet everywhere we look there is overlap. (So what’s that you say? You don’t know what the “TLA” in “TLA-land” stands for? Why, TLA is the best, most perfect-est of all three-letter abbreviations, and in fact I scooted the answer to your question past you once already in this paragraph. Given that perfection, though, I’m pleased to present it again, this time much more directly and in all its simple, mind-thwacking, logic-imploding beauty: “TLA” stands for “three-letter abbreviation.”)
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So let’s get to the IBD TLA we care about, shall we?
Since The Google Machine probably won’t tell you, it looks like it’s up to me to tell you that “IBD” as used in “FP50IBD”stands for “Independent Broker-Dealer.”
Now, a detailed discussion of what IBDs of this sort are all about is way beyond the scope of this piece, so here I’ll just say that a “broker-dealer” is what people usually think of as a “stockbrokerage” and that an “independent” broker-dealer is one that is . . . independent, i.e., not part of a huge financial services Goliathan mega-store of a financial services behemoth, and one that instead simply serves people or businesses that need a stand-alone broker-dealer. So think of an IBD as being like the stockbrokerage part of a big financial garganto like Morgan Stanley, but with that part disconnected from all the other parts of the company, and you’ll have a good enough definition for our purposes right here and right now.
And then the “50” part is tres easy: it means a list of the top fifty IBDs.
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In turn, that list of the top fifty IBDs is compiled and published by a trade rag called “Financial Planning” which is what the “FP” in “FP50IBD” is all about. So here we have a trade magazine about financial planning focusing considerable effort and reader attention on . . . of all things . . . stock brokerages, and the Top 50 of those that are independent.
So what’s up with that, eh? I mean, aren’t financial planners supposed to be as different as night and day from stockbrokers? And people lookin’ for a financial planner don’t want no stinkin’ stockbroker, right?
Hmmmm . . .
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For the beginning of an answer to these questions, let’s look at how FP mag describes itself on its About Us page:
Since 1970, Financial Planning’s mission has been to deliver the essential information that independent advisors need to make informed decisions about their business and the clients they serve. We are the only website dedicated to the needs of the independent financial planner. Our loyal audience consists of powerful and action oriented financial advisors who rely on us to provide news, opinion, expert advice and practical business building ideas that independent financial planners need to be successful. Their primary concerns are their clients (building relationships), their practice (building and managing their business) and managing their client’s portfolios.
Let’s look at the language soup in that quote, shall we? And let’s first look at it from an inside-baseball perspective (not to worry: I’ll help with both the baseball part and the inside part), and then relate that inside perspective to how NFs — normal folks — who aren’t playing this particular game of baseball hear things.
The first thing to note is that the word “advisor” comes up a lot in FP Mag’s description of itself. To an inside-baseball ear, the word “advisor” has a pretty specific meaning (though we can’t seem to decide the specifics of how to spell it, with most of us going with the O version of “advisor” but some preferring the E version of “adviser”). That pretty specific meaning stems, I believe, from the Investment Advisers Act of 1940, which is, when all is said and done, mostly about . . . you guessed it, investments! So within the industry the word “advisor” usually echoes within the “investment advisor” hall, so to speak, and usually means “having to do with investments.”
Seen in that light, it’s striking to see the willy-nillying and the seesawing and the back-and-forth’ing in the quoted language, switching between language that is unmistakably about financial planning and language that is similarly unmistakably about investment advising (not to mention toggling between the singular and the plural and between the second and third persons . . . ).
Indeed, the first two sentences of that quote seem to use the phrase “independent advisors” and “independent financial planner” essentially interchangeably (emphasis added by moi):
[FPMag’s mission is to] deliver the essential information that independent advisors need to make informed decisions about their business and the clients they serve. We are the only website dedicated to the needs of the independent financial planner.
And then the last couple of sentences talk about what the people reading FP Mag care about, which boils down to two facets of taking care of business (building and running their practices) and but a single core activity undertaken on behalf of their clients (managing portfolios). So when it comes down to specific outward-facing services, FPMag seems to be thinking in terms of investing.
This carries through to the second and final paragraph of FPMag’s description of itself:
We also produce podcasts, conferences, custom publications and eNewsletters—all covering in-depth analysis and planning advice. Whatever the medium, our purpose remains the same: to provide advisors with the most up-to-date information and cutting-edge analysis on investments, client relationships and business management. Our mission is to help advisors run a thriving business.
Again, the language vacillates between financial planning and investment advising sorts of things, but if either tends to dominate, it is, to my ear anyway, the investing side of things.
And so it is throughout the investment advising/financial planning landscape. Financial planning and investment advising are all smooshed together in one ill-defined, ill-conglomerated, often-conflicted gnarl-mass. Public confusion ensues.
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Elsewhere in this blog I talk about how investment advisors differ from stockbrokers (see here, here, here, here and here, to name just a few). I’ll briefly summarize much of that discussion by noting here that (a) human stockbrokers ruled the investing roost some decades ago, until about, say, 1990, but were (b) largely forced to change their approach when the online stock brokerages successfully drove the prices of stockbrokerage down by more than 90%, which (c) persuaded/forced many stockbrokers and industry newcomers who formerly would have been primarily stockbrokers to become primarily investment advisors, particularly if they worked mostly with WFs — wealthy folks — because investment advisors could charge a percentage of assets under management fee, typically in the neighborhood of 1% of assets managed per year and because investment advisors hadn’t seen much, if any, loss of pricing power (and, for that matter, still haven’t . . . ).
And just like that — voila! — the pricing world-of-hurt occasioned by the rise of the online stockbrokerages was avoided and, lo’, those fleeing doth saw RIA-land, and what they doth saw they doth did likee very much, as in, Hey you guys, don’t all run to the Registered Investment Advisor side of the boat at the same time!
So in many ways, you can think of investment advisors as the modern version of stockbrokers .
And I quickly add: yes, I know these are fighting words to many of my friends, but the way I and many, many people see it is that investing is investing is investing is investing, so people who are providing and being paid for investing services are all doing the same thing, even if they are doing so within very different milieus. More specifically, yes, I know the standard of care is quite different between stockbrokers and investment advisors (the former owe their customers the same minimal standard of care as a shoe salesperson, while the latter owes the Full Monty of a fiduciary standard of care, punctilios and all), as are the revenue models they use (interesting flip: old crooked stockbroker behavior was churning, while new crooked investment advisor behavior is reverse churning!). Yadda, yadda, yadda and etc., etc., etc.: yes, I know them’s was fightin’ words in that single-sentence paragraph up above this one.
And, yes again, I’ll up the fightin’ ante by noting a positive on the stockbroker side of yore in that, when they paid themselves out of their customer’s money, they at least used a mechanism which allowed their customers to easily know how much they were paying (a trade confirmation showing, unmistakably, the add-on commission), while many investment advisors seek, as best I can tell, to limit the attention their payments to themselves elicit in their clients (often burying the debit in a dozens-of-pages-long monthly statement).
I call it getting paid in the background, while Michael Kitces, if memory serves me, uses the very apt phrase in this context of low saliency payment mechanism. Investment advisors are every bit the world-class masters of low saliency payment mechanisms that gyms and cable companies and mobile phone companies are, with Wall Street taken as a whole (a/k/a the FSIC, a/k/a the Financial Services Industrial Complex) the long-standing master of getting paid without most folks even knowing they are paying.
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I know for an anecdotal fact (whatever that is . . . ) that very few people, when they first consider working with a financial planner, are seeking out the modern version of a stockbroker. And I also know for a fact that when those people realize that most financial planners make their livings by managing client investments, they are a bit bummed because that is not really what they had in mind. Rather, they want someone to help them figure out how to get from where they are to where they want to go, and they wish to receive that help in an investing-agnostic way. That is, they are amenable to using investments to help them get them from Point A to Point B, but they don’t want their advice to be biased towards (locked into?) an all-investments-all-the-time approach to that journey. And they certainly don’t want their commercial relationship with their planner, at the compensation level, to be determined solely by the number of dollars they have invested through their planner, particularly when that number is driven largely (and, over time, largely driven larger) by market events having nothing to do with the skill or effort or wisdom of their planner . . . er . . . investment advisor.
And when the financial planner says, “Oh, don’t worry. We’ll do a plan for you and help you keep it current, but what you are going to pay us for is managing your investments,” I think a lot of the listeners continue to be bummed, with the plaintive wail understood to be: can’t I just hire you as a planner?
Some financial planners will say yes; many will say no.
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What’s a person to do? What’s our industry to do?
My answers stem from this notion: you are what you get paid for. If a financial services provider gets paid assets under management fees, then that FSP is an asset manager. If an FSP gets paid for helping people plan for how to get from where they are to where they want to go, then that FSP is a financial planner.
They are not the same thing. Most fundamentally, their playing fields are differently shaped and sized. Asset managers work with one-third of a balance sheet. That is, their work pertains directly to assets, but does not pertain directly to liabilities or (strange as it may seem) net worth. By contrast, financial planners work with an entire financial life. Their work pertains to anything and everything within that financial life, i.e., all three parts of the balance sheet, plus both sides of the income statement, plus all the non-numeric flesh that the numeric skeleton of a financial life — consisting of all five of those numeric components — carries upon it. So, yes, there’re lots of numbers involved in financial planning, with some of those numbers clearly being numbers about investments, but there’s also a whole lot of all the other stuff of which a good life is made: love (family, children, friends, community), endeavoring and accomplishing (hope, fear, ambition, disappointment, good luck, bad luck, good times, bad times), and everything else.
And from that it follows that all who purport to be of service with respect to all of that for a given client should not pay themselves based on a formula tied in with one-third of the balance sheet inside that client’s financial life. That glove just does not fit.
I see no valid reason to tie financial planning/entire-life sorts of services to an asset management/balance-sheet-only sort of revenue model other than (a) it is an absolutely off-the-charts fantastic revenue model, right up there with Microsoft’s DOS revenue model, and (b) it lives within the core of what Wall Street understands, which is, at its heart and all the way on down to its bedrock historical foundations, stockbrokerage, plain and simple. Neither of those factors has anything to do with the person receiving the services and, indeed, both tend to run against the interests of the person receiving the services.
As a first corollary to this central idea of AM’ing <> FP’ing (that’s a “not-equal” sign to all you non-Excel formula types out there), I further propose that, if an FSP wants to do both asset management and financial planning, then s/he should be required to charge separately for each.
And then as a second corollary, this one aimed at the more general ill of intentionally low-salience payment mechanisms, I also propose that FSPs be required to disclose, on at least a quarterly basis and on a single letter-size piece of paper or single email each with no more than two basic lines of information and zero lines of legalese (the legalese can live elsewhere and be incorporated into the document via reference), to each customer and client, the total compensation the FSP generated via the services the FSP provided to that particular customer or client, separated into (here come the two lines of information) (a) the amount the customer or client paid, and (b) all other amounts the FSP received arising from or in any way connected with the services the FSP provided to that particular customer or client.
Clearly, this solution would not be great for investment advisors. Some (most?) would have to disclose business practices that, for various reasons (e.g., embarassment, shame, fear, skullduggery) they would prefer to remain un-seen and de facto secret. Some (most?) would make less money, which might not be a bad thing for the country as a whole; the retirement security of the overall population might well increase! Also clearly, and exceedingly so at that, powerful interests don’t want anything like this to happen. So I don’t expect it to happen anytime soon.
But I do think the investment advisor piece can be handled at the robo level quite satisfactorily, and that that would leave a large opening for pure financial planners to establish a beachhead where the population as a whole slowly but surely comes to an understanding that paying directly for financial planning services can be terrifically cost-effective, and can generate a truly wonderful, life-changing experience, while paying for financial planning services indirectly by purchasing asset management services with some financial planning services thrown in for good measure can be a terrifically inefficient, discombobulated approach, generating a very curious and mysterious experience, leaving people wondering what they are paying for and whether they have exceeded the “thrown in for good measure” amount of financial planning service requests over and above the asset management services they’ve directly purchased.
And then it is on us pure financial planners to figure out how to make our services terrifically cost-effective. That means affordable, and it also means that the services must produce observable positive outcomes over time, which will usually take the form of observable changed behaviors and observable changed numeric financial health.
It’s not easy, but I, for one, think I am a nice big chunk of the way up the curve on figuring out how to do that. Yay.
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I close with a bald assertion that brooks no exceptions — an assertion that is very much a part of the conceptual framework set out above, so a fitting end-cap for this piece — and then ask for your help in thinking on it, to see if you can brook that cross and find one or more exceptions.
Here is the bald assertion: every single aspect of your life has a financial component to it.
And here is the ask: please think about whether there are any exceptions to that bald statement, i.e. whether you can think of something in your or anyone else’s life that was or is entirely devoid of a financial component.
If you can think of one, please do let me know! For more than a decade, I’ve been asking people to find an exception to this statement, and so far it’s been nothing but silence.
It’d be fantastic if you or someone else contacted me with a great exception for me to think on, and then it’ll be on to figure out — or not figure out! — how that exception fits in with the ideas set out above.
Having heard no exception thus far, though, this pure financial planner can so far say, without hesitation, that pure financial planning work pertains to a person’s entire financial life, and, therefore, to a person’s entire life, period, dot, the-end. And that makes the work very interesting indeed, and most pleasing to a generalist such as myself. And very profound for everyone involved.