Articles About The Financial Planning Profession

Industry media has often noted that gender pay gaps among financial advisors are shockingly large – with gaps observed as high as 40% or more. However, these headline-grabbing numbers don’t tell the full story. In particular, just looking at ‘raw’ pay gaps (i.e., gaps that don’t adjust for other relevant pay-related differences between men and women) can be misleading, because it doesn’t tell us whether the gap results from men and women being paid unequally for doing equal work, from men and women being paid relatively equally but working in different capacities, or from some combination of these factors. In fact, the Bureau of Labor Statistics—the entity that publishes the data most advisor gender pay gap statistics are based on—explicitly cautions that their data does not include the relevant information needed to fully assess a pay gap.

At the same time, many misunderstandings exist with respect to how to interpret and understand pay gap analyses themselves. For instance, just because a gap does not remain after controlling for relevant differences does not suggest that gender discrimination is not an issue within an industry. A proper pay gap analysis will control for relevant differences in worker characteristics (e.g., job role, hours worked, productivity, etc.), but if differences in these characteristics are themselves the result of discrimination (e.g., a ‘glass ceiling’ effect in which equally qualified women are passed up for promotions for discriminatory reasons), then this effect will not be picked up in a pay gap analysis. Such effects are not picked up because a gender pay gap analysis is only examining the very narrow question of whether men and women receive equal pay for equal work, and not the broader question of whether other discriminatory factors may influence the roles that individuals end up in. On the other hand, another common way to misinterpret a pay gap analysis is to conclude that any unexplained gap is evidence of discrimination. Discrimination is one possible explanation, but there are alternative explanations, such as researchers not having access to other relevant variables that should have been controlled for.

In the context of the financial advisory industry—an industry that has long been male-dominated and has struggled to recruit more women into the field—understanding the extent to which we do see evidence of potential discrimination is important, as the common message that women are not paid equally in our field could itself be a factor discouraging women from pursuing a career in financial planning. Accordingly, using data from our 2018 Kitces Research Study, we conducted what was, to our knowledge, the first gender pay gap analysis among financial advisors that examined more than just the ‘raw’ gap between men and women.

Based on highly detailed information provided by over 700 financial advisors, we observed a ‘raw’ gender pay gap of 19% among financial advisors before controlling for a number of factors such as experience, credentials, advisory role, team structure, hours worked, revenue produced, marital status, and psychological motivators around compensation. The gap we observed is likely lower than the ~40% commonly reported in the media because we excluded administrative workers, many of whom would be included in the BLS statistics. However, the factors controlled for in our study (including both revenue and time spent, and the preference for variable vs stable salary income) explained 91% of the gender pay gap observed, leaving an unexplained gap of just 1.8 percentage points. Discrimination is one potential factor that could explain this remaining gap of 1.8 percentage points, although other factors, such as relevant variables that were not included in our study, could also explain the remaining gap. Notably, the biggest driver of the pay gap that we observed was the tendency for men, on average, to be more motivated by income potential (and ostensibly choosing more variable-compensation revenue-sharing roles), while women were, on average, more motivated by stable pay (and thus may tend to choose salaried roles with less long-term upside).

Of course, as noted previously, our findings do not suggest that gender discrimination is not an issue within financial planning. In fact, previous research has found that factors such as ‘performance support bias’ (e.g., the assignment of better accounts to men relative to women when a broker leaves a firm) do contribute to the advisor gender pay gap in a manner that would be missed by our study. Furthermore, a follow-up Kitces Research Study in 2019 that sought to examine relationships between family characteristics and advisor earnings (since the "motherhood penalty"—i.e., systematic biases that working mothers face in the labor market—contributes significantly to the gender pay gap in many fields) and did find gender differences in relationships between income and family-related characteristics among advisors. For example, we found evidence of a ‘marriage premium’ and a ‘stay-at-home spouse premium’  among men but not women, providing support to the notion that factors outside of the workplace may also be influencing earnings differences amongst advisors, and emphasizing that work to further close the gender pay gap should be cognizant of addressing these complicated factors.

At the same time, we do believe there are potential reasons to be optimistic about our findings. While we could not examine all potential types of gender bias, at least on this narrow form of potential discrimination (unequal pay for equal work), we did not find evidence of significant gender discrimination. We see this as a positive message for women who otherwise fear that they may not be paid fairly if they pursue a career as a financial advisor. Furthermore, women were represented among all levels of advisor success, including the highest earners bringing in over $1 million in annual personal income. And while it did appear that, on average, women prioritized some career choices over income to a greater extent than men, average income among women was still very high relative to income levels of most Americans ($165,000 for women in 2018 and $197,000 in 2019). So, to the extent that advisors (regardless of gender) may select different pathways within the industry based on personal preferences (e.g., selecting a stable-pay job because of a desire/choice to use that as a foundation to start a family and have more work-life flexibility), it still appears that excellent career opportunities are available regardless of preferences.

Ultimately, the bottom line is that despite widespread reports of large gender pay gaps within the financial advisory industry, we did not find evidence of unequal pay for equal work. And while our studies do identify some differences in income between men and women in the advisory industry, other relevant differences, particularly with respect to work and income preferences, explained most of the gender differences in income that were observed. While our findings should not be interpreted as suggesting that gender discrimination is not an issue within the industry (as there are many forms of potential discrimination that would not show up in a pay gap analysis and other limitations to consider), our findings do suggest that perhaps, at least on the narrow dimension of unequal pay for equal work, the news is not as bad as commonly reported.

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Over the past several years, despite numerous programs from a wide range of organizations encouraging women, people of color, and minority groups to join the profession, the financial planning industry has struggled to increase diversity among its ranks. Which appears at least in part to be due to the fact that, while a 2019 CFP Professionals Survey showed strong job satisfaction among women, Black, and Latino CFP professionals, those satisfaction levels are still materially lower than for ‘traditional’ white male CFP professionals, signaling that the financial planning profession may be attracting more diversity but is also losing diverse CFP professionals at a faster rate… such that the overall diversity among CFP professionals has not increased despite a steady rise in both the total number of certificants and the number of diversity programs targeting them. Because the reality is that the problem is not necessarily one that can be addressed by increasing diversity efforts alone, and instead appears to be that increasing inclusion efforts is the key to increasing (and maintaining!) a more diverse pool of financial planners.

Whereas diversity efforts can be thought of as sending invitations to (more) guests to attend a party, inclusion efforts are separate from those of diversity and can be thought of as asking the guests who arrive to actually dance and engage with other guests. Inclusion involves helping individuals feel safe, involved in the group, respected, and valued. It also recognizes and honors cultural diversity, supporting individuals to express themselves authentically and as valued members of the organization. Furthermore, researchers have found that without efforts to facilitate inclusion, diversity policies can actually be damaging to an organization by upsetting the racial majority, who can tend to feel that the diversity programs are set up to unfairly discriminate against them.

Importantly, effective diversity and inclusion training programs are dynamic and necessarily take into account the unique potential prejudicial viewpoints of their participants, which can range from blatant (openly expressing prejudicial opinions) to symbolic (veiled but deliberately expressed) to aversive (subconsciously expressed). Depending on the participants involved and their respective viewpoints, good training programs can simply encourage individual self-reflection, or can incorporate philanthropic community engagement to give participants opportunities to interact with individuals from more and different cultural backgrounds.

Financial advisory firms looking for ways to increase diversity and inclusion can start by developing mentorship programs to support new financial planners of all backgrounds and by investing in scholarship programs to help aspiring CFPs meet their education and exam requirements. Even compensation can be structured to be more supportive of diversity and inclusion efforts, adopting different compensation models such as monthly or hourly subscription fees to help newer advisors who may initially lack the social structures to thrive on commission-based or AUM-based compensation models (that have disproportionately relied on new financial planners coming from backgrounds and ZIP codes that already have significant financial affluence to turn ‘friends and family’ into initial clients).

Ultimately, diversity and inclusion are important aspects of the financial planning industry that can only help businesses succeed. Not only does a diverse industry workforce better serve a diverse client base, it also helps firms retain diverse employee pools and gives them access to a richer pipeline when recruiting new talent. Despite the shortfall of diversity efforts in our industry so far, a growing focus on inclusion – particularly including mentoring, and organizing/attending conferences and events dedicated to supporting specific groups – can help the industry work towards achieving a net increase in diversity, and not simply bringing in more diverse financial planners only to continue to lose them a few years later.

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On July 29, the Wall Street Journal published an article which reported that nearly 10% of the certificants included on the CFP Board’s “Let’s Make a Plan” website, which the CFP Board makes available to consumers to find a CFP professional, have material public disclosures listed on the FINRA BrokerCheck site (including several with felony charges!). Notably, though, exactly zero of those “red flag” disclosures are included on the CFP Board’s own website. Which raises the question: How effectively does the CFP Board ensure its own professional standards of conduct are really being upheld, especially as it trumpets a consumer public awareness campaign advocating that those with the CFP marks are the “Gold Standard” that consumers should look for?

In this episode of #OfficeHours with Michael Kitces, we discuss the main issues raised by the WSJ article (as well as the CFP Board’s response), how the CFP Board’s public awareness campaign has unwittingly amplified the issues, some potential challenges the CFP Board faces in addressing these challenges, and explore what it might take for the CFP Board to close the gap between what it promotes in its public awareness campaign and the standards its CFP professionals are actually meeting.

While the CFP Board promotes its “Let’s Make A Plan” site as the “go-to” resource for finding qualified financial planners, the WSJ report pointed out that they have failed to disclose important background details (which even FINRA discloses on its own BrokerCheck website) that would be relevant to a consumer seeking a trustworthy professional. To which the CFP Board was quick to respond, referencing limited staffing and budget resources (70 employees and a $30 million budget, compared to FINRA’s 3,000 employees and $1 billion budget) and non-profit status (meaning that they can only certify and set standards for its certificants, as opposed to a regulatory agency’s official authority to investigate allegations against advisors), as reasons that the WSJ shouldn’t necessarily hold their “Let’s Make A Plan” site to the same standard as a bona fide regulator like FINRA.

The CFP Board also maintained that it is not their policy to publish allegations of wrongdoing, especially if the CFP Board hasn’t investigated them itself, and will only publish disciplinary actions against prohibited activities fully investigated by the Board (as contrasted with FINRA, that sometimes will publish information about client complaints, even if there was no ultimate finding of wrongdoing). Yet historically, disciplinary action against a CFP certificant has been taken by the CFP Board only after another regulator has found them guilty. And ironically, other regulatory bodies generally have less stringent rules of conduct. Which means in essence, the CFP Board is claiming a higher standard of conduct, but often only taking enforcement action based on other regulators’ lower standards… raising the question of how exactly the CFP Board can ever ensure its CFP professionals actually will uphold its proclaimed higher standards?

Despite this, the CFP Board acknowledged it could do better, promptly established an independent task force to “strengthen and modernize enforcement”, and has pledged to begin checking third-party regulatory records (e.g., FINRA and the SEC) every time CFPs renew their certification, instead of conducting an initial one-time background check and relying on self-disclosure in subsequent years.

Still, though, the question remains of how can the CFP Board possibly enforce the higher standards they have been advocating for nearly the last decade with their $10 million annual awareness campaign, if the CFP Board doesn’t have the capacity or authority to fully investigate allegations made against CFP certificants?

Perhaps the most straightforward path is, to the extent that promotion of CFP Board’s higher standards and enforcement of those standards are inextricably linked, the CFP Board’s public awareness budget itself could be (partially) reallocated to support efforts to uphold and enforce CFP standards as well? Or alternatively, the CFP Board could also be more proactive about collecting information already available from third-party regulators, make it easier for fellow CFP professionals to identify peers who violate the Board’s Standards of Conduct, and devise an improved investigative process to actually be able to review complaints and disciplinary issues.

Ultimately, the key point is that the CFP Board needs a mechanism to enforce the high standards CFP professionals are required to follow and that the CFP Board is so proactively marketing to consumers through its own public awareness campaign. And the need for better enforcement mechanisms is especially critical with the new CFP Code of Ethics and Standards of Conduct going into effect in October, 2019, which will only increase the stakes further. Proactively reporting all disciplinary records and creating tools for consumers and CFPs to easily register complaints are simple steps, at least initially, towards improving oversight of financial advisors, until the new independent task force releases its recommendations for strengthening and modernizing enforcement of CFP standards.

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For the past several decades, RIAs have increasingly differentiated themselves and their advice from competing broker-dealers by the “best interests” fiduciary standard that RIAs owe to their clients, from outright marketing themselves as fiduciaries, to signing “Fiduciary Oaths” for clients (that other broker-dealers wouldn’t and couldn’t sign).

The fiduciary distinction for RIAs wasn’t originally intended to be a marketing differentiator for advice, though. Its roots lie in the fact that RIAs were created from the start to be providers of investment advice, while broker-dealers originally were created to play a vital role in the capital formation and capital markets process (which included selling investments, in the form of stocks and bonds to prospective investors, often underwritten by the broker-dealer’s investment banking division). For which RIAs were subject to a fiduciary standard – as the providers of advice – while broker-dealers were subject to a lower suitability standard consistent with the sales-centric role they were created to fulfill.

But over the past several decades, as technology has increasingly commoditized the core functionality of broker-dealers, from “discount” brokerage reducing the price to execute trades (without a stockbroker to facilitate them), to online platforms making no-load funds available to consumers directly (without a broker-dealer to sell them), the RIA and broker-dealer channels have gone through a Great Convergence. To the point that today, a consumer may pay 1%/year for ongoing financial advice in the form of a fee-based wrap account, a C-share mutual fund trail, or an advisory fee, and not even make a distinction between the choices. Except from a regulatory perspective, these remain substantively different choices, given the (originally) different roles that broker-dealers and RIAs play.

In recent years, the Great Convergence has led to a flurry of proposals on new standards, as regulators have recognized that as the gap between broker-dealers and RIAs has been reduced over the years, so too did the gap in the standards of conduct between them need to be narrowed as well. Resulting in the release earlier this summer of the SEC’s new Regulation Best Interest, lifting the standard of conduct for broker-dealers to a “Best Interest” standard when making a recommendation to their customers.

Notably, in practice, the new Best Interest standard under Reg BI is not a full-scale fiduciary duty and only applies at the time of the broker’s recommendation itself (and not to the overall relationship). Nonetheless, Reg BI will grant – and in fact, require – that broker-dealers now explain their standard of conduct as being an obligation to act “in the best interests of the customer when making a recommendation.”

Which leaves little room for RIAs to market their fiduciary obligation to act “in the best interests of the client” as a differentiator when broker-dealers will be able to use substantively identical words. Raising the question: how will RIAs differentiate themselves in the future?

On the one hand, some RIAs may point out that there’s still a difference between being a “fiduciary at all times,” versus "just" being held to a Best Interest standard at the time of recommendation alone. Others may pursue and highlight voluntary designations like CFP certification, which itself has its own “fiduciary at all times” obligation (applicable to not only RIAs but those at broker-dealers as well). Some may even choose to pursue new terms of distinction, like “stewardship” as a higher standard above merely being a legally-obligated fiduciary.

In the long run, though, arguably the best path forward for most advisors will simply be to actually differentiate on their services and what they actually do for clients, rather than their standard of conduct in the first place. As the irony is that, the more fiduciary advocates push for higher standards across the industry… the less likely it is that being a fiduciary with higher standards will ever be an effective differentiator again in the future.

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Last November, the FPA National leadership made its bombshell announcement that it was planning to dissolve its 86 independent chapters and nationalize them into a single consolidated entity. The new initiative, dubbed the “OneFPA Network”, was being rolled out under the auspices of trying to create better alignment and integration between National and its chapters… by literally integrating them into a single unit.

Yet while the FPA’s independent chapter structure arguably is a relic of a bygone era – when the association’s predecessor was first being founded, there were no computers or fax machines, so chapters had to be decentralized – the backlash from the membership was fast and fierce. Some raised concerns that the shift would amount to a power grab by National. Others suggested it could be a money grab for the cash in chapter coffers. Few trusted the way that FPA was unilaterally rolling out its chapter dissolution plan.

And so after a nearly-4-month “Listening Tour” for chapter feedback, the FPA has now announced “We Listened. We Learned. We Adapted.” And is rolling out a new second iteration of the OneFPA Network plan... that does not include a requirement for chapters to dissolve, and will instead begin to more gently “beta test” some of the integrated technology, accounting, and staffing initiatives. But only after a 45-day Public Comment period, that gives all stakeholders an opportunity to share their thoughts and concerns.

Yet while the second version of the OneFPA Network plan is certainly more palatable than the first, its "Participatory Governance" structure is literally not participatory governance at all (as it doesn't actually give any governing and oversight power to its chapters in the first place), and it’s also sparser than the prior version on many of the key details, from what the Key Performance Indicators will be for the chapter beta test (and whether it’s even possible for the test to “fail” or if the OneFPA Network is still a fait accompli), to what the Master Services Agreement will be that the chapters must sign in the future (a key point of contention in the original plan), and even what the overriding goals and key metrics of success are for the entire OneFPA Network in the first place… so members can provide feedback on whether or not they believe the OneFPA Network really is the best path to making FPA more viable, strong, impactful, and relevant.

Though perhaps the greatest concern is simply that as a culmination of its Listening Tour, the FPA leadership observed that “Stakeholders want a greater voice”, “Better technology is required”, “Chapter autonomy is paramount”, and “Collaboration among FPA and its communities is needed”. All of which were actually previously cited in a key 2014 Consultant’s Report to FPA. Which, ironically, was used by the FPA to justify the OneFPA Network in the first place… despite now recognizing that its OneFPA Network proposal failed to achieve any of those objectives as stated 5 years ago (and still today).

All of which raises the question of whether the FPA is still jumping the gun by asking for feedback in a Public Comment period about how best to implement the OneFPA Network in the future… when the real question should be whether the OneFPA Network is the right step to take in the first place, what goals the leadership is really trying to accomplish, and whether there might be a better way to get the same results… without spending $1M of FPA’s cash reserves and thousands of hours of volunteer energy for an initiative that may not substantively solve any of the problems that FPA actually faces.

At a minimum, though, it’s time for the FPA National leadership to get clear and concrete about what their goals actually are, and how exactly the OneFPA Network may accomplish them. Or not. So if the FPA once again fails to grow as a result of the OneFPA Network, the leadership will at least, for once, be held accountable for its results.

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From February 19th through February 21st, the CFP Board’s Center for Financial Planning hosted their third annual Academic Research Colloquium (ARC) for Financial Planning and Related Disciplines in Arlington, VA. This year's event saw a 20% increase in attendance, bringing together roughly 230 attendees, of which about 35 were practitioners, to share and discuss research relevant to the financial planning profession, as a part of the CFP Board Center’s longer-term goal of establishing itself as the “academic home” for the financial planning profession.

In this post, Derek Tharp – lead researcher at Kitces.com, and an assistant professor of finance at the University of Southern Maine – provides a recap of the 2019 CFP Academic Research Colloquium, and highlights a few particular research studies with relevant takeaways for financial planning practitioners.

The 2019 CFP Academic Research Colloquium again had a strong showing from CFP Board-Registered Ph.D. programs, with scholars from Missouri, Texas Tech, Georgia, and Kansas State producing nearly 32% of all research (when weighted by type of presentation and authorship rank). Additionally, Ohio State, Alabama, and the College for Financial Planning contributed another 13% of total research. Despite the concentration among top programs, the ARC remains an academically diverse event, drawing in scholars from a total of 69 institutions, including Harvard, Wharton, and Stanford.

The colloquium featured a wide breadth of topics. Some particularly relevant themes for financial planning practitioners included a number of studies on financial psychology of both clients and practitioners, including measuring brain activity during financial conversations to determine whether planning or emotional areas of the brain were activated during financial conversations, examining the tools that do (and do not) work for measuring risk-taking behavior, assessing perceptions of success and satisfaction among female advisors, and identifying gaps between perceptions of both financial planning graduates and employers regarding student preparedness for a career in financial planning. In addition, there was research on the impact advisors may have on clients- both good and bad - including differences in financial decision-making among households that use a financial planner versus a transactional advisor, the use of municipal bonds among advisor-assisted investors, and the characteristics of those who report being victims of investment fraud.

Overall, the third Academic Research Colloquium again brought together a strong mix of academics and practitioners to present and discuss financial planning research. However, some considerable challenges and opportunities going forward include continuing to develop Financial Planning Review into a high-impact journal, dealing with (potentially) declining institutional and sponsorship support, and the Center’s general push to continue to establish the ARC as the “academic home” of financial planning. Only time will tell if the Center for Financial Planning will be successful in their pursuit, but the ARC continues to be a conference worthy of attending for both academics and practitioners who wish to engage in academic research.

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When the Financial Planning Association recently announced its OneFPA Network initiative to consolidate its chapters, a key aspect was to gain operational efficiencies and leverage the FPA’s economies of scale by fully centralizing the accounting of all 86 of its chapters. The systems overhaul would require a substantial initial investment – estimated at more than $300,000 – but with the end result of all chapters being relieved of the burden of chapter accounting and instead simply receiving monthly financial reports directly from National.

Yet part of the controversy of the OneFPA Network initiative is that FPA has been experiencing its own deterioration of financials over the past decade, with revenue down by millions of dollars since the financial crisis impacted the financial advisor community, raising questions of whether the FPA is simply trying to consolidate its chapters finances so it can get access to available chapter cash reserves and annual surpluses.

To rebut concerns about FPA’s financial state of affairs, the organization conducted in late January a first-ever “Overview of National Finances” to its chapter leaders, which did candidly acknowledge that the organization’s revenue has dropped by nearly $4M from a decade ago, but noting that membership revenue is actually up over that time period, and emphasizing that FPA’s finances have stabilized since the downturn. Except, as it turns out, the historical trends that the FPA presented didn’t even match its own published Audited Financials, to the tune of nearly $1.5M revenue per year for several years, and a cumulative mismatch of nearly $8M of 'missing' revenue over the past decade.

In addition, it’s notable that since 2015, the FPA stopped distributing its Audited Financials to members altogether – ironically a self-violation of the FPA’s own “Information and Transparency Policy” – and only began distributing a more limited financial summary in its Annual Report. Which itself was excluded from its just-released 2018 Annual Report, leaving FPA’s own membership entirely in the dark about its current financial state (except, again, for a recent webinar that reported numbers failing to match FPA’s already-published Audited Financials to the tune of $8M of missing revenue). Even as the webinar did concerningly highlight a substantial $700k drawdown in FPA’s available cash over the past year, which appears to be attributable primarily to a significant decrease in the FPA’s deferred revenue… a potential signal that its actual revenue is about to deteriorate further.

Fortunately, the reality is that the FPA does have a demonstrated track record of managing its expenses (i.e., cutting staff and costs) in-line with its revenue, and as a result, its available reserves have remained stable throughout its financial turmoil of the past decade. Which suggests that the FPA may not literally be in any kind of “financial distress,” but simply that the organization’s revenue is declining more substantially than it has previously implied… which should be a concern for a National Board that, thus far, has not held its staff leadership accountable for the decline.

More broadly, though, the key question is simply this: how can the FPA move forward with the OneFPA Network and confidently and transparently account for its chapters – which is at best an extremely time- and labor-intensive tasks when committed to monthly reconciled reporting – when the National organization can’t even effectively (and transparently) account for itself?

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