Business Model for Personal Financial Planning

I am not a CFP, but I am a former IT professional now working in a finance-related industry. I share your concern: if you can't "advocate products and moves that [you] may not think are really necessary" then I predict you will not make a lot of money. Have you ever tried and succeeded in a sales-based job? If not, then you are facing an uphill struggle -- make sure you have an adequate personal financial cushion before submitting your resignation at your current job.

Disclaimer: I have never been a very good salesman.

-Mark Bole

Well the short answer is "from fees." =)

What you're describing is a fee-only financial planning or investment advisory practice. If you google those terms you'll find plenty of information about it. "Fees" include:

• doing ongoing management and billing a percentage of assets. Revenue from this source is a function of your assets under management ("AUM"). This is the most common billing method among fee-only practices.
• providing advice on an hourly-fee, fixed-fee, or retainer basis. There's a group of planners that do only hourly work, called (google:) the Garrett Planning Network.
• some combination of the above (which is what I do)

There isn't really any limitation imposed by sticking with passive management, that's a strategy decision. Fee-only advisors who believe in active management use no-load mutual funds, or institutional share classes. Those who don't use passively-managed funds and ETFs.

Your basic question is whether it's viable...yes of course it is. If anything having a fee practice allows you to provide a broader range of advice. Commission-based "advisors", i.e., registered representatives of broker-dealer firms, are compensated for sales of financial products. Any advice provided is supposed to be only "incidental" to the sale of securities. So that's the business they're in...executing securities transactions. Especially since last week's court decision throwing out the SEC's Merrill Rule (something you should read about if you're getting into this business):

-Tad

I have often thought of a similar switch once I didn't need to work 7 to 5, and could retire early, go back to school, and do this.

What licensing would a CFP need? Do they need a series 7? I assume licenses depend on what would be "sold" (investments vs services vs insurance products)?

Can these be studied for (as far as licenses) or is a Bachelors/Master in a business field needed?

To sit for the CFP you must have a bachelors degree from an accredited university and pass the prelicensing certification course (offered by multiple universities). If you already have a CPA, CLU, ChFC, CFA or numerous other designations the prelicensing course is not required. Prelicensing is $5000 - $8000 if taken via distance learning.

Once you pass the CFP examination, you cannot actually refer to yourself as a CFP until you have at least three years in the financial planning industry. This is usually accomplished by working for someone that already is a CFP, ChFC, CLU, blah, blah... Of course, you cannot actually sell investments or insurance just because you are a CFP. As a matter of fact, without the proper licenses it is a violation of NASD/SEC code just to recommend specific investments to clients. Whether they ever purchase them or not does not matter.

To sell stocks and bonds you need a series 7 license (a bear of a test IMO), however a series 6 allows you to sell mutual funds and variable annuities ONLY (the test is much easier I have heard).

A series 63 is also required to sell securities. It covers the state specific rules of securities trading (series 7 is federal).

To sell insurance you must pass your state specific insurance examination and usually a prelicensing course. For variable life/ annuities you must pass an additional insurance test and already have a series 6 or 7 license.

Off the top of my head, that should give you the certifications you need to get a good start. Its not as bad as it looks on paper. Of course, the more you learn/license the more you can offer clients and the easier it is to earn $$$. When you can legally handle a client's taxes, legal paperwork, and finances all in one shot it is easier to justify your fees.

You may wanna specialize in tech issues. It's only natural.

Yes, that's right. The CFP credential isn't a license to do business, it's what is known in law as a "certification mark," which is a type of trademark...a brand name for the members of a trade association who follow the association's rules for using the mark. It's somewhat analogous to being a Realtor (who still needs to hold some type of real estate license).

You also need to be licensed to provide whatever services you perform, some examples:

• Series 7 - commissions for sale of securities
• Series 65 - investment adviser - fees for investment advice or financial planning that involves securities
• insurance agent, broker, analyst
• tax-related licensing - CPA, Enrolled Agent, tax preparer
• law (estate planning, business planning, tax) - member of a state bar

There are some very narrow areas where you could practice as a CFP but hold none of these licenses (newsletter publisher maybe?) but most CFPs are going to hold one or several of the above, or some similar licenses. Which are needed is to a certain extent a function of state law where you practice.

-Tad

This is good info... the degree is a requirement? In a business field or any field?

The tests a person passes... does this skill need to be maintained (pass the test every year/decade...) or does "continuing education" come into play to maintain credential?

The pre-licensing which costs 5k-8k... is there a course or distance program which you would recomend? Would it be better to spend the 8k to get a second Bachelors degree (to prepare take the test) or to just prepare for the test?

You may also need to sit for the 6 and 63. The important thing about financial advising is that there are more regulatory bodies than you can shake a stick at, all of them watching you and what you recommend. So if your conscience takes a vacation, even for a second, someone will know. I am an advisor and I can't even tell you how many trees have died in the name of compliance meetings. This alone should stop you from worrying about recommending something not in the clients best interest. Or there's the millions in fines that firms and advisors have been charged for doing that very thing. Really, you can make a good living either way, just make sure of two things: 1) No matter what, whatever you do or recommend HAS to make sense for the client, and 2) No matter what, give 110% of your attention to each client and to the necessary compliance. You'll be just fine. Also, have a pile of cash on hand to live off for the next year plus. It takes a while to get to the point where you can support yourself just doing this.

"CMJohnson" wrote

Financial advisors are in no small part salespeople, right? So it seems to me that what 'makes sense for the client' is subjective. It's kinda like a car salesperson or a real estate agent or any profession where a "sale" is part of one's income: They are violating no law when they urge the high end of the product. But the high end does not make sense for a lot of people.

Similarly, a financial advisor is within the law to urge purchase of a mutual fund with a 5% front load; a tax deferred annuity with high expenses; taking out a second mortgage when maybe the client really needs to cut personal living expenses; and other practices that are viewed by many as questionable.

Everyone has a right to make a living. But consumers should understand that, no, financial advisors do not /exactly/ have to recommend "what makes sense" for people. Caveat emptor with all professions, because the law's protections are limited. The law often expects people to read the fine print and do some of their own homework.

Financial advisors that are licensed and regulated by the CFP board of standards, SEC, NASD, and numerous other regulating bodies aren't concerned with simply staying inside of legal boundaries. We can lose our licenses (and our right to practice) for making "unsuitable recommendations" to clients regardless of legality. Nevermind the E&O costs!

If this ethical dilema is so insurmountable then shouldn't Doctors be inclined to keep people just sick enough to keep coming back and lawyers should only provide enough advice to keep their client in legal straits, but not guilty. Why don't they?

Becuase doctors, and lawyers, CPAs, CFPs, etc, etc, are held to higher standards by professional boards! Sure there's an ethical dilema (the principal-agent problem) but there is in many professional service fields so lets no overly focus on one industry. Have you ever compared the percentage of complaints filed against AMA certified doctors and board certified lawyers to certified financial planners? Maybe you should be targeting a different group.

Like you, I would recommend that potential investors research their financial planner, ask about his certifications, and educate themselves so they know which questions to ask and which pitfalls to avoid. They should do that no matter what the industry. But lets not make a mountain out of a mole hill. The fact is that if the practices you so vehemently and regularly warn against actually occurred with any regularity the industry would either A) no longer exist or B) become rapidly and harshly over-regulated to the point that the unethical practices no longer occurred. Its simply the economics of a capitalist society.

A more logical position would be to advocate using only "financial planners" that are certified. After all would you go to a dentist that is not ADA certified. I wouldn't!