Will financial planners ever be professionals?

The two most important professions of the 21st century are, undoubtedly, the medical profession and the financial planning profession.

A financial planner meeting with clients

In a recent article in Citywire, Stephen Cranston states that “Financial advisors are not, and never will be, professionals like doctors, lawyers and accountants.” He suggests that financial planners don’t “go through years of university training and articles” and that most financial planners join the industry from one of the large agency forces where they have received “great training” from the life offices in “sales and client service skills”.

As a CFP® professional, I am disappointed by Cranston’s comments. I work closely with many financial planners who were lawyers or accountants in a previous career or have completed their MBA, CFA or other postgraduate qualifications and are CFP® professionals. Furthermore, universities now offer degrees in financial planning and the CFP® professional designation requires post-graduate study and work experience akin to articles. But we only have around 3 500 practicing CFP® professionals in South Africa, whereas according to PI Financial Intelligence Services there are 11 750 financial service providers (FSPs) and 197 000 representatives in South Africa. Clearly there are many salespeople out there peddling financial products under the guise of financial advice, which provides some rationale for Cranston’s comments.

His comments are made in the broader context of an article which considers the merits of financial advisors using discretionary fund managers (DFMs). Cranston does suggest that “realistically it makes sense for financial advisors to outsource fund selection and asset allocation – unless they belong to larger integrated practices which have a strong investment management competence in their own right”. However, for those financial planners who do use a DFM, he questions their professionalism.

The two most important professions of the 21st century are, undoubtedly, the medical profession and the financial planning profession.

As Cranston says, “Financial advisors love to use the analogy of the family doctor or GP. Following that logic, GPs can write a script prescribing the medicine patients need when they have flu, so equally advisors should be able to take out their pad and ‘prescribe’ the medicines, or funds, their clients need.” He goes on to say, “You would be puzzled if you arrived at the GP’s office and he or she said: ‘We don’t believe in this practice that we have the competence to pick prescription drugs, so I have hired a third party to do that for us.’”

The analogy of the GP is wholly appropriate. Financial planners require knowledge and skills to advise clients not just on investments, but a range of matters from budgeting, tax and estate planning, to long- and short-term risk planning and healthcare. And these are just the technical aspects of a financial planner’s job. The important human aspect of financial advice, where a financial advisor helps a client integrate their life and money decisions, is gaining recognition with the inclusion of Financial Psychology in CFP® curriculums around the world.

When a financial planner uses a DFM, it’s not like a GP saying they don’t have “the competence to pick prescription drugs”. Rather it’s like a GP using a specialist, be it a cardiologist, physician or nutritionist. The financial planner will determine what is needed from a client’s investment and what would be an appropriate portfolio to invest in, but it will be structured and implemented using a specialist. In the same way, a GP may pick up an anomaly in their client’s heartbeat, but they won’t intervene in an area where a cardiologist is the specialist.

As most financial planners are GPs, they may use specialists in other areas beyond investments, such as tax consultants or fiduciary specialists. Importantly, in the same way that a GP will collaborate with a medical specialist about a patient’s condition, much collaborative work happens between the financial planners and the specialists they use. After all, the financial planner remains the guardian of the client’s financial health.

As a follow-up to his Citywire article, Cranston tweeted, “I hear the core job of the financial advisor is to talk you off the ledge for 100 basis points a year. My psychologist can do the same job for the equivalent of 0.05 basis points a year.” There are many potential ledges that a client can find themselves on, but I am assuming in this instance talking a client “off the ledge” means preventing a client from capitulating when markets are down, rather than doing something stupid with their money like buying a fancy car they can’t afford.

Rob Macdonald, Head of Strategic Advisory Services, Fundhouse

If a financial planner can prevent a client from cashing in their investments to lock in losses, then they are likely to be saving a client a lot more than 100 basis points a year. Since 1984, independent investment research firm Dalbar Inc. has published its annual Quantitative Analysis of Investor Behavior report, which studies the returns that investors get versus the returns of their investments. The study consistently finds investor returns are materially lower than their investments. The gap between the two is often referred to as the “behaviour penalty” which according to the 2022 Dalbar study, was 3.5% per annum over the last 30 years. In the short term, the gap can be higher, as in 2021 when the number was closer to 10%. No surprise given the uncertainty and stress that many clients experienced during the Covid pandemic.

The 2022 edition of the Dalbar report concludes that investment results are more dependent on investor behaviour than fund performance. It seems there is some value to talking clients off the ledge. I believe influencing a client’s behaviour is a key part of a financial planner’s role but is most effective once a long-term financial plan funded by a sound long-term investment portfolio is in place. How much value does influencing behaviour add? Vanguard estimates that a financial planner adds about 3% per annum to a client’s portfolio, half of which is through behavioural coaching while a 2021 paper by Russell Investments puts the number at 2.02% per annum.

Ironically, the World Economic Forum (WEF), in its 2018 Future of Jobs Report, predicts that technology will make accountants and lawyers redundant, as well as sales agents and brokers. Financial and investment advisors on the other hand are predicted by the WEF to be stable professions. This is of course only if a key part of their role is “talking their clients off the ledge”. Technology after all will do much of the technical work for financial planners. In fact, Michael Kitces, a leading US financial planner and commentator, has stated: “The future of financial planning is not about dispensing expert financial advice, but helping clients engage in financial behaviour change.”

The role of a financial planner is so much more than writing a prescription for investments or any other financial product. It is about helping clients achieve holistic financial health and this is where the analogy with the GP comes full circle. The two most important professions of the 21st century are, undoubtedly, the medical profession and the financial planning profession. People are going to live longer and they are going to need their money to last longer. Nobody would entrust their physical health to a distributor of pharmaceutical products rather than a doctor. Nor should they entrust their financial health to a distributor of financial products, but to a professional financial planner who prescribes products rather than sells them. That’s of course when they are not talking their clients off the ledge!

Dalbar Inc, Quantitative Analysis of Investor Behavior, 28th Edition
Stephen Cranston, “Investor Notes: How I’ve come around on DFMs”, Citywire, 9 September 2022
World Economic Forum, “The Future of Jobs Report”, 2018