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WF: How has the concept of fee only financial planning evolved in the US? What were the key drivers that enabled the growth of this movement? What have been your own experiences with adopting this model - what were some of the challenges that you faced?
Rick: In my interactions with advisors in India, I gather that the Indian market is perhaps where we in the US were sometime in the 1970s and 1980s. Most of the financial planning done in India today is by commissioned advisors, who earn commissions on funds and insurance that they sell based on the plans they write.
The biggest challenge of course is the transition that involves giving up commissions and building a fee only model where it is your clients who pay you a fee and not the manufacturers. This is a traumatic transition for advisors - in fact, its far more traumatic for advisors than for customers!
The biggest challenge in this transition is education. First, advisors need to be educated that a fee only model is good for them in the long run, because it frees them up to do more planning, to be more client centric, and importantly, to create a revenue model that is far more valuable when the time comes for them to sell their practice and retire.
The education of clients is frankly lot less of a challenge. Ask any client, "Would you prefer that I work for the manufacturers of products or for you?" and the answer will always be, "Me!". Secondly, in the US, the client pays us as fees just about half of what he would incur by way of total expenses charged on the products which have commissions embedded in them.
The big challenge however is that the client does not see the commissions being paid out, whereas he actually has to write out a cheque to us for our fees. Clients do not like writing out fee cheques - because they see what they are paying! Even though the fees is much less than the costs in a commission model, its still a challenge for many clients - because they see the fees going out, but do not see the commission costs incurred by them.
I have been practicing a fee only model for 33 years - and I can still see that writing out fee cheques continues to be a challenge even in our market!
What I see here in India is that the set of advisors who are embarking on a fee based model are really the rain makers - they are the ones who are shaping the future, just as a bunch of us did 30 years ago in the US. They are the ones who are going to make things happen in India. They are going to lead change.
When I look at the US today, we now have over 100 universities that offer financial planning courses, we have financial planners who come out of college and get jobs in large planning firms - they don't have to set up their own firms and go out and seek clients. It wasn't so 30 years ago. The planners who set out on this model in the US 30 years ago had strong entrepreneurial skills, contributed to the growth of the profession, and also benefited from it. I see the same movement now beginning to take shape in India.
In India today, since the concept is still in its nascent stage, a fee only planner will perhaps need at least 2-3 years before he can build a sustainable business. That's a long time - and in the interim, some source of income is necessary. This could be income from your spouse that sustains the family or just some other way in which you receive income until such time that you can actually sustain a fee only model. That is a challenge at this stage for advisors in India.
WF: What has been the biggest driver that got clients to opt for a fee only planner vs others? Were lower costs the bigger driver?
Rick: Once clients understood that they will actually pay less to us that what they were incurring, that was indeed an eye opener. But I think the bigger driver of change was when they understood that they are clients of a fee only planner and not customers of commissioned advisors. When you are a customer, the advisor's fiduciary duties are towards the manufacturer. When you are a client, the advisor's fiduciary duties are towards you, the investor. This difference between a customer and a client is really the biggest driver for those who opt for a fee only planner.
WF: Were there any large mis-selling blowups that happened that catalysed the growth of fee only planning in the US?
Rick: Well, to be honest, some of these "blowups" are continuing! In recent years, we continue to see firms fined for abuses of pushing products, for steering consumers towards high commission products - and it continues even today. We see terrible products come across our desks even today - products whose fees are so high that the costs are likely to be higher than the average return from the products! This stuff is being sold - its not being bought!
When you talk about the growth of fee only planning in the US, you must bear in mind that while the US may be ahead of India, its not that much ahead really. Only 17% of FPA's members (Financial Planning Association, USA) are fee only planners. And, when you apply this number not just to financial planners but to all advisors in the US, I'm guessing that fee only planners would perhaps by only 5% of all advisors.
From my interactions with advisors in India, I learnt that there is a perception that fee only planning is very large in the US. Its not. I live in South Dakota - when I set up my practice 33 years ago, I was the first and only fee only planner. Today, in South Dakota, there are 3.
Fee only is a trend that is clearly growing in the US, and growth is being catalysed significantly by the media, which highlights the fiduciary role that fee only planners perform for their clients.
WF: In the US, you have fee-only planners, you have fee+commission planners and you have commissioned advisors. Given the prevalence of all 3 models, have you seen any trends in terms of client profiles that gravitate towards fee only planners vs those who prefer commissioned advisors?
Rick: I find that business owners and professionals, who are used to writing out cheques for professional services - to their accountants, lawyers, solicitors, consultants etc - typically find it a lot easier to understand the value of a fee only planner.
The clients who typically struggle a lot more with the concept of fee only planning are middle management executives, middle class and mass affluent consumers - people who typically do not have interactions with fee based professionals like accountants, solicitors and consultants.
Writing a cheque for professional services is painful - even for clients who have availed the services of a fee only planner for some time! We offer our clients two options - either they write us cheques or have the money withdrawn from their account. My clients tell me, "Rick, its so much better for the fees to be withdrawn from my account, because I don't have to see it when its going out!" They know exactly how much is going to go, based on the invoice that we send, they know when its going to go out from their account, but the fact that they are not physically writing out a cheque is a lot more comforting for them! Its just the way our brains are wired!
WF: You have written 4 popular books, some which talk to the consumer and some which offer insights to financial advisors. What is the key message that underlines the thoughts you have shared in these books?
Rick: The key insight really is what the noted psychologist Daniel Kahneman spoke about, which won him a Nobel Prize for Economics. What he got the world to understand was that 90% of all financial decisions are made emotionally - in the part of the brain that controls emotions, and not in that part of the brain that drives logical decisions. When I saw what happened in the dot com boom and bust, and then we saw what Kahneman spoke of, I could completely relate to what he was saying. There was nothing logical about professional money managers, smart people, pouring money into businesses with no cashflows on the one hand and spurning companies with strong cash flows on the other hand, simply because they were "old world" companies. That got me thinking that I better understand this behaviour a lot better, to help my clients avoid some of these pitfalls, if I had any notions of staying in this business 10 years later.
As I understood behavioural finance better, I saw a huge opportunity to marry two powerful concepts to give clients a much better investing experience. We have financial planning on the one hand, which is full of number crunching, plans, figures and forecasts. On the other hand, we have emotions that drive financial decisions - what people think, feel and believe.
I never intended to become a pioneer, but discovered that I had become one, when I started my practice as a financial therapist. We had financial planners on the one hand and we had psychologists and therapists on the other hand - but really nobody who put these together - nobody who brought insights from psychological therapy into the world of financial planning.
Financial therapy is still an evolving practice in the US - a group of us founded the Financial Therapy Association in 2010. Right now, there is only one university in the US that offers a minor in financial therapy. We have a long way to go to promote and popularize this practice. My books essentially deal with financial therapy.
WF: A final piece of advice for Indian advisors: given how the financial planning and advisory profession has evolved in the US over the last 3 decades, what would you advice Indian planners and advisors to do and importantly, not to do, in order to scale higher and serve clients better?
Rick: First thing that comes to my mind is don't be afraid of charging fees. The key is education : help your clients understand the difference between customers and clients, help them understand what your fiduciary duties are, when you work only for them. Help them see the difference between a customer and a client.
Second, focus on getting the necessary skills to do this job well. When you transition from selling products to providing financial planning services, you need to reorient yourself completely and learn a whole new set of skills. Products come way below in the scheme of things for planners. Only one seventh of what we do concerns investments, and products is just a subset within investments. Most of what we do has nothing to do with products - its about retirement planning, estate planning, tax planning, asset protection and things like that.
Complete the CFP certification, take online courses. Get yourself the training and skills that separate you from the others. It takes a lot to become a trusted advisor for life. It can be a scary transition. But remember, even as you make that transition to serve your clients better, you are doing yourself a lot of good. Build a practice that is either fee only or substantially fee based, and you have built for yourself a business that is far more valuable when you decide to hang up your boots, than a book of assets that is purely commission income driven. That should motivate you to get onto the journey and deal with the challenges that come along the way.
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