Professions, like other industries, move in phases. To those in the affected group, the trends are sometimes not so apparent. When you are busy climbing a tree, you may not notice that the ground is being eroded, or that the loggers are approaching on the other side of you.

Financial planning (or we might use the terms ‘advising’ or ‘counselling’) started in the US in the mid 1960s. It wasn’t organised, but there was a trend that hindsight makes quite apparent. Persons selling the familiar financial products of life insurance, real estate, stocks, bonds and mutual funds were growing impatient with their role as ‘product peddlers’. Their clients were asking more strategic questions, which they wanted to answer in a professional manner. So they started to add analysis that was not strictly related to the products they were selling.

For example, mutual fund proponents were touting the concepts of ‘buy term and invest the difference’. True, some of their motives were related to their desire to invade previously accumulated cash values and ‘re-position’ them into funds. But many of them sincerely believed that steady investment in securities would out-perform the very conservative growth within the whole life policies of that era.

Life agents were finding that to defend their favourite product against this concept was tough. You had to really understand all the tax aspects of the investments and insurance contracts as well as how to prepare a sophisticated response to the challenge. You had to investigate the historical performance of securities and gauge the elements of risk. Not all mutual funds grew exponentially! They asked: ‘Why can’t we have a policy that passes the investment growth to the policy owner?’ Of course, this ultimately produced the variable universal life policy.

Meanwhile, life agents were using more sophisticated modelling tools to determine the needs for insurance. They were moving beyond the ‘Human Life Value’ principles of Solomon Huebner. Some of the early developers of a more scientific approach were Gus Hansch, who developed the Financial Profiles, and Tom Wolfe, who produced the Capital Needs Analysis. These were justifying larger purchases of insurance by portraying a larger picture. The Life Underwriter Training Council, established by the National Association of Life Underwriters, was training new agents in the concepts of programming insurance needs using insurance policy settlement options. The Computone Systems briefcase timesharing system was equipping a thousand advisers to instantly deliver more accurate responses.

The earliest advocates of financial planning were sprouting up in the forest, like mushrooms. Singly, or in small groups, largely ignorant of what the others were doing. But all of these persons were seeking to develop more accurate and more motivating methods of moving clients into an improved financial pattern of activity.

Many were calling themselves by terms like financial ‘architect’, ‘planner’, ‘adviser’ and ‘consultant’. For example, in 1969 I was undergoing this transformation like many others, and I remember making a list of all the terms that I might use. When I had covered a full page, I started to eliminate those words that seemed to indicate a prejudice for one type of product or another. This led to my incorporating ‘Financial Planning Consultants, Inc.’, which was a very popular decision, since at least five other individuals or groups arrived at the same collection of terms - in different states.

Meanwhile, Loren Dunton gathered a small group of salesmen for a meeting in Chicago in 1971. Out of that grew the establishment of the College for Financial Planning, the International Association of Financial Planners (IAFP) and the Institute of Certified Financial Planners (ICFP). The profession began to organise and the association-sponsored events provided the venue for the exchange of ideas and techniques. Gradually, the curriculum at the college was strengthened, and the profession began to coalesce.

In the 70s, financial planners learned to produce plans. These plans were used to justify the purchase of financial instruments - life insurance, mutual funds and limited partnerships comprised of real estate and other tangible and intangible properties. Plan writing software like ExecPlan, ProPlan, Softbridge and the Leonard System helped advisers sell a multiplicity of products. The better planners started charging fees, but there was very little discussion of the fee amounts and how to propose them to clients. One reason is that the IAFP and ICFP had been advised there were anti-trust issues involved in any discussion of fees. So a lot of planners charged no fees, giving away their valuable services.

In the 80s, the American College began to realise that financial planning was growing while life insurance was shrinking, so they got on board with the Chartered Financial Consultant (ChFC) designation. It was an academic success, but the ChFC has never gained the prestige it deserved. The ChFC was often regarded and referred to as a ‘financial designation from the insurance college’ despite its obvious parity with the CFP curriculum.

The Tax Reform Act of 1986 changed everything. Congress allowed the Internal Revenue Service to retroactively disallow many tax shelters and stripped away the tax underpinnings of the real estate market. However, the trends that were predicted in the Stanford Research Institute’s landmark report, ‘Financial Planning - Marketing Strategies’, were still holding true. What Loren Dunton said the public needed was still valid: “To learn how to spend, save, invest, insure and plan for the future in order to achieve financial independence.”

During the late 80s and 90s there was continued growth of other universities offering financial planning curricula - some to full-time undergraduate students, but most to those already in the financial services industry - on a distance learning basis. Now a great many of the students in these courses are those seeking a career change - toward financial planning, and some would say they are acquiring knowledge, but not skills.

As the stock market began its slow rise, more and more financial advisers began to shift from planning to portfolio management. They quickly realised, being good at math and projections, that it was far more profitable to receive a small level commission on an increasing amount of money than a larger, short-term or one-time commission. Since this was not favoured by most broker-dealers, who were committed to the trading philosophy and up-front commissions, they began to migrate away from the wire houses and insurance companies.

Pretty soon, the profitability for those advisers lay in retaining the portfolios and capturing more assets, including the funds within qualified retirement plans. Because the compensation was paid in the form of a fee, rather than a commission, they self-designated themselves as ‘fee-only advisers’ and have been very successful in convincing the media that they have no conflicts of interest, whereas it is quite obvious that they do have a powerful motive to retain and increase the funds under their management fee umbrella.

Meanwhile, advances in technology led financial advisers from mainframe and time-sharing systems to personal computers, to networked office installations and, eventually, to a much heavier dependency on the internet for program access, data sharing and communications. Now, the financial adviser without a personal website is like a dentist without a reclining chair and that collection of tools suspended above it.

The dot-com market adjustment of the early part of this century has brought a need for many firms and institutions to change their direction. But many of them do not have a clear focus on their future. They keep plodding on in the same direction as before. We can gain some valuable insight by understanding the problems that exist in the US profession today (see breakout box).

And I might offer several other observations, for the benefit of the reader. Some readers will immediately recognise the validity of this information, and will ask themselves: ‘How can I use these concepts to correct my path, and deliver better analysis, products and service to my clients?’ From questioning, they will move to change, and from change they will move to improvements, and as a result they will achieve the last two items listed above.

Others will try to argue with the statements and will assume they are doing everything so much better than their peers that there is no need for change.

Some educators will violently disagree with the ‘no plan’ observations, believing that subject education is the same as learning how to construct plans, while some educators will recognise this as an opportunity.

Some associations will recognise opportunities lie in improving the value proposition for their members, and they will grow. D

Edwin P. Morrow, CLU, ChFC, CEP, CFP®, RFC - Financial Planning Consultants. He is the chairman and chief executive of the International Association of Registered Financial Consultants (IARFC) and he speaks frequently at professional conferences on topics related to his practice experience, computerisation, and enabling financial advisers to improve their client services by building their practices through effective client relationship management. He can be contacted at edm@iarfc.org.