An Interview With FI-nancial Planner About Becoming A Financial Advisor

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An Interview With FI-nancial Planner About Becoming A Financial Advisor
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One of my highest priority 2018 goals is to start down the path towards becoming a financial advisor. I’ve always said that I wanted to help people with money once I was financially independent. After I started my blog Winning Personal Finance, I realized that it would be a mistake to delay this goal (that I’ve already had for 12 years) much longer.

If I was still a student, becoming an advisor would be an easy path to follow. Take the courses. Pass the test. Get an entry level job and grow from there.

As a “Mid-Career” professional, I’m finding the path more challenging. I’m already earning a healthy income in another field. I use that income to support my wife and two kids. While we have a well above average savings rate today, moving back to an entry level job seems a bit crazy.

Fellow ChooseFI blogger FI-nancial Planner, as heard on the CFP Roundtable episode, was gracious enough to answer a few of my questions. I know there are many others in the financial independence community that are interested in becoming financial planners, so we turned the discussion into an article for you below. My questions are in bold titles and the FI-nancial Planner’s answers are in normal text.

Questions focused on becoming a financial advisor

What CFP educational program did you take? How well did the program prepare you to be an advisor? Was additional education and experience outside of the program necessary for you to feel like an expert?

I was able to do the challenge status due to my CPA background so I can't speak personally to the educational program. I do work with quite a few graduates of CFP programs including VA Tech, TX Tech and UGA. We've had interns from Utah Valley University and I have talked with Kansas State graduate students. All are great programs with excellent graduates. These programs provide technical knowledge and a limited amount of human knowledge or soft skills, most of which you pick up on the job.

Once in the industry, it's possible to gain experience through programs offered by industry organizations like the FPA Residency which I attended. My firm strongly encourages new CFPs to attend residency and I would encourage others to attend, even if not covered by your employer.

I'm not sure that I would call myself an expert, I think that comes with loads of time and experience in the industry. I think it is easy to focus on the technical side of planning and doing fancy work with stock options and the like, but the good financial planners are able to connect with clients. People skills are what really sets great planners apart. This part of the talent stack comes from experience and time in front of clients, there’s no free lunch for this part.

I would recommend some financial planning podcasts–Michael Kitces’ Financial Advisor Success and XYPN Radio are two great podcasts with interviews of leaders in the industry.

For somebody eligible to skip most of the coursework with Challenge Status, do you suggest doing so or taking the full course anyway?

I did the challenge status and didn’t do the coursework. Depending on your background, I don’t think it’s necessary to get a handle on the concepts and technical knowledge. Also, the firm I joined was able to help me grow and learn on the job. If I didn’t have that opportunity, taking the coursework would have provided more background knowledge.

What program did you use for your capstone course? Do you recommend it?

I used the Zahn review course and they were linked with Tallahassee Community College. The capstone course was OK, I don’t remember much of it except that when I delivered my plan the instructor stopped me halfway through and said “Clearly, you know what you are doing, you did a great job”, and ended the call. I did not learn anything doing this course, it operated more like a basic check of competency.

Do you have any advice for somebody preparing for the CFP exam?

There are several reputable companies out there that offer study materials and guides. I would definitely recommend using one of these and putting in the time.

I would estimate my study time at 150 hours of studying for this exam. Comparing it to the CPA exam, I would say it was like taking two exams at once in regards to the amount of content. Putting in the time is required to do well on the exam.

Based on your experience, it seems like those eligible for the capstone can still succeed as financial advisors and save some time and money. Do you feel like you missed out on anything by skipping the other courses? Do you think the other courses are necessary to prepare for the exam or is taking a review course enough?

I think taking the review course is plenty to help you pass the exam. Working as an advisor is another thing entirely. I think the apprenticeship model is really helpful in getting you up and running as an advisor. There are so many other elements to financial planning beyond the technical numbers and book learning side. I don’t think I missed a single thing on the technical side by skipping other coursework. Seeing our new hires coming out of school, I think I had more technical knowledge than most of them, after a few years as a public accountant.

It seems that many financial advisory jobs end up very sales focused. Do you have any suggestions for somebody wanting to get financial advisory experience without working as a salesperson? I’m looking to get into this line of work to help people, not sell them the “financial product of the week.”

Yes, there are tons of sales oriented positions in this industry. It’s important to note that product sales and business development (BD) are different. To thrive in this business, you will need to bring on new clients, what I call BD. Many young advisors are nervous about this, but if you approach it from providing help to people that need it, it is more palatable.

There are lots of firms in the Registered Investment Advisor (RIA) space who don't seem as sales/BD oriented, and I am working at one of those firms. I have zero BD requirements until my next promotion (level five of seven in our firm). With that said, I think I lack BD skills and I expect a tough transition to that role. If you're at the right firm, they'll provide the training and support to make you successful in that type of position.

By following the fiduciary route of getting your CFP and working at an RIA, there will be very little product sales as a part of your job, if any at all. We are really in the business of selling our services, as we can’t be paid by product sales as fiduciary fee-only advisors.

To find the firms that are fee-only, you can look on NAPFA’s website or ask the compensation model of any firm you speak with.

I’m a high earner in a career outside of personal financial planning, If I wanted to change to a financial planning career path without realizing a significant drop in income, what advice would you give me?

If you're going to work at a firm instead of for yourself, you will likely take a drop in income since you are inexperienced. However, if you are able to bring in business, there are usually rewards tied to that new business. It will be tough to move sideways with respect to income as you’re essentially on the same skill and knowledge level as a new college graduate.

With that said, you're more likely to get back to your old salary faster by going this route than creating your own firm. I would really encourage career switchers to work inside a firm rather than go it alone and try to build a business while learning about financial planning along the way. This seems like a disservice to clients to me.

Would it be possible to start getting experience as a financial advisor as a side hustle outside of working hours? If so, what is the best way to go about doing so?

There are tons of opportunities to do this if you can get connected to the right people. There are lots of jobs where they need a paraplanner (a back office planning associate) to just prepare financial plans. I have a friend that does this on the side while he is building his own planning business. I think the hard part here is that you may not have the skills or background to engender trust to work as someone’s planning associate on the side.

How much can I expect to make as an advisor starting out (assuming no book of business to start). What is the income growth potential?

I can only speak for my firm and give broad ranges. We are in the DC metro area. A first year associate out of school makes between 50-60k and raises for high performers over the past five years have been in the 7-15% range. Career switchers will likely come in as senior associates and make 65-75k starting out and expect similar raises. Bonuses are in the 5-10% range. Of course, keep in mind that the past five years have been a ridiculous bull market that helps the firm’s bottom line dramatically.

After listening to lots of XYPN podcasts focusing on advisors building their own firms, a reasonable growth rate seems to be two clients per month. If you figure out what you expect to make from each client, you can work out your earnings potential.

Questions focused on the business of financial advising

What type of fee arrangements and services do you have with your clients (hourly, charge per plan, retainer, assets under management)?

Speaking just of my firm, we charge per plan (fee based on complexity) and assets under management. However, I know of many in the industry that work on an hourly or retainer basis. My firm has not implemented those models although I think they are the future for younger clients.

Index fund investing is all the rage these days. Do you agree that investing in low cost index funds is best? Why/Why not?

Yes, the statistics are hard to argue with here. Active managers, as a group, underperform or match their indices. There are a number of factors here, beyond the fees there are two main reasons. The first is risk aversion (what if your large cap value fund underperformed by 5% one year, how likely would you keep your money there?) and the second is size related (it’s hard to invest $50 billion in a way that doesn’t mimic an index).

I believe in less efficient markets (where information isn’t as readily available as the US market, for example) there is opportunity to add value by using active management. Emerging market equities and debt are great examples, when you have managers who are on the ground doing the hard work of gathering information, there can be an edge gained by paying a higher fee to these folks.

My personal goal is not to manage investments for people but to provide fee only financial plans and not be associated with selling specific investments or insurance products. Do you think there is a market for this type of service?

Yes, I do think there is a market for this and I hope to pursue it myself one day (likely after reaching FI). The problem with this is that you constantly need to be bringing on new clients to make a living doing it this way. The AUM/investment management model generates recurring revenue whereas a financial plan doesn’t go stale each year and need an update. There is a lot of value to help a client reorganize their financial life, and even if that takes a year to do, what value will you provide the next year?

I think there is value to providing ongoing investment management services, but I don’t think the 1% AUM fee is really a reasonable charge to do so, especially if you're using passive investment vehicles. A more reasonable fee may be in the 0.25%-0.5% range, and the value would be more behavioral, keeping clients in the market or evaluating valuations and reallocating investments accordingly.

In an ideal world, I think providing ongoing financial planning services will be my main model, but investment advice will be the recurring money maker. For example, maybe a $250 per month financial planning retainer and 0.5% of assets under management.  A $1,000,000 client, would be paying $8,000 per year. For a $250,000 client, the fee would be $4,250. Obviously, this client would need to have strong cash flow to pay this fee.

Another fee model that interests me is a fee tied to net worth and income. Say 2% of income and 1% of net worth. This would be the upper bounds on the fee based on what I’ve heard in the industry about where clients see the value of the services they receive.

I know many in the FI community would have a heart attack at this fee, but imagine how much people pay for other services in their life, often to receive much less in return. A client can always decide to not pay the fee, so they are finding value in the services that we provide.

It’s a shame that you and I both think we need to reach FI before we can run this type of business model. A financial advisor can bring tremendous value to clients with tax planning, investment advice, and asset protection advice. Even without managing somebody’s investments. Today, I’d guess that most consumers go it alone because either they can’t find an advisor they trust (it seems that all advisors are selling them something) or the fees charged are high enough to dissuade them. For the record, I fall into the second boat where paying 1% of my invested assets that are currently self-managed in index funds seems way too expensive for a second opinion on my personal financial situation. Do you think the big hurdle to run this type of model is a marketing funnel that will bring in enough new clients to avoid the need for recurring revenue from clients?

I think it’s likely that you and I are just risk averse. Whether we were starting a toothbrush manufacturing facility or a financial planning business, we would be scared to take the plunge without a backup plan (in our case, FI). The marketing funnel is absolutely a solution to this problem, as it will work to limit the risk of not having enough revenue to make a profit and live at our accustomed standard of living.

I understand the reasons why potential clients shy away from financial advisors and I think that the general population is more likely to go without an advisor because of the lack of trust rather than due to the fee. I would venture to guess that those two camps make up less than half of the population however. The other half either doesn’t know they need financial help or are afraid to bare their financial lives to another person.

What types of clients would benefit from hiring a financial advisor (age/income/net worth/goals)?

I think everyone needs a financial plan, but may not need an ongoing relationship with a financial planner. Pretty much everyone would gain from engaging a planner. Newlyweds, new parents, and soon to be retirees are obvious. How about a college student or recent graduate needing help with student loans or starting a new job and understanding benefits? The industry leans towards those who have accumulated money because they are profitable and fairly easy to work with. However, that’s somewhat like teaching editing skills to a college student, whereas some folks need to learn how to read.

How can we bridge the gap between those that would benefit from a financial plan and those that are getting them? Many advisors with an AUM minimum won’t accept clients without significant assets such as most newlyweds or college graduates. I dream of providing a valuable financial plan for those that need them at a fair price. Do you think offering this type of service to those who have not accumulated great wealth is a viable business? I’ve looked into “financial coaching” as an alternative but that would mean not providing investment advice at all. It seems a bit crazy to be a “financial coach” and not be able to talk about investments.

I don’t know much about financial coaching but that doesn’t seem like a viable alternative to me. It seems like that would be limited to budgeting and cash flow issues.

There are models out there that work for clients who do not have a large net worth or investable assets, but I think the problem comes back to perceived value. I am very confident that I could provide more than $250 a month of value to a client, but I don’t think there are many out there who are willing to pay that fee. With that said, my annual revenue from that client would only be $3,000. I would need 25 clients at that price to cover my costs of a firm (I think ongoing costs would be in the 10-20k range) and take home a reasonable amount. To match my current salary, I would need at least 40 clients. At a rate of one to two clients a month, it would take me two to three years to break even, let alone the massively increased work hours to get there.

I have heard of joint sessions similar to group therapy that work for some advisors. If you and a few of your really close friends (close enough to share all your financial details!) come together and pay $50 per hour, an advisor could make $200 per hour for a consulting session. That might be viable. But, there are a lot of variables here like finding 4x the clients and overcoming the taboos.

How can your clients expect to benefit from spending their money on the services of a financial advisor? (The more analytical the better i.e. many clients find tax savings, investing fee savings, etc. that far exceed the cost they pay.)

I can think of several clients where a cursory review of their tax returns more than paid for our fee. One client wasn’t contributing the maximum to their HSA but had more than enough medical expenses to contribute and withdraw the entire balance. That discussion saved him probably $3,000 in taxes.

Another client wasn’t gifting appreciated stock, but rather tens of thousands in cash to charitable organizations. Imagine the tax savings on a $30,000 contribution when using appreciated stock in the height of a bull market! That’s an easy $6,000-7,500 savings right there.

We have another client who is looking to get married for a second time. How much value will working with him on an estate plan and prenuptial documents provide? Hopefully zero value, but potentially tons of money.

There are numerous studies showing the value that financial advisors provide. The two I have read most closely come in around 3-4% per year.

  1. Vanguard
  2. Michael Kitces–This is a subscriber only report but indicates savings from a financial advisor:
    • Tax–$1,000s-100,000s (these $ figures aren’t quantifiable not sure if it’s even relatable)
    • Investment planning–low estimate 1%, high estimate 4.11%
    • Estate–$10,000s-millions (properly handling estate taxation, implementation of the estate plan etc.)
    • Retirement Planning–$1,000s-100,000s (Deferral/withdrawal strategies, social security planning)
    • Insurance–$100s-1000s (correct coverage type and amount)

Hi, it’s Jason again. First and foremost, I want to thank the FI-nancial Planner for sharing his wisdom. I’m probably not going to figure out my situation with one conversation. It’s going to take the aggregation of marginal gains to get where I want to go. Still, I think this discussion took me a couple of steps closer to my goal. Hopefully, it did the same for you.

I dream that one day everybody will have access to an affordable financial plan. I also can imagine a world where financial planners are able to make a living by providing advice rather than managing assets or selling products. Does anybody else out there have the same vision?

An Interview With FI-nancial Planner About Becoming A Financial Advisor

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5 thoughts on “An Interview With FI-nancial Planner About Becoming A Financial Advisor”

  1. Hi Jason,

    I have also thought about moving down this path – but agree that it is a long road when you are already on a strong income. In my case I dont think it will be worth it, but as you said once you reach FI anything is possible!

    Thanks for publishing this article.

  2. I have recently been looking into financial coaching vs. financial adviser. I have come across similar road blocks, and it would be difficult to leave a consistent paycheck while not being FI yet. There don’t seem to be a lot of models out there for coaches, but I am going to keep researching.

  3. Financial Advisors are required pretty much at every stage of planning a business. Probizadvisor is one such firm that hires top professionals with high experience who can give sound guidance on various aspects of financing a business. they help you plan out a good financial plan that will enable you to perform better in terms of profitability.

  4. You NEED to be good salesman. That’s the most important thing. Managing the money is the easy part- you need to be able to bring in clients first. That is all any firm cares about.

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