Entrepreneur Leadership

You’ve heard laments about the decline of the Financial Planning Association.  But private ventures are succeeding in the space where the leading membership organization would normally rule.

Nobody was especially shocked that representatives of the financial planning profession sued the SEC in the Southern District of NY over its ill-conceived Reg BI rule.  But I think most of us were taken aback when we saw who the plaintiff was.  The XY Planning Network?  Not the FPA?  Not NAPFA?  Who is representing the body of financial planners these days?

“Over the past few years, we’ve been in meetings with NASAA members and regulators, along with representatives of the CFP Board and NAPFA,” says Michael Kitces author of The Kitces Report and Nerd’s Eye View, and cofounder of the XY Planning Network.  “The FPA,” he adds, “was invited and for whatever reason they didn’t show up.  They are just literally not showing up to meetings and participating in the discussions, and they seem to have no advocacy strategy—because if you had a strategy, it would have been: what are we going to do about this giant Reg BI thing?

Kitces notes that after the lawsuit was filed, the FPA’s response to press requests was that it was still evaluating its options.  “Apparently, they didn’t even know that they had missed the deadline,” he says. 

NexGen’s origins

The lawsuit puts a bright spotlight on an interesting trend across the planning landscape.  For the past 20 years, a number of organizations have been stepping into leadership and service roles that would normally be filled by a major professional association.  In some cases, these programs and services were actually proposed to the associations themselves, and some of the most successful were created privately only after the FPA failed to respond.  “Almost everything we do at XYPN are things that I begged FPA to do for ten years,” says Kitces.  “And either they didn’t do them, or they did them so badly that they didn’t work.”

A case in point is arguably the FPA’s most successful community program: its NexGen initiative.  “Because NexGen is now under the FPA,” says Kitces, “most people don’t realize that when it started in 2004, NexGen was created as an entirely separate independent organization.”

In the early 2000s, as a member of an FPA career development committee, Kitces had lobbied for an FPA initiative to promote the career development of an entirely new group of professionals: advisors coming out of newly-founded college curricula. 

“At the time, the organization had something called the Bridge the Gap program,” Kitces recalls.  “It was designed to help people who were coming into the industry as career changers jump-start their careers.” 

The FPA’s response was: Why not include the new college graduates in Bridge the Gap?  Kitces argued that this program wasn’t meeting the specific needs of the youngest new professionals. “Career changers have a fundamentally different set of needs and issues than new advisors coming to the profession in their 20s,” he explains.  “They’ve got families and mortgages and they are not staring down student loan debt.  They have certain salary expectations based on what they were getting in their previous careers.  A 45-year-old engineer career-changer,” Kitces adds, “doesn’t have anything to relate to a 22-year-old living with his parents trying to get a paraplanner job.  Yet the FPA was putting them in the same bucket.” 

The FPA eventually responded with a program called MPact (Mid-Profession and Career Transition community), but the program collapsed in three years, and suddenly there was no more career transition group at all.

What to do?  Kitces and Aaron Coates of Relevant Financial Advisors in Elkhart, IN decided to take matters into their own hands.  They created a ListServ on Yahoo! and invited younger planners to start communicating with each other.  “NexGen became an incredibly active and vibrant ListServ,” says Kitces.  The group set an upper age limit of 36 so as to specifically exclude career changers, and so that it would remain relevant to the younger cohort as the initial participants aged out. 

“For the first years, the relationship between NexGen and FPA was extremely tense,” Kitces recalls.  Why?  “Because,” he says, “the FPA leadership was afraid that we were literally spawning a next generation membership association that was eventually going to replace them as their members retired and we got all the young people.”

Two years later there was a detente of sorts: the NexGen volunteer leaders contacted the FPA leadership, asked for and received staff support to help create an annual conference.  The conference was a success (I attended the first two), But suddenly, after the second one, during the 2008 financial crisis, the FPA unilaterally ended the partnership. 

“The FPA pulled its conference support, so we had to create our own gatherings,” says Kitces.  “Meanwhile, the FPA kept trying to launch career changer groups and they would fail.  They couldn’t figure out how to replicate NexGen, so around 2011, the FPA asked the NexGen leaders to fold themselves into the FPA, the leadership responded, and that’s when NexGen officially became an FPA community.”

Private ventures

Not everybody was willing to fill a void in the profession and then give a functioning organization back to the FPA.  As a result, the space traditionally occupied by an effective membership organization is now crowded with for-profit enterprises. 

Exhibit A, of course, is the XY Planning Network itself, which now has more than 1,000 members and which, Kitces says, will surpass the FPA in total revenues next year.  Just a few years into its existence, XYPN already offers a member benefit package that FPA members might envy, including a complimentary tech stack that includes Capitect (portfolio construction and rebalancing), MessageWatcher (email, website and social media archiving), RightCapital (financial planning), Smart RIA (automated compliance) and Wealthbox (CRM).  Perhaps the most important component, AdvicePay, allows advisory firms to collect subscription fees and other non-AUM revenues from clients. AdvicePay was developed in-house because there was nothing else in the marketplace that would facilitate the predominate XYPN revenue model.

Meanwhile, XYPN is now attracting 30 media inquiries a month and thousands of consumer leads a year, grants its members access to coaches and consultants on demand, and runs a vibrant discussion forum that is rivaled only by the much larger National Association of Personal Financial Advisors (NAPFA). 

“Over half our members log into our Member Forum at least once a week,” says XYPN co-founder Alan Moore.  “I think we’re getting 20,000 page views a day inside the Forum, where people are seeing those interactions and participating in the discussions.”

In other examples of for-profit organizations making a living in the traditional association space, the FPA’s Journal of Financial Planning competes with Investment News, Advisor Perspectives, RIABiz, Financial Planning magazine, Investment Advisor and Financial Advisor, with a fraction of the competitors’ readership and a very small fraction of their advertising revenues.

In the group discount space, the newly formed Chalice Financial Network (https://www.chalicefn.com/) compares favorably with the FPA in its focus on pooling member dues to negotiate discounts using economies of scale.  For $99.99 a month, Chalice’s 49,000 members receive discounts on compliance services from National Regulatory Services, free website design from ProSites, free premier membership in SuccessionLink (listing buyers, sellers and merger partners), discounts on Quickbooks for accounting, and arrangements with WeWorks and Jones Lang LaSalle for short-term or longer-term office space around the country.  Perhaps Chalice’s main benefit is a technology overlay on a discounted tech stack that includes market leaders Orion, Riskalyze, Redtail and eMoney.  Average annual savings per member: $15,000.

The conference space, of course, has evolved a variety of competitors to the once dominant FPA national convention, prominently including XYPN’s annual meeting, along with increasingly popular broker-dealer and national custodial conferences, the new Wealth/Stack conference, the Insider’s Forum conference, multiple meetings put on by Financial Advisor magazine and NAPFA’s Spring and Fall annual meetings.

To be fair, other advisor organizations have, at various times, whiffed on potential new ventures or opposed what they probably should have embraced.  But there is evidence that they learned from their initial failures.

The Insider’s Forum conference was born after Co-producer Jean Sinclair, of Avenue Advisors in San Diego, created and then chaired a new NAPFA conference focused on practice management and investments. It was a financial and experiential success, and Sinclair received a standing ovation from the attendees. NAPFA produced the conference once more and then stopped. By then Sinclair had already moved on, and took with her the idea to work with Joel Bruckenstein, Dave Drucker and me on the conference that ultimately became the Insider’s Forum.

Bruckenstein and Drucker had several years earlier brought the idea of a tech conference to NAPFA, which provided back office support for their ideas. That arrangement ran for two years before Bruckenstein and Drucker took the conference private and created what became the T3 conferences.

Perhaps unsurprisingly, in volunteer-led organizations, the members are the people coming up with most of the new ideas. Sinclair and Annette Simon (of the Garnet Group in Bethesda, MD) both had chaired numerous NAPFA conferences, and as far back as the mid-2000s they wanted to create an event for women advisors. They received an informal go-ahead from the incoming NAPFA chair, so were surprised at the initially low level of enthusiasm and support from the organization. Staff members queried, “What if the men want their own programs too?” Sinclair recalls.

Cheryl Costa (Woodside Wealth Management in Framingham, MA) was equally passionate about supporting women advisors, and she was a current NAPFA Board member, while Simon and Sinclair’s terms already ended. The three women were told to write a business case to procure a small amount of funding for a women’s workshop as part of an existing NAPFA conference. They launched NAPFA’s Women’s Initiative, the first such initiative in the advisory space.

Within a few years, Kate Healy of TD Ameritrade Institutional who shared the trio’s passion, offered financial support for continued women’s programming. “I breathed a sigh of relief,” says Sinclair, “because that gave me confidence that the initiative would continue. But,” she adds, “in defense of NAPFA today, all that happened under a different regime. NAPFA now has the Genesis for younger advisors and the Large Firm Forum—in addition to a thriving Women’s Initiative. They realized they needed to offer tighter cohorts the opportunity to network, and programming specific to their interests.”

Capricious rule making

The most startling recent example of a private venture taking over traditional association functions, of course, is the XYPN’s lawsuit against the SEC’s Reg BI initiative.  The original complaint is being amended as you read this, but the argument actually appears to be more cogent and profession-enhancing than anything the associations have ever put forward—in lawsuits or during the comment periods.

To start with, Kitces argues that Reg. BI is blatantly incompatible with the Investment Advisers Act of 1940, which was originally created with two core purposes.  “The first was to protect the public by having clear standards for anybody who was an investment advisor—which back then was called an ‘investment counselor,’” he explains.  “They wanted to protect the public and make sure that investment counselors who held a position of trust and confidence with their clients met a different and higher standard than broker-dealers.”

That much, most of us know.  But the second core purpose of the ’40 Act has been less-discussed, and may be of greater interest to the planning community.  “It was actually written into the Senate report,” says Kitces, “that the law was designed to protect honest investment counselors from the stigma of other people pretending to be investment counselors but not being subject to the same standards.”

Sound familiar?  The actual wording referenced “honest investment advisers” compared with “tipster organizations” that sold products, but disguised themselves as advisers.  A 1935 report by the SEC (the same SEC that proposed Reg. BI, you understand) stressed that “An adviser cannot provide unbiased advice unless conflicts of interest are removed.”

The point, and it’s one that we haven’t heard from our professional organization lobbyists, is that the 1940 Act—still the law of the land—was enacted not only to protect consumers, but also to protect the reputation of professionals who provide unbiased advice from organizations masquerading as advisors.

Kitces notes (and you’ll see why this is important in a minute) that Rule 208(c) of the ’40 Act specifically states that individuals cannot hold themselves out to the public as an ‘investment counselor’ without registering as an RIA.  “‘Investment counsel’ was actually a regulated title,” he says.

Fast forward to 1999 and the so-called Merrill Lynch Rule, where the SEC decided that pretty much no matter what brokers did, their advice would be considered solely incidental to their business of selling securities (hence no need to register brokers as RIAs), and then wind forward a few years to the SEC’s update in 2005, after the FPA threatened a court challenge to this indulgent interpretation of the ’40 Act.

“In 2005, the SEC made the Merrill Lynch Rule final,” says Kitces.  “But they said that financial planning has emerged as a distinct profession over the past 25 years, since the original Investment Advisers Act of 1940.  And because it was a distinct service from brokerage that receives compensation unto itself, it should be a registered activity.” 

This is important.  In other words, the SEC was now committed to protecting two terms from misuse by pretenders: the old outmoded ‘investment counselor’ that is written into the ’40 Act, and the new term: ‘financial planner.’

“The FPA still ultimately sued the SEC, even though it had this tremendous gift of recognizing that financial planning cannot be a solely incidental activity,” Kitces adds.  “The FPA won, the rule was vacated, and so were all the provisions that said that financial planning is a protected term.  The provisions of the 2005 rule were stricken from the books.”  Kitces sees this as a step backwards for the profession.

Then came the infamous RAND study in 2008, where a team of researchers basically discovered what all of us knew: that consumers couldn’t tell the difference between who was calling themselves what, and who was regulated by which entity under which terms—which brings us to Reg BI and what Kitces thinks is a key point.

“In Reg BI,” says Kitces, “the SEC essentially said: we don’t believe it is feasible or necessary to regulate titles and how advisors hold out.  They didn’t acknowledge that this was an explicit purpose of the original ’40 Act, and they said that in the 2005 rule, they didn’t regulate how advisors hold out—which is literally factually wrong.  In Reg BI,” he adds, “they cited their own 2005 rule incorrectly.”

Later in the interview, Kitces says that much of the crux of the XYPN suit boils down to the fact that the SEC has, in the past, unequivocally recognized that financial planning is a distinct service from brokerage and cannot be solely incidental, but this was not only not reflected in Reg BI, they completely punted on it. 

“They denied their prior rules, and they provided no justification as to why financial planning was a separate profession in 2005 but not in 2019,” Kitces says.  “That is literally the definition of arbitrary and capricious rulemaking.”

The complaint also takes up a number of issues that most advisors are familiar with, most notably Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which specifically was intended (as one of the framers put it) to “make sure the huge gaps that existed that allowed systemic regulatory arbitrage could no longer take place,” and (subsection (g)(1)), which authorized the SEC to create “the same standard of conduct [for brokers and dealers] as the standard of conduct applicable to an investment adviser under Section 211 of the [Advisers Act].”

If the XYPN lawsuit is successful, the entire fiduciary segment of the financial planning profession could reap enormous benefits.  But Moore says that the immediate objective was to protect the XYPN franchise and its fiduciary planners who are members.  “The accusation we’ve been facing is: oh, it’s just for PR purposes,” he says with a laugh.  “I would respond that it would be the most expensive PR stunt in history.  There are,” he says, “a lot cheaper ways to get attention.”

Reg BI, says Moore, directly harms XYPN in a number of ways.  First, the organization’s advisors—who now make up 5% of state-registered advisors nationwide—are providing fiduciary advice, but they have to compete against brokers and reps who are not providing advice under a fiduciary standard.  “Yet they are both calling it the same thing,” says Moore.  “In the end, we feel like that creates an unfair business environment for our advisors to have to operate in.”

In addition, there’s the consumer protection issue.  “Consumers deserve that when they talk to a professional who they believe is giving them advice, who says they are giving them advice, they should be getting unbiased advice,” says Moore.  “So we looked around, and got wind that the state attorney generals were thinking about filing, but the FPA was wrapped up in their OneFPA initiative, and I am not sure this was even on their radar as something they needed to accomplish.

“I wish,” says Moore, “that the FPA had done it.  I think they had standing.  They had every opportunity.  This is their job.  But they fell flat.” 

(The FPA was contacted for this article, with a request for comment and perhaps a substantive interview.  But the request was made several days before the FPA conference, and nobody was ever made available before, during or after the conference.)

Rival advocacy

During its long revenue and membership decline, the Financial Planning Association has repeatedly excused its lack of growth and failed initiatives by asserting that these are very tough times for associations to survive.  But the abundance of private ventures that have successfully moved into space where the FPA has either tried to compete or been urged to do so suggests that something else is going on.  Kitces points to the resurgence of NAPFA once the organization hired Geof Brown to provide more dynamic leadership.  In the past six years of Brown’s tenure, NAPFA membership has grown 50%, to just under 3,800 members. 

NAPFA chair Dave O’Brien adds that NAPFA’s Spring conference was oversold and could not have handled any additional exhibitors, and the Fall conference had the biggest first-time attendee figures in the organization’s recent history.  NAPFA’s Find an Advisor referral program to members has grown every year since inception, with 2.5 million prospect inquiries in FY 2019, 1.2 million member profiles viewed and 431,787 NAPFA planning firm website links clicked.  (Over the same six-year period, the AICPA PFP Section—another competitor in the conference space—has more than doubled its membership, and the AICPA’s annual ENGAGE conference has become one of the most successful and content-rich meetings in the planning landscape.)

XYPN now buys NAPFA memberships for all of its members, who receive those Find an Advisor referrals and discounted access to the two national conferences.  But perhaps most importantly, Kitces says, NAPFA is more effective at promoting the same advocacy agenda as XYPN. 

“We see better execution with NAPFA than the FPA,” says Kitces.  “We write a multi-hundred-thousand dollar check every year to NAPFA, not as a sponsor but to pay for membership, because we believe in the value of membership associations.  And,” he adds, “NAPFA has helped open doors for us to have advocacy conversations with NASAA and others about the state regulation of financial planning fees.  Regulators look at them differently from private organizations, and we can piggyback off of that.”

Bigger picture, the argument that professional associations cannot thrive in this environment, and therefore cannot afford robust regulatory advocacy, is hard to justify when you consider how effective other associations have been in their lobbying efforts.  “Look who struck down the DOL Rule,” says Kitces.  “It was SIFMA and the Financial Services Institute—the broker-dealer organization that the FPA spun off in 2004.  FSI is now doing far more advocacy work than the FPA is doing.  The Investment Adviser Association has been very strong on advocacy,” he adds, “and SIFMA, while I don’t like their positions, is damned effective at advocacy.”

Kitces notes that NAIFA (National Association of Insurance and Financial Advisors) has been struggling with membership, but it continues to be extremely effective in its lobbying efforts, and on the outside, AARP—a membership organization for a specific type of financial consumer—has been quite effective as well.

Moore has found that creating programs and services that advisors value is deceptively easy in the current business environment—but only if you ditch the group-think mindset, only if you focus hard on specific issues facing the advisor community, and especially only if you execute effectively. 

“When I was an advisor first starting out in this business,” he says, “I had to look at every CRM, and everything every CRM integrated with, and whether it was a real integration—and a new advisor would have to reinvent that wheel for every other piece of software as you build your tech stack, and it is just overwhelming,” he says.  “So we set out to create a solution for advisors who didn’t want to go through all that time and trouble as they tried to ramp up their business, and we tried to make the initial cost of starting a new business more reasonable.

“I think,” he adds, “that the FPA struggles because it doesn’t really have a clear mission or target market.  If I log in as an advisor, 98% of what is posted in the discussion forum is not relevant to me, because 98% of the people in the organization are not like me.  If I go to the conference, there might be three sessions that are really applicable to someone like me.”

He also thinks that it’s hard to innovate within the revenue model that the FPA has created for itself.  As an example, he points to the curated exhibit hall that XPYN manages.  (The Insider’s Forum pioneered the curated exhibit hall, meaning it only invites exhibitors who will be relevant and interesting to the conference attendees.)  “To exhibit at an FPA event, our AdvicePay service has to pay $10,000 for a booth,” he says.  “When you charge $50 a month, you have to get a boatload of new customers to justify that expense.  People like us are priced out.  But BlackRock,” he adds, “just needs one advisor for every ten conferences they go to to get an ROI, because they’re distributing products through advisors.” 

The result?  At the typical conference, the prices are bid up by the product distributors, the solutions providers can’t pay the bills, and the exhibit hall is filled with people the advisors don’t want to talk to. 

“So what do you have to do?” asks Moore rhetorically.  “You have to con the attendees with alcohol and food in the back of the exhibit hall to try to get them to interact with the vendors.  It is a terrible vendor experience, a terrible attendee experience, but the association’s annual budget is dependent on getting those big checks from the exhibit hall at the annual conference, so they can’t sit down and say: how can we create a great vendor and attendee experience by only having the people the attendees want to talk to?

Calling for a stronger FPA

The interesting part about the FPA’s decline, and so many other private organizations moving into the spaces that the FPA does not occupy effectively, is that the whole situation creates an interesting conflict of interest for certain members of the planning community.  On the one hand, you have to be concerned for the profession as a whole.  Kitces praises the local chapter leaders for the great educational programs many of them are putting on.  But he believes the membership dues that go to the national headquarters are not buying much effectiveness on behalf of the profession.  “The FPA’s influence is waning,” he says, “and that role is too critical for a body of 80,000 CFP certificants and 300,000 financial advisors to not have an effective guiding-light membership organization.”

On the other hand, the organizations that are thriving where the FPA is noncompetitive have a powerful incentive not to call out the FPA’s board or suggest that they look for more competent (and competitive) leadership, the way NAPFA did more than six years ago. 

If the FPA suddenly revamps its conference experience, and takes the lead in advocacy, and its magazine becomes competitive with the private ventures, and other initiatives begin to encroach on profitable programs that have evolved during its long decline, a number of bottom lines might suffer. 

Is it better to simply be quiet and prosper at the FPA’s expense, or speak out and wake up the slumbering giant for the good of the profession overall?  Put another way, is it possible that the most persistent critics of the FPA’s long decline are the ones who most want it to rise up and succeed, and the people who are silent and blindly supportive are accessories to a weakening status quo?

The leaders at XYPN have chosen to call for a stronger FPA, even if it means more competition in the long run, even if it might negatively impact their bottom line.  “I don’t think the problems at the FPA are going to be solved until they have a staff leadership change,” says Moore.  “They’ve had the same staff leadership in place for basically 20 years, and they’ve overseen the downhill slide of the FPA.  I have zero faith that the current staff can handle pivoting the organization.”

How might the FPA board address this challenge?  Kitces wonders whether the board has set clear metrics to hold the staff leadership accountable for effectiveness, or whether staff leadership has been allowed to scatter around a lot of metrics which means some will be met almost by accident. 

Moore thinks that it might be time for the FPA to go through the exhausting process of reinventing itself.  He says that his own organization, every year, meets with the intention of finding ways that someone from the outside could successfully compete with XYPN. 

“We ask ourselves, if we were going to build a business to compete with ourselves, how would we beat ourselves?” says Moore.  “That should be the question that the FPA is asking itself.  I would be interested to hear if the FPA’s staff and board are thinking along these lines.  If the board were to leave and start a new competing association, how would they beat today’s FPA?”

The process might start by, at a minimum, avoiding past mistakes.  Kitces ruefully reports that the FPA, rather than strengthening its position in the marketplace, is in the process of repeating its problematic decisions that led to the independent founding of the NexGen organization.  NexGen worked, he says, because the members had a shared experience, while the original FPA programs didn’t work because they mixed in older career changers with younger graduates from college programs.

So what has the FPA done recently with NexGen?  “For years,” says Kitces, “a whole bunch of career changers showed up and said, we’re 40; we don’t qualify for NexGen.  So where’s our group?” 

Earlier this year, the FPA offered its solution.  “The FPA continued to fail to figure out how to produce something for career changers,” says Kitces, “so they ended up changing the age limit for NexGen from age to years of experience”—once again shifting it to a broader “new in the business” organization, recreating a formula that repeatedly failed in the past. 

“They took the one thing that was created independently for them, that worked,” says Kitces, “and I think they may have broken it.”

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