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Regulation Challenges Facing Financial Planners

By Taylor Liao, CFP 

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) brings a new era of regulation focused on promoting transparency and accountability in the US. The UK also just had a regulation change giving more protection to the public. These kinds of changes are likely a consequence of the mis-selling of investments by financial advisors. I don’t expect that we will have this kind of regulation change in Taiwan during the next five years.

The number of financial planners and financial planning firms is too small. Compared with others sectors of the financial industry, financial planners are insignificant and we don’t have enough influence to get noticed by regulators. Even though individual territories might not be enacting regulation at the moment, I think it’s the worldwide trend to be more and more transparent in dealing with clients. It’s better for planners to adapt to the trend as soon as possible, because it may become mandatory at anytime. Meanwhile, it’s important for those of us of in Taiwan to continue pushing for legislation to be made for the financial planning profession.

If I could speak to a regulator today, here is what I would ask for the financial planning profession:

1)    Legal protection of “financial planner”

For example, Taiwan has regulation protecting “wealth management”. People in the financial industry who want to develop their business and offer wealth management have to meet specific qualifications first. Financial planning, on the other hand, doesn’t have any regulation. Anyone and everyone can put “financial adviser” on their business card and in reality, they might be a sales person. Someone who calls themselves a financial planner should provide a comprehensive plan and advice to their clients. Salespeople who are calling themselves financial planners are misleading the public and could potentially cause clients harm. We desperately need regulation that clearly defines “financial planning” and who can be a “financial planner”. This confusion and mistrust of the public hurts the image of the financial services industry. For the best interest of the public, regulation should reserve the title “financial planner” for individuals who earn CFP certification.

2)    CFP certification is the minimum standard

As I said above, a qualified financial planner should be a CFP certificant. There are several financial planning designations in Taiwan right now beyond CFP certification, but none of them have as high of an entry level. To achieve these lesser designations, applicants pay less and take easier education courses and exams. These designations are popular among salespeople because they are easy to get and the public doesn’t know the difference. People in the financial services industry know the difference though. They know that CFP certification requires a higher application fee, more hours of training, and passing a more difficult exam. The minimum standard for financial planners should be the same as CFP certification.

3)    Regulation specifically for financial planners

Similar to lawyers and accountants, financial planners can run their business alone or build up a financial planning firm to provide planning services. When it comes to product implementation, financial planners can act as an insurance broker and deal with the insurance company directly. There is a critical problem that financial planners who sell products face: planners are required to work with only one insurance broker or company. This dilemma is a bottle-neck for the development of the financial planning profession. Insurance and financial planning are two very different industries, but the authorities regulate them as if they are the same.

Unless a financial planning firm owns an insurance broker firm, it is illegal to share any profit that is generated through insurance products. The same rule applies for stock and mutual funds; a securities company or fund house is not allowed to pay management fees to financial planners or firms unless they are registered salespeople, even if the client was introduced to them by the financial planner or firm. The financial industry environment is not favorable to the financial planning profession. Financial planning needs customized regulation to further its progress; this would benefit the public.

4)    Financial planning needs a cooperative business model

Financial planners in Taiwan are completely outnumbered by the other sectors of the financial services industry. There are more than 200,000 insurance agents, and only 1,000 CFP certificants. Another shocking statistic is that 90% of financial planners are still at their original job position and have not made the transition to become independent planners. The reason for this is because there isn’t a successful business model for them.

I have written in a previous blog that planners should not outsource product sales. But, a few days ago, I was talking to a friend and it occurred to me that financial planners need to find a business model that helps insurance agents understand and accept financial planning. We should cooperate with them. Insurance agents have worked in their careers for a long time and they will be reluctant to give up their existing job to become a financial planner. Even if they decide they want to work towards becoming a CFP certificants, it will be 2-3 years before they have completed their education and exam.

The workable business model I have come up with is called a “joint-call”. Through a tight selection, financial planners should find insurance agents to join their team and call them financial consultants. Their job is to refer clients to financial planners. The referred client will receive a free one-hour meeting with the planner to gain understanding of financial planning and to decide whether it is a fit for them. If the client decides to develop a plan, the planner will take over the relationship. In order to join the financial consulting team, the insurance agent must agree with the value of financial planning and be willing to learn the basics about it. Once the financial planning is done, the financial consultant will receive part of the fee as a reward for the referral. The planner is in charge of providing comprehensive planning including a recommendation for an insurance product, which will be sold by the financial consultant.

In this business model, the financial consultant shares the referral fee and the planner or firm does not share the product commission. The product commission will most likely be more than the referral fee and it might seem unfair for the planner, but this is the only workable business model for financial planners right now. If we aren’t competing with insurance agents for product sales, then we position ourselves to be a center of influence or they might be more willing to become financial planners in the future. This is a quick strategy that could expand our influence to the whole financial industry. If financial planning can get a bigger following of people, then the financial services environment might start to benefit us. Financial planners should not only focus on the group of CFP professionals when considering developing the profession. Instead they should extend their outreach to recruiting more people to join the industry.

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