Which Firms Are Really Driven by Financial Planning?

What You Need to Know

While consultative selling and financial plan-driven investing have grown dramatically, they are not as widely practiced as you may think.
All investment decisions should be backed by some form of financial plan, but often they are not.
Product-driven investing is increasingly being forced out, largely by FINRA fines.

In 1989, I obtained a securities license through the penny stock firm J.W. Gant, with penny stock firms a common avenue for getting your securities license at the time. These firms were heavily sales driven, with every representative having the book “The Closer” on their desk. (Think of the movie “Boiler Room.”)

One week after getting licensed and observing the representatives at this firm, I left for a sounder financial services foundation to build upon. 

To a large degree, sales techniques are tactics that need to be deployed when you lack a person’s trust. Surprisingly, sales tactics and product selling are still heavily utilized while consultative selling and financial plan-driven investing, although having grown dramatically, are not as widely practiced as you may think.  

Between Regulation Best Interest and the fiduciary standard, technically all investment decisions should be backed by some form of financial plan, but oftentimes they are not. Captive insurance broker-dealers, wirehouses, banks and transactional stock and bond broker-dealers are still common training grounds for teaching aggressive sales techniques and leading with products to be sold. 

As an advisor at a captive insurance broker-dealer explained to me, “I want to grow into wealth management while my broker-dealer is in lockstep with sales of insurance products.”  

Industry Divergence

Herein lies a divergence within insurance broker-dealers, with some such as Lincoln Financial and MassMutual being planning driven and having high numbers of certified financial planners, as well as reps with CLU and ChFC designations, yet others we’ve researched falling flat. 

In doing an analysis of a well-known captive insurance broker-dealer with over 6,500 representatives, we counted 289 representatives with CFP designations and of those, only about half the CFPs were doing advisory business. That equates to one-half of 1% of their representatives having a CFP designation, and a quarter of 1% that have the CFP designation that are also doing advisory business. 

As some insurance broker-dealers resist the conversion to being financial planning driven, independent broker-dealer management increasingly discerns advisors that don’t do financial planning as problematic.   

One advisor shared this about joining an independent broker-dealer and his conversation with the president of IBD. The advisor commented, “Your broker-dealer has some of the best brokers in the industry!” The president responded, “That’s the problem, they’re brokers!” 

What the broker-dealer president was insinuating was that these representatives were sales driven rather than planning driven. When you have investment decisions motivated by a financial plan, you have an advisor that is largely insulated from conflicts with clients and compliance departments, while product-driven sales can be fertile grounds for customer complaints, such as claims of inappropriate investments or a failure of fiduciary duty.  

The Wirehouse Scene

In a recent conversation with an independent RIA, I was reminded how sales driven some wirehouse advisors continue to be. The RIA operated a model that supplied office space, technology and staff for advisors, paying a 65% payout.