If you weren’t aware, there are not many financial planners. In Longmont, of 132 securities licensed professionals, only 89 are licensed to give advice, and of those 89, 22 are CFP® Professionals, and of those 22, only 4 are practicing financial planners. In Longmont, MY Wealth Planners® is the only practicing fee-only financial planning firm with a CFP® Professional working with local clients. Yet this problem is larger than Longmont, there’s actually a national shortage of qualified people giving financial advice. The CFP Board reports 98,883 CFP® Professionals nationally, which means there is only one CFP® Professional for every 1,327 households in the United States; if we take Longmont as a non-representative sample and extrapolate it nationally (forgive me for the statistical sin, but take it as a very rough approximation), then there is one CFP® Professional practicing financial planning for every 7,302 households.
To compare all of this, there are 1,100,101 licensed and practicing physicians in the United States, or one for every 119 households. We often talk about the shortage of doctors, the long wait times, the short service times, and so on, yet the number of licensed healthcare providers vastly outstrips the limited supply of qualified financial advice-givers.
“And what’s the problem?” You might ask. Well, last week, we released a Fleece Vests episode about unregulated financial advice, specifically calling out the serious harms that unqualified parties giving financial advice or financial education can cause, let alone those who are simply dodging regulation or are operating under the guise of “education” rather than advice. However, that problem has arisen largely because of the shortage of qualified people giving financial advice. So this week, we’re discussing the financial advice shortage, the impact qualified financial advice has, and the issues and opportunity costs that arise in its absence.
How bad is the financial advice shortage?
In the intro, I shared the gross number of CFP® Professionals and pointed out that while there is a healthy number of them, many do not practice financial planning and the ratio of financial planners to clients is not manageable. To give you a peek, most financial planners will cap their clients at between 80 and 100 client relationships. Further, many financial planners seek to create what we call a “lifestyle practice,” in which they work with 40-50 ultra-affluent clients in a select and specialized niche, thus serving even less than the typical planner’s cap. Consequently, the average CFP® Professional and financial planner serves clients in the 94th percentile of overall wealth (net worth) and the 89th percentile of income, leaving the 93% less-wealthy or 88% lower-earning of the population to seek other sources of financial advice.
Worse, despite growth in the CFP® Certification over the past several decades, the larger profession of financial advice professionals is shrinking. Cerulli Associates, a research firm specializing in wealth management firms and the larger financial industry, projects that 109,093 financial advice professionals (37.5% of the headcount) will retire by 2034. While the CFP Board is “minting” approximately 6,000 new CFP® Professionals in the United States annually, this means we can expect a 49,093 decline in financial advice givers, even as the population is expected to grow by an additional 8,846,153 households over the same time period. In other words, if CFP® Professionals follow the broader industry attrition rate, we can expect that access to advice will only have improved to one CFP® Professional per 1,062 households, and only one client-serving CFP® Professional per 5,842 households.
The Intervention of Financial Advice
Some reading this might be sitting there saying “Well hold on just a moment. Comparing financial planners and doctors, talking about huge shortages even though it looks like the numbers might get better over the next decade, what’s the big deal?” That’s a fair question. To explain, let me talk about this in terms of my own journey into becoming a financial planner; or perhaps more broadly, my family’s journey with financial planners.
When my parents got married in the 80s, their combined income was $30,600 a year ($87,682.14 adjusted for inflation). By the time they retired from public service in the 21st century aughts and teens respectively, their combined income had grown to about $158,000 annually. This means that on that income and with the gentle raises afforded to public employees over the years since, they managed to help put three kids through college on Series EE savings bonds and their personal savings and put together an adequate retirement for themselves. Despite what anyone might describe as a successfully managed financial life, I would argue that they benefitted from “working harder, not smarter.” Mind you, that’s not a criticism. They simply weren’t in the 89th percentile of income or the 94th percentile of wealth. They were the type of folks to be turned away by a financial advisor working in a bank branch, not the type of folks to receive warm invitations to golf outings or to be on the list for VIP prospecting events by wealth managers. They were, and to this day are, everyday folk.
Yet, my family would have benefitted enormously from the help of a financial planner. They would have been told about the potential returns from the 529 College Savings plans in California and then Colorado and the tax benefits of contributions in Colorado. They could have been advised about the tradeoffs between buying years in their pensions versus contributing to deferred compensation or other contribution retirement plans. Their retirement, while reasonably secure and well-established, could be that much more so had they had the benefit of competent and ethical financial advice throughout their working years, rather than at the precipice of retirement and by an admittedly green financial planner (hi, it’s me.)
Even a limited engagement financial plan could have made an enormous difference in my family’s lives, not just that of my parents, by those of my siblings and extended family. Yet, in a world of financial planners who are seeing significant retirements across the broader industry, the trend in services is not to provide limited engagements or one-off advice conversations, but rather, to provide long term ongoing services, which many families frankly cannot afford. Even though a singular “intervention” (to use the academic parlance) would be hugely valuable for many, it’s simply not in the economic of personal interest of many financial planners to do so.
The Opportunity Costs in Lacking Financial Advice
All of this said, what is being missed out on when the average member of the public isn’t able to easily access financial advice? Let me give you one illustrative example of one of thousands of financial issues financial planners often help with:
A common piece of advice for many people, even when they’re young, is to save 10% of their income. Whether this be in a savings account, 401(k), etc., most of us have heard this. Yet, this is unlikely to be sufficient for an ambitious household. Let me explain: Imagine you are earning $50,000 at the start of your career at the age of 25. Whether you earn this individually or as a shared income with a partner isn’t terribly relevant. Now imagine that you’re saving 10% of your income. Every decade, you get a raise of $50,000, so that at age 35 you’re earning $100,000, at age 45 you’re earning $150,000, and at age 55 you’re earning $200,000. Not bad! If you’re saving 10% of your income the whole time and earning an average return of 8% after expenses, you’ll have saved up $2,335,976.62 over forty years. Assuming a 5% rate of return in retirement, 3% inflation, and a 20 year retirement, this will afford you a retirement income of $139,352.95, which in today’s dollar’s would be $42,719.60, or a pre-retirement income replacement of only 21.35%. Not so great.
A financial planner might be one of many possible interventions that could suggest an alternative saving strategy: Save 10% of your income to start, but upon each raise of $50,000, save 50% of your new raise. This means saving $5,000 annually for the first decade, then $30,000, then $55,000, then $80,000. Given the same rate of return assumptions, this means you’d retire with $6,084,262.16, and your retirement income would be $362,957.34 per year, or $111,267.06 in present-day value, an income replacement of 56.63%. Is it the 100% you might hope for? No, but this ignores external financial resources such as social security, pensions, or home equity as other sources of retirement income, which very well may fill the gap.
So imagine: if one extremely common piece of “good” financial advice is going to result in a massive retirement savings shortfall, what else might you or anyone else be missing among the thousands of financial issues and factors that can impact your life on any given day, in any given year, over any given lifetime? That is why the shortage of qualified financial advice professionals is a challenge, and one we must continue to address for the benefit of the public. This is why a core mission of MY Wealth Planners® is to serve as a teaching hospital, helping to onboard students and career changers into the field of financial planning and to better expand access to financial planning not just for the 89th and 94th percentile.