AT THE FEDERAL LEVEL, the SEC uses the services provided approach to define financial planning in these terms:
Financial planning typically involves providing a variety of services, principally advisory in nature.. regarding the management of.. financial resources based upon an analysis of individual client needs. Generally, financial planning services involve preparing a financial program for a client based on the client’s financial circumstances and objectives. This information normally would cover present and anticipated assets and liabilities, including insurance, savings, investments, and anticipated retirement or other employee benefits. The program developed for the client usually includes general recommendations for a course of activity, or specific actions, to be taken by the client. For example, recommendations may be made that the client obtain insurance or revise existing coverage, establish an individual retirement account, increase or decrease funds held in savings accounts, or invest funds in securities. A financial planner may develop tax or estate plans for clients or refer clients to an accountant or attorney for these services.
“The provider of such financial planning services in most cases assists the client in implementing the recommended program by, among other things, making specific recommendations to carry out the general recommendations of the program, or by selling the client insurance products, securities, or other investments. The financial planner may also review the client’s program periodically and recommend revisions.8
To summarize, the SEC defines a financial planner as a person who does business in the following manner:
• Provides advisory services regarding the management of financial resources
• Provides analysis of individual client needs • Prepares a financial program based on the client’s financial circumstances and objectives, including:
– present and anticipated assets and liabilities
– insurance
– savings
– investments
– retirement and employee benefits.
The SEC staff believes most financial planners also:
• Provide special recommendations for client action
• Assist the client in implementing the recommendations
• Periodically review the program and recommend revisions.
STATE DEFINITIONS OF financial planners vary considerably and utilize either or both of the two basic precepts: holding out and in the business.
Maine seems to use both the holding out and the in the business concept by defining a financial planner as “a person who provides a variety of services, principally advisory in nature, to consumers with respect to management of financial resources based upon an analysis of individual consumer needs.” 9 Under this definition, “financial planner” includes, but is not limited to, persons “who designate themselves financial analysts, advisers, consultants or planners, financial management advisers, securities or investment analysts, estate planners or other such terms.”
Maryland, on the other hand, uses only the holding out definition. It requires all who hold themselves out, among other things, as “financial planners” to register as investment advisers.10
Minnesota also uses a holding out approach, and its regulations and statutes incorporate a very broad definition. In this state, a financial planner is any person who indicates he or she is a “financial planner, financial counselor, financial adviser, investment counselor, investment adviser, financial consultant, estate planner, or any other similar designation.”11 Thus, financial planners are all who hold themselves out using one of these magic words on their business cards, letterheads, signage, or yellow page advertisements.
Some years ago, a large brokerage firm in Minnesota took the position that its registered representatives were stockbrokers and did not provide financial planning services. As a result, the firm did not consider them financial planners. This analysis may have been correct under SEC regulations or the IAFP’s definition discussed below. However, those definitions did not apply to the state’s law. Because the brokerage firm was calling its registered representatives financial consultants, the Minnesota Department of Commerce found those representatives were indeed financial planners, whether or not they actually did financial planning. Not only were these brokers miraculously transformed into financial planners, suddenly they also had a statutory duty to act as fiduciaries rather than just sales representatives. The firm also received a $30,000 fine for failing to provide certain paperwork to its clients, another state requirement of financial planners.12
The vast majority of insurance agents in Minnesota believe they are plain-vanilla life insurance agents. However, almost all of them provide estate planning services. After all, the two purposes of insurance are to build an estate and to preserve an estate. It would make sense that anyone selling this kind of insurance would be an estate planner. However, “estate planner” is a magic phrase under the Minnesota definition of financial planners. Most life insurance agents are surprised to find they are considered to be financial planners because they do estate planning.
Although Minnesota life insurance agents often find themselves classified as financial planners under their state’s specific law on that subject, those living elsewhere should be aware that their state’s insurance laws may also define financial planning. Generally, these statutes describe whether or not an agent qualifies as a financial planner.
What about persons who do not practice financial planning but have the designation “Certified Financial Planner,” “Chartered Financial Consultant,” or “Personal Financial Planner” even if they are not actually in the business of planning? One might argue that any one of these titles makes them a financial planner in Maryland even though they are not actively in the business of doing planning. That is the interpretation made by Jacqueline H. Hallihan, President, and Robert Stirling, Associate, of National Regulatory Services, Inc.13 According to them, two states, Maryland and Washington, have gone further than the SEC and have stated that simply using the CFP licensee designation after one’s name is “holding one’s self out” as providing investment advice.14
What are the laws in your state? It can make a big difference in how you practice your profession. Call or write your state departments of securities and insurance to request a copy of their statutes and rules on financial planners and advisers. Specifically ask them how they define financial planners and whether there are any special legal requirements. You might be surprised to discover how your state departments of securities or insurance define the term “financial planner.”
GIVEN THE DISPARITY IN legal definitions of financial planners, it is not surprising that consumers are confused. As Bill E. Carter, President of Carter Financial Management, Inc., sums up the situation, “Many consumers cannot distinguish what it is that makes someone a financial planner as opposed to another type of financial services provider.”15 This confusion is not good for the profession.
In an attempt to clarify these issues, the IAFP established this definition: “[t]he financial planning process involves assessing an individual’s current situation and setting financial and personal goals before implementing financial decisions. It includes identifying financial problems and providing a written plan. The final steps involve implementing the plan and periodically reviewing