Wednesday, March 7, 2012

More on CFPs and RMAs

Kay Conheady, CFP®, who operates the very informative CAPE Research Catalog website, and who has written for Advisor Perspectives, provided the following comment at my "CFPs and RMAs" blog entry: 

I'm a CFP (finished experience requirement in 2007).

I didn't hear about the Trinity study until I read your JFP article last year!

We were not even so much as introduced to CAPE ratios nor did we receive any training in the components of stock market returns (yield + earnings growth rate + changes to P/E multiple). The investment course was all about MPT. The course work definitely needs to change so it includes these topics and builds savvy in forecasting future market returns.

Dick Purcell, through his posts at, introduced me to the idea of risk being the risk of not reaching your goals. The CFP course work also didn't introduce us to the idea that the longer the investment horizon the higher your risk is of not reaching your wealth accum goals - also tripped upon this at Dick's website. Again, the CFP course work needs to change to include more about retirement planning - about sequence risk, safe withdrawal rates etc.

Adding this subject matter will increase the amount of time the average CFP aspirant takes to finish the course work...but will ensure that person is much more expert out of the chute!


Don't worry anonymous commenters, she did approve for me to provide her fully identifying information. I don't have any way of knowing who you are if you wish to post anonymously.

Thank you, this comment is very helpful for me to understand more about the CFP designation and how it may be improved, or also how alternatively the RMA designation could serve a role to fill in some of the missing pieces.

It does seem that the CFP education materials are missing some key details. There is so much more to retirement planning than just knowing about the tax-code savings vehicles. Retirement planning is about building investment strategies that will best help you to reach your retirement goals. Retirement advisors should understand the concept of goals-based investing, which is described very well in this article by Dan Nevins, and which I also described in my review of Risk Less and Prosper at Advisor Perspectives. That review starts with:

Little of what is taught in traditional investment textbooks is of value in personal financial planning. Risk is not standard deviation; it is the probability and consequences of not meeting one’s goals.  That real-world perspective animates a new book by Zvi Bodie and Rachelle Taqqu that implores advisors and their clients to lock in the funding of their essential expenses before worrying about their discretionary goals.

And though I thought that all CFPs would know the Trinity study, that may not really be the case, and even more, the education program does not give background for understanding my primary concern about the success rate tables found in the study.  This is how I summarized the argument in "Can We Predict the Sustainable Withdrawal Rate for New Retirees?" :

Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study. Studies such as those are fine for what they accomplish: they show how successful different withdrawal rate strategies were in the historical data. But it must be clear that this is not the information that current and prospective retirees need for making their withdrawal rate decisions. John Bogle makes clear why in his 2009 book, Enough. Though he was speaking about stock returns, the same idea applies to sustainable withdrawal rates, since they are related to the returns of the underlying portfolio of stocks and bonds. He wrote, “My concern is that too many of us make the implicit assumption that stock market history repeats itself when we know, deep down, that the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns” (page 102, original emphasis).

Future stock returns (and, therefore, future sustainable withdrawal rates) depend on the sources of returns: dividend income, growth of the underlying earnings, and changes in the valuation multiples placed on those earnings. The historical average success rate for a withdrawal strategy is not the information retirees need to know when determining their forward-looking sustainable withdrawal rate. As Mr. Bogle also writes, “But no, the contribution of dividend yields to returns depends, not on historic norms, but on the dividend yield that actually exists at the time of the projection of future returns. With the dividend yield at 2.3 percent in July 2008, of what use are historical statistics that reflect a dividend yield that averaged 5 percent - more than twice the present yield? (Answer: None.)”

Thank you again Kay. I hope something can be done to improve the curriculum for CFPs, and it would be great if the RMA program could play a role in this process as well.  If something needs to be cut from the CFP curriculum to make room for the new material, I suggest that planners can probably help their clients very well even if they have no idea what a Treynor ratio is (that is in the curriculum, right?)


  1. Wade,
    Treynor, Sharpe, efficient frontier, risk adjusted return. All there.

    Might be worth noting that I took the CFP course work in 2000-2003 - I suppose it's possible it has been supplemented since then.

  2. Wade and Kay --

    The CFP "investment training" is anti-fiduciary! Not just irrelevant, but instead mis-trains planners to divert clients from pursuit of best prospects for their futures, to approaches more favorable for the financial industry and academics.

    Wade, I can't resist your concluding reference to the Treynor ratio. A while ago I scoured the two versions of the CFP exam offered at the CFP Board website, looking for tests in comparing investments and identifying the "best" in probabilities for future results. The only one I could find presented four investments -- and scored as correct the answer choosing the investment with the highest Treynor ratio! I then compared the four for a simple plan, and found that the so-called "correct" answer rejected an investment with 90% goal-meeting probability in favor of one offering 50%.

    It's really scandalous that those CFP Board people are spending their time telling the public they are training "fiduciaries" and lobbying for the fiduciary standard instead of correcting the anti-fiduciary nature of their investment training. They are a terrible danger to all CFPs as well as the public.

    Dick Purcell

  3. Wade and Kay --

    Leading CFPs are so far beyond the CFP investment training's mis-focus on the single-year abstractions of MPT. But the CFP Board continues to guide 200 schools in filling the heads of waves of new CFPs with the MPT diversion.

    It certainly is not fiduciary to divert client attention to the individual year, where she cannot see what's best or worst in prospects for her future, and also cannot see the long-term cost of excessive fees.

    Isn't this a threat to the profession, to all CFPs? Why do leading CFPs let it continue?

    Dick Purcell

  4. Thanks to both of you.

    Planners do need some basic understanding of MPT. Efficient frontiers, risk-adjusted returns, and so on are important to know about. In fact, I used the concept of efficient frontiers applied to a long-term retirement horizon to investment safe withdrawal rates and asset allocation:

    But for long-term planning purposes, the general framework should be rather different from basic MPT. As Dick suggests, the investment strategy that maximizes the single-period Treynor ratio may not be the one that provides the best opportunity to reach one's financial goals. In the end, meeting goals matters more than maximizing the Treynor ratio.

  5. Wade
    I’ll weigh in with even more detail.
    This is just as introduction only, not ego:
    See “blog” at
    Finished “Financial Planning Fiduciary Standards under Dodd Frank” (2012) Now on Amazon
    This is the complement to two video courses approved by the California State Bar for Continuing legal Education
    Fiduciary Standards Dodd Frank: investments
    Fiduciary Standards Dodd Frank: Insurance and Annuities
    See also

    For over 20 years I have tried to get the various organizations and regulatory entities (are there any?) to adhere to even suitability standards. Not even close. I was a CFP from 1984 to 2010 where I simply terminated the ‘designation’. I have taught most financial planning, investment and insurance continuing education courses and on and on

    Bottom line- the fundamentals of investing have never been taught to a broker. It is simply not required for testing. No diversification, correlation, standard deviation, retirement planning, risk of loss and more. Actually, CFPs are not taught much either. I got mine in 1984 and said, “I don’t think I know that much” (I was right).
    Insurance is an absolute minefield of exponentially increasingly complex products that are not addressed (Ca does not required insight on product illustrations. Nor even longevity tables) Consumers are universally lost.
    The CFP does require one to learn the risk of loss. No software program or simplistic retirement analysis can ever present any type of return without numerically stating how much one can lose if the volatility does not conform to the simplistic Bayesian curve. And so on.

    Some of this might look pretty impressive- save for the fact that no one cares. NAPFA, CFP Board of Standards, CPA society et al have violated California laws for years. The CA Department of Insurance told them to get licensed if the wanted to offer comprehensive fee planning. Not one did and the CFP Board actually told members to keep violating the law but to keep quiet about it. I lost that one

    Fought with the NASD, FINRA, SEC (directly with Schapiro) to demand brokers get the necessary knowledge to protect consumers. Even to basic suitability standards. Not even close. Lost another

    Tried to get the NASD, FINRA to get arbitrators trained to the fundamentals of investing as well since most arbitrations are not based on real world application. Lost another.

    Really went after the CFP Board to adhere to its own fiduciary standards at the Board level. Lots and lost of wasted ink. They sheltered a CFP who had agreed to pay a $300,000 settlement. He walked away scott free.

    Tried the Florida Dept of Financial Services. After years and years of diddling till they got to the guy- they then said too much time had passed to do anything (Unbelievable).

    My recent text covers what is needed for real life fiduciary knowledge. The DOL said that, while nice, they’d just wait for the subsequent claims to alter the industry. (Oy!!!) NASAA- nothing? Nor FINRA, SEC (though not necessarily unexpected)

    Wade- probably what I think I would like is to communicate with you directly. I spent most of my adult life trying to make a difference for consumers and maybe we can help each other. We are both trying to focus in the same direction and maybe something can work