Updated Friday, July 11, 2014 as of 4:01 AM ET
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Sounding Off: Mandatory AUM Tax?
Financial Planning, On Wall Street, Bank Investment Consultant and Money Management Executive
Friday, January 25, 2013
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Professor John Grable touched a nerve when he suggested in Financial Planning’s current issue that a mandatory AUM tax on advisors could help make financial planning available to all American families. Actually, he touched a lot of nerves.

The University of Georgia CFP argued that a Financial Planning Service Insurance Fund should be created – with the cost underwritten by advisory firms. As he sees it, a new Office of Financial Planning Reimbursement should be established that would distribute planner reimbursements based on an insurance claims model, with payments capped at about $25 per hour.

“Clearly, an educator can't have this keen a sense of humor or realize how laughable government run projects are. Then, I realized, as a chill crept down my spine: This guy is serious. Ouch,” wrote Dan Hawtree, a Monee, Ill., planner and CPA.

Others were harsher.

Planner Peter Prescott, also a CPA, at Prescott Tax & Wealth Management in San Juan Capistrano, Calif., said, “My initial reaction would be an alternative solution: Tax all college professors who make more than $52,000 per year ($25/hour x 2,080 hours per year) since they are in the education business and have guaranteed pensions not available for private-sector planners.  This pool of money can then be used to pay recent graduates who just completed their master’s program in business, financial planning or a related field. Although similar to Mr. Grable recommendation,” Prescott added, “I realize Mr. Grable might find this flat tax an additional burden and deem it to be socialist in nature.

“An alternative approach might be to let new, inexperience financial planners work with low- to middle-income clientele to develop their skills and practice.  In this approach, the subsidy of $25 per hour would not be necessary since they would be able to sell financial products that would pay commission income in the range of $25 per hour.  Not surprisingly, this is the current approach in the marketplace.

“If the desired objective is to provide truly free service to low-income individuals and families on a no-load basis, then the best pool of practitioners would be volunteers who provide financial planning services for free as a community service.  I am confident there are numerous skilled planners available as more baby boomers reach retirement age. In either of my recommended approaches,” Prescott concluded, “I don’t advocate the establishment of a flat tax or another layer of bureaucratic administration.”

In his proposal, Grable noted that, last year, “Financial planners and associated advisors managed $43.8 trillion in household wealth. A flat-tax equivalent to 1cent for every $10,000 in AUM would generate $43.8 million annually. A binding contribution of this magnitude is probably less than the total labor value associated with pro bono efforts currently underway nationwide. Obviously, $25 an hour does not provide enough income to support a large planning practice. It does, however, provide a base level of income for those interested in providing financial planning, counseling or some life planning solutions as an aspect of a more expansive practice. The reimbursement pool also offers a platform for new advisors to build a practice that includes middle- and low-income households. Those markets are indeed underserved, but not undeserving,” Grable said.

Despite the criticism, Grable says he is “encouraged about the discussion this proposal has generated. He notes that his concept stems from three observations:

  1. The financial planning process is effective,
  2. The vast majority of middle- and low-income American households are underserved by the financial planning profession and
  3. "Financial planners actually care about observation No. 2.”

He worries that the negative responses “implies that the financial planning process is not a societal good, but rather an elitist service. … If the profession continues down its current path, outside observers will rightly conclude that financial planners are similar to hedge fund managers and investment bankers. With this perception will come increased regulation and oversight, enhanced continuing education and ethics requirements, and increased fees. All of this,” Grable adds, “will be imposed from the outside. I continue to ask, if the planning process is effective, why not create a professional response to meeting the financial needs of all Americans?”

Read John E. Grable's latest article, Financial Planning for All: An Insurance Solution

What do you think? How do you feel about this issue?

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