From the July 2006 issue of Wealth Manager Web • Subscribe!

A Stand on Standards

How our deeds align with our words makes a statement to the world about what is in our hearts. "I don't like that boy," said my son. "Joshua, that doesn't sound very nice. Is he mean to you or others?" I asked. "No. "Then why don't you like him?" Joshua's response: "He doesn't do what he says he'll do."

Even at the young age of seven, my son already has an understanding of the importance of aligning our words and deeds. Sometimes misalignment is a matter of neglect or unreliability. Other times, a misalignment is the result of misrepresentation or even fraud. No kind of misalignment can be tolerated from practitioners in a profession such as financial planning as it evolves from a sales culture to a publicly recognized profession.

As most of you probably know, the Financial Planning Association (FPA) is suing the Securities and Exchange Commission (SEC) over the distinction between types of financial planners. As I write this in early May, lawyers on both sides have made filings in the case. A reading of the briefs gives one the impression that the issue is quite complex. There are complex issues to be addressed, but at the heart of the matter for the profession is the simple issue of assuring that people do what they say they will do.

For as long as I can recall, there has been an ongoing debate as to how to build financial planning into a profession recognized by the public. The emerging professional culture is very different from the sales culture from which the planning movement was born. Even today, the sales culture dominates, because most practitioners are still simply selling their employers' wares.

There is absolutely nothing wrong with sales per se. People need to buy financial products to achieve their goals. It makes perfect sense that there should be product purveyors who provide advice on what they sell. The professional culture that has grown up in financial planning, however, is focused first on the clients' needs, not the sales goals of the employing firm. The profession is willing to be held accountable to a standard that mandates putting the client's interests first. To many practitioners in America, financial planning represents a higher calling as well as a higher standard. The public is catching on to this, and the planning profession in the U.S. is enjoying unprecedented success. However, the core of the profession is still very small when compared with the number of financial services firms and personnel nationwide. So how do we grow the profession?

There have been two main schools of thought. One is to lower the standards that apply to the practice of financial planning in order to get more people to use the planning process when working with clients. In this scenario, the client's interests would not need to be at the forefront. Proponents contend that there is too much liability risk in adopting a client first standard. Once people get used to planning, the standard could be raised back up. In the meantime, numbers will grow, yielding better awareness and potentially more clout among regulators and legislators.

The second perspective takes the position that without a client-first standard, there is no profession. Proponents of this view believe the public will not accept planning as a profession unless practitioners are actually held accountable for their marketing promises to serve the client's interests. The pitch "I'm on your side and here to help you" simply can't be followed by "but don't hold me to that." Acceptance of accountability to the standards should be the only barrier to entry. Anyone who is willing to meet the standards is welcome. This approach expects the profession to grow as the public and media find people who will say, "I'm on your side and here to help you, and you can hold me to that." Lowering standards serves only to reduce planning to a mere sales technique. This is expected to be a slower path to larger numbers than the other approach.

So which is better: Let everyone in and get them to behave later or only let in those who will behave from the start? My belief is that we must require the client-first standard. If people will not join the profession unless standards are lowered, it is ridiculous to think they will accept raising the standards later. If their numbers do grow dramatically, they will have the power to dictate that the lower standards remain. This will weaken the profession as the public finds that their planner does not need to put their interests first.

The current FPA suit relates to an exemption for brokerage firms from the Investment Adviser Act of 1940 that the SEC put into effect in 1999. Our concern was that the exemption basically allowed sales representatives to market and provide services identical to those provided by financial planners and investment advisors without having to meet the same high fiduciary standard. Instead, brokerages would be held to a lower "suitability" standard. A fiduciary standard requires a practitioner to put the client's interest first. Under the suitability standard, this is not necessary.

Since that time the exemption has gone through a number of changes, but the same basic flaw remained: Yes, the advertising of major firms is almost entirely centered on the quality of their advice and the relationship between client and advisor. And yes, firms present their personnel as trusted partners working for the clients' interests. Yet when firms communicate with regulators, they disavow any responsibility for placing the clients' interests first, citing the exemption and claiming they need only meet the suitability standard.

Regardless of what the court rules in the FPA's suit against the SEC, I believe the financial planning profession has already won in one respect. The consumer media has almost universally defined a "real financial planner" as an individual who will accept fiduciary responsibility in serving the client. Even if the courts allow the exemption to stand, I doubt the consumer media will be offering a different message anytime soon.

The fiduciary standard, however, is only a foundation on which to build. For financial planning to be viewed as the true profession we think it is, practitioners need to be held accountable for all of the financial planning work they do--not just the implementation. Unless you have taken the step to attain one of a handful of designations--the CFP mark being the most prominent--no authority seems to care about what you do in the planning process leading up to implementation. This is precisely why we see so many strategies and products employed that are technically "legal," but simply are not in the client's best interests.

This condition has little to do with compensation, by the way. It is not difficult at all to find people who market themselves as fee-only financial planners with a clear fiduciary duty, but really only provide asset management. Assets do need to be managed, but without the broader context the financial planning process provides, the odds of clients' achieving their goals are diminished significantly.

Putting the client's interest first is an enormous responsibility, and with that comes liability. Firms are wise to respect that. However, if a firm offers its people to the public as trusted advisors, the firm should be willing to have them regulated as advisors and held accountable for putting the client's interests first. In the end, the solution is very simple: Do what you say you will do. Joshua expects no less from us.

Dan Moisand, CFP, is a principal of Spraker , Fitzgerald, Tamayo & Moisand, LLC, in Melbourne, Fla. President of the Financial Planning Association and a two-time winner of the Journal of Financial Planning's national "Call for Papers Competition." he has been listed as one of the country's best advisors in several magazines.

Editor's Note: Mr. Moisand's opinions are his own and are not to be construed as the Financial Planning Association's position.

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