More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
One the things I love most about covering financial planning is the CFP Board. They may be the worst thing to happen to the planning profession since limited partnerships, but I pray that planners continue to keep them around, for the entertainment value alone. I had begun to despair that with the appointment of Sarah Teslik as CEO, the Board had entered a new era of boring professionalism. Then, suddenly, my spirit was buoyed to new heights as those wacky folks in Denver unleashed a staggering one-two combination--Sarah Teslik going off the wall on Nightline and then the baffling proposed revisions to the Board's code of ethics.
In case you missed Teslik's Nightline gig, or the subsequent flurry of e-mailing by CFPs in reaction thereto, here's the skinny. She was asked to testify before the Senate Banking Committee on financial literacy. Her message was that financial literacy just isn't working: people are bombarded by financial information, yet studies show that 70% of Americans spend more than they make, as the personal-debt-to-income ratio has doubled in the past 10 years.
In her remarks she might have suggested the logical next step: Because people often respond better to personal interaction rather than data dumps, perhaps we need to find a way to hook up professional financial planners with more people who need their help. She even used parallels between debt on the one hand and physical conditioning, diet, and alcoholism on the other. Yet she never drew the obvious conclusion that in those cases, people tend to be far more successful with interaction from the equivalent of a financial planner: an AA sponsor, a nutritionist, or a personal trainer.
Instead, her testimony on May 23 took a bizarre twist: "All around us a revolution in science is occurring that can help translate the excellent financial literacy and financial planning work that has already occurred into better results....The implications of behavioral finance and neuro-economics go much farther and some of the design suggestions they make, however unnerving they may at first seem, are exciting."
Yes, you read that right: "...however unnerving..." Then, possibly for my personal entertainment, Teslik made the leap from science to science fiction: "There are chemical problems, biological problems that lead us to be consumers today... Medication's a possibility. Another...one is gambling. Gambling works. People love gambling... We could have people contribute to their pension plans, to retirement plans...And all of it gets divvied up into the pension funds, except for $100 million, which someone wins as a lottery at the end of the year."
You got it: America's personal debt problem is caused by chemical imbalances that could be corrected by drugs or gambling. You just can't make this stuff up. To be fair, there are some academic studies that are beginning to point in these directions. But do we want the CEO of the CFP Board suggesting what one can only call radical theories, such as these as solutions, to the U.S. Senate? Or to the public on national TV? As a fledgling profession struggling for credibility, this association with the lunatic fringe combined with the lost opportunity to suggest competent financial planning as the real solution has to be considered one of the industry's all-time PR disasters--right up there with the dog that Forbes successfully enrolled as a member of the IAF back in the day.
About Those Ethics . . .
Hard as it is to believe, Teslik's testimony was only the setup jab in the CFP Board's recent knock-out flurry. The haymaker came in the proposed ethics revisions that were released at the end of July.
There are some good things to be said about the new standards. For instance, they are shorter than the old version. The new version also eliminates the two-tier standards of the older version: one for all CFPs, and one for CFPs who identify their services as "financial planning."
One might rightly ask why a certified financial planner would need special standards if they hold themselves out to be a "financial planner?" I told you, these guys are a jaded journalist's dream. The best I can tell from various answers I've received over the years is that some CFPs, such as academics, don't practice financial planning and therefore shouldn't be treated the same as CFPs who do. It's also been suggested to me that CFPs whose employers don't allow them to offer planning should have a lower standard.
Call me cynical, but I have to wonder whether folks who get to use "CFP" on their business cards but aren't held to "financial planning" standards have at least the potential for deceptive marketing. At the risk of taking some of the fun out of the Board, here's a suggestion: Rather than write standards for all possible variations of CFP certificants, and then higher ones for practicing financial planners, wouldn't we be better off rightly assuming that the vast majority of CFPs are practicing planners, and writing the standards appropriate for them?
In its new proposed standards, the Board attempts to solve the problem by requiring planners to have a more comprehensive engagement agreement with their clients. Since only practicing financial planners will have clients to engage, this would seem to solve the problem for exceptions such as academics.
Yet by focusing on a detailed client agreement, the proposed standards put a much greater emphasis on "disclosure and transparency," as CFP Board chair Bart Francis calls it. The problem is that when it comes to personal finance, disclosure doesn't really work (see "Disclosure Diversion" sidebar). "What you're really asking," says Francis, "is whether disclosure and transparency are effective means of protecting the public. That's a fair question." I tell ya, these guys are killing me.
Which brings us to the best part: The fiduciary duty clause of the proposed standards. The old standard required a fiduciary duty only of CFPs who take custody of client investment funds, which is to say, virtually nobody. Under the new standards, Rule 1.1e states: "It will be presumed that the duty of care of a fiduciary is to be applied to the professional judgments made by the certificant pursuant to the agreement unless the parties specify in their agreement a different legal standard governing these actions."
On the surface, this looks pretty good: The Board assumes financial planners are fiduciaries. Yet the ability to avoid fiduciary duty simply by getting your client to sign off is a loophole large enough to drive the 5th Armored Division through.
Consider how this would work in practice. If CFPs were required to present their clients with a form that stated: "I understand and agree that as my financial planner you will have no fiduciary duty toward me and therefore you will be under no obligation to offer advice that's in my best interest, nor to put my interests before your own or those of your firm," then maybe it would work.
But who would sign a document worded this way? Most people may not understand what a fiduciary is, but they certainly want their financial advisors to have a duty to put their interests first. So who would ask their client to sign such a document? Again, no one. Instead, clients might get something as simple as a one-page document listing all the "duties" the advisor does have to the client, but omitting a fiduciary duty.
I've been around too long to believe such a disclosure would work to the client's benefit. In the vast majority of normal planner-client relationships, giving CFPs the ability to get their clients to opt out of a fiduciary duty is tantamount to giving stockbrokers and anyone else who cares to use it the right to hold themselves out as a CFP while adhering to far lower standards. Does this start to feel like CFP Lite all over again?
I spoke to Francis, who assured me that someone using the non-fiduciary option to obtain an unlevel playing field had never occurred to the Board in the two years they were drafting the proposal: "We're charged with raising the bar for certificant ethics and conduct, and I think we've done that," he said. "We don't think about how stockbrokers might use them to their advantage or what the public might think."
I've been talking to Board chairs for a long time, and Francis comes across being as honest and straightforward as anybody who's ever held the job. So I'm inclined to take him at his word. Which is even more troubling--and entertaining--than the alternative. Can the experienced financial planners who dominate the CFP Board really be so na??ve, so focused on their own mission, that they don't consider how their standards will affect the bigger picture of professional financial planners trying to establish a level playing field with other so-called "advisors?" If so, that might explain why medicating folks and getting them to gamble to lower their debt would seem like a good idea.
Bob Clark, a former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at email@example.com.