Many financial planners share traits that distinguish true professions from industries: Advanced academic training, standards of practice and conduct, and a determination to serve a higher calling such as public service, to name a few. But unlike law and medicine, financial planning does not restrict entry to the profession. Sure, you must be licensed to sell something or give investment advice, but piecemeal regulation of financial planning's subsets does not preclude anyone from giving overall financial planning advice. That makes it hard for the public to tell the white hats (those who adhere to the financial planning process) from the black hats (those who masquerade as financial planners merely to sell their company's products).
If a financial planner is a registered investment advisor, he or she is governed by the Investment Advisers Act of 1940 and is obligated to meet fiduciary standards--in other words, to act in the client's best interests. But for years, many brokers have provided virtually identical financial planning advisory services without being subject to the Act, and they did it with the Securities and Exchange Commission's tacit approval.
One result of this was the SEC's controversial ruling: "Certain Broker-Dealers Deemed Not To Be Investment Advisers." Many refer to it as the "broker-dealer rule," but I'll just call it "Rule 202" for brevity's sake. Although it included language designed to discourage registered representatives and others from holding themselves out to the public as financial planners unless they are dually registered, the rule's vague, confusing language has resulted in vast loopholes. Nearly 2,500 people and organizations filed comment letters with the SEC regarding the rule after it was proposed. Almost all the comments--including those from major consumer groups--opposed the rule. Recent surveys clearly support the idea that registered representatives and agents who are members of FPA believe planning to be a professional discipline and they support a fiduciary standard for practitioners.
The rule also failed to address a significant concern: If you're a broker/dealer whose financial planning practice is deemed "incidental" by the SEC, you still get a free pass on fiduciary requirements. That doesn't automatically make you a bad person or a bad planner; it only means the bar is set lower for you. How many brokerage clients would be happy if they knew that? Not many, according to recent studies.
One 2006 survey found that 43 percent of investors were unclear about the differences between stockbrokers and investment advisors offering fee-based advice. After being shown the standard disclosure brokers are supposed to include in account applications, advertisements and sales materials for their fee-based accounts--the one that states that the investor's and broker's "interests may not always be the same"--79 percent of the survey respondents said they would be less likely to seek advice from brokerage firms.
Dual standards mislead the public, which already has trouble telling responsible financial planners from ardent salespeople posing as planners. But dual standards are also bad for business. Those who bury potential conflicts of interest in fine print or who otherwise try to evade the differences in accountability between advice and sales invite negative publicity. They risk misunderstandings with clients that can turn explosive later. Ultimately, they risk losing the trust of their clients.
So, here's the situation: We're stuck, for now, with a rule that almost no one likes--a rule that burdens brokers with embarrassing disclaimers but fails to clarify very much for the consumer. Brokers and RIAs are suspicious of each other's motives. To top it off, the CFP Board's recently proposed changes to its Code of Ethics and Professional Responsibility were inconsistent with how the core of the financial planning profession views its responsibilities. The financial planning profession is walking a tightrope between public confidence and public distrust; this is no time to appear shaky. It is, rather, a time for dialogue and a commitment to high uniform standards.
Fortunately, the dialogue has begun in several different venues within FPA and includes anyone who expresses an interest. Broker/dealers must continue to play an integral role in delivering financial planning to the public, shaping the profession and providing career opportunities for up-and-coming financial planners. Half of FPA's 28,000 members are affiliated with broker/dealers and are subject to the same Rule 202 requirements. FPA wants registered reps to do financial planning; we are simply insisting that all planners be held to the same standards.
Brokers reluctant to get on board the fiduciary train are setting themselves up to be easy targets. Shrewd firms with registered investment advisors are eagerly creating marketing materials, explaining to prospective clients why RIAs must meet higher standards than brokers. Why position yourself as less than clear about your role and your accountability?
Responsible brokerage firms are working to give their reps the support they need. Some have indicated that they will register their sales reps as investment advisors when offering financial planning services. Many firms, large and small, share FPA's commitment to deliver effective, competent, ethical financial planning. Many FPA members, including the registered representatives at these firms, already conduct themselves like fiduciaries, putting the client's interest first, regardless of whether or not they are legally required to do so.
Any assertion that broker/dealer firms cannot allow reps to be fiduciaries is simply false. Most broker/dealer firms already allow their reps to serve as fiduciaries by dually licensing them as investment advisor representatives, usually to facilitate financial planning, investment advice, or offer wrap-fee programs. Another common scenario occurs when NASD firms permit many of their reps to establish their own RIA specifically in order to facilitate planning.
Since at least the 1987 release of IA-1092, the SEC has maintained that holding [oneself] out as a financial planner triggers the need to register as an investment advisor. Though weak in some areas in my view, a December 16, 2005 interpretation letter surrounding Rule 202 from the SEC to the Securities Industry Association did clearly reiterate this position. Investment advisors are fiduciaries.
The SEC does NOT prohibit an RIA from working for/with a broker dealer, insurance company or other firms. They do require disclosure of such relationships in Form ADV. FPA agrees with the SEC that RIAs should NOT be prohibited from having such relationships, and we agree they should be disclosed.
The law of the land allows reps to "switch hats" to a non-fiduciary status with adequate disclosure. While there is certainly plenty of room for debate on what, exactly, "adequate disclosure" is, a framework already exists for handling potential conflicts. It isn't perfect, but it does exist. Now, whether a particular broker/dealer firm will allow a particular rep to utilize this existing framework to practice as that rep would want is a whole other issue.
I worry a lot that some reps will find themselves in an untenable position if their firm makes a poor choice in this regard. Make no mistake, however; it is the firm's choice and not the doing of the SEC, FPA, CFP Board or any other party. I am comforted knowing that many firms have realized that planning is great for the client and thus for their reps' businesses, and these firms work to help establish sound processes to manage the liability that comes with the responsibility.
I hear now and then from reps who are adamant that they already conduct themselves as though they would be held to a fiduciary standard, but oppose imposition of a fiduciary standard. I can't help but wonder how being required to do what you already do would represent any kind of burden at all. Even more puzzling: If you do what you say you will do, why wouldn't you want those that don't do what they say they will do to be held accountable? With a lower standard, they have that "out."
As long as you act professionally, provide full and fair disclosure and adhere to a high standard of care in the services you provide, there's a valued place for you in financial planning. It's time for all who fancy themselves a financial planner--regardless of other labels or place of employment--to commit to appropriate standards for the authentic financial planning process, the process that places the client's interests at the top. It's just plain good business.
Dan Moisand, CFP, is a principal of Spraker , Fitzgerald, Tamayo & Moisand, LLC, in Melbourne, Fla. and President of the Financial Planning Association. Editor's Note: Mr. Moisand's opinions are his own and are not to be construed as the Financial Planning Association's position.