From the April 2007 issue of Wealth Manager Web • Subscribe!

Not Quite Crystal

Because the roof of our house is more than 45-feet high, we had hired a handyman to put up our holiday lights. After New Year's, he returned to take them down--after three attempts to reach him by phone. And--to the astonishment of my wife, Kelly, who had hired him--he wanted more money to do the job. I have no doubt that the original arrangement was that the money he had already received was to be his compensation for both the installation and the removal of the lights, but without a written agreement there was no way to truly prove that point. Not long after that incident, my office manager informed me that I was getting a new password for one of the companies we do business with regularly. Before I could access the system, I was instructed to click a box indicating I had read, understood and agreed to the terms of an accompanying disclosure. It didn't take very long before I got tired of reading. The slide at the side of the screen had barely budged from its starting position. I simply stopped reading and clicked that I agreed. In a short span, I had two real-life examples of the importance of effective communication and the limits of disclosure.

These two incidents highlight the disclosure issues consumers face when establishing an engagement with a financial professional today. The importance of effectively defining the scope of the engagement cannot be understated. In fact, this is a reason that the CFP Board's very first practice standard 100-1 focuses on this critical initial step in the financial planning process.

At first blush, the solution to the problem of too little disclosure is to simply require a written letter of engagement. However, we don't have to look far to see that putting something in writing does not guarantee an adequate level of clarity. How many Web site disclosures have you actually read in their entirety? (A prospectus would be another common example of this.) Despite the noblest efforts to provide greater clarity, these disclosure statements often are not understood by the average investor. Heck, advisors often have trouble deciphering some of the language.

It isn't just about length, either. While there are several things that make the SEC's disclosure requirements for fee-based brokerage accounts--under the infamous broker/dealer exemption--inadequate, I will touch on only two.

First: Simply stating that there may be a conflict of interest between the broker's interests and the client's is in no way as useful as actually disclosing what those conflicts are. The SEC's own consumer focus groups clearly indicated that the "disclosure statement" did not convey meaningful information.

The second point is that this required disclosure--vague as it is--actually applies to traditional commission-based relationships as well, yet is only required for fee-based accounts. During the SEC meeting at which the exemption was adopted, Commissioner Cynthia Glassman, questioned publicly whether this disclosure should also be required with other brokerage accounts.

Personally, I am not calling for this disclosure to be required for commission-based accounts as well. Many financial planners who also are dually licensed tell me they find this disclosure embarrassing. They resent efforts by firms to focus on these exempted accounts when they are entirely willing to accept the fiduciary duties that accompany an advisory account. They believe that being clear about their qualifications, experience, education, compensation and any conflicts of interest gives them a competitive advantage, whereas the absence of such disclosure only increases the chances that their client may be left wondering. And wondering does not foster the trust that makes for a good relationship.

In spite of the difficulty in creating clear, meaningful written communications and the inevitable debate about what such communication should include, I must commend the CFP Board for taking the courageous step of proposing to revise its code of ethics to include a written engagement letter. However, the CFP Board's Code of Ethics only applies to CFP licensees, and the financial planning profession is much larger than that community. In addition, everyone working in the financial services industry is subject to disclosure requirements based on their implementation of some part of a client's financial plan. These roles vary greatly and as a result, the public gets widely varying disclosures even if they are working with people using similar, if not identical, titles. Study after study shows that a large majority of the American public simply does not understand the difference between a "financial planner," a "financial consultant," a "financial advisor," a "wealth manager," a "wealth advisor," an "investment advisor," an "investment representative," and a "registered representative." To make matters worse, sometimes there is no difference. How on earth is the average consumer supposed to be able to differentiate? This situation must change!

Malaysia has found one way to address this consumer confusion: In that country, if you use a title like those I just listed, you must be registered as a fiduciary and held to a fiduciary standard. The same requirements would apply to people who use descriptions of services like "wealth management," "investment guidance," "financial advice" or "financial planning." Penalties can run as high as $250,000 or 10 years in prison. Malaysia does not have many problems with consumer confusion.

America so loves creative marketing and catchy phrases that perhaps a different tactic might work here: Protect a term and title--in this case "financial planning" and "financial planner." Eventually this could work. When it adopted the controversial broker/ dealer exemption, the SEC itself stated that " planners today belong to a distinct profession, and financial planning is a separate discipline from, for example, portfolio management." I agree wholeheartedly.

Right now, those who would like to avoid fiduciary accountability are telling the SEC that because they don't call what they do "financial planning," fiduciary standards should not apply to them. Hopefully, the SEC won't give them a pass. Of course, no matter what course the SEC takes, their next tactic would likely be an effort to convince the public that "financial planning" is not what it really needs. Instead, they need "wealth management" or a "financial consultant" rather than a "financial planner." We are already seeing some of this in their advertising.

Nonetheless, if regulators will, at the very least, require fiduciary behavior from those who profess to offer "financial planning" services or use the title "financial planner," these terms will, in fact, take on important meaning. If our profession rallies behind these terms and continues to act like true professionals, the public will learn to specifically seek out that terminology.

Sadly, this puts much of the burden to wise-up on the consumer. In the interim though, there is one step that would go a long way toward clearing up consumer confusion: Require the same uniform disclosure of all who offer personal financial assistance to the public. This disclosure need not be inordinately detailed. But it would include the professional's qualifications, education, compensation, disciplinary history, and material conflicts of interest. It would describe the fundamental aspects of the relationship between the client and the professional as well as basic information about preferences and processes. We need not reinvent this wheel. Although far from perfect, the current SEC form ADV Part II asks for nearly all the necessary information.

In fact, why not make all individuals holding themselves out to the public as a source of assistance with personal finances answer form ADV II's questions as an individual. If we add to that form a requirement to provide some guidance about the level of detail necessary in a few areas such as compensation and relationships to financial services firms, and voil?--form "ADV-Personal" is born!

If nothing else changes regarding the regulation of financial services and financial planning other than to require delivery of such a form, it would be a great step toward clearing up the public's confusion about their relationship with the people who serve them.

While today's requirements may be better than nothing, the public deserves much better.

Dan Moisand, CFP, is a principal of Spraker , Fitzgerald, Tamayo & Moisand, LLC, in Melbourne, Fla. and Chair 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.

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