From the March 2009 issue of Wealth Manager Web • Subscribe!

Bad Times, Good Timing

Trust: Clients seek it; you've earned it. But in the post-Madoff era, even established registered investment advisors are tainted by the public skepticism born first of the subprime crisis that felled investment banks and brokerages and now the alleged Ponzi scheme that enabled a 'trusted' money manager to bilk sophisticated clients and endowment-rich institutions of $50 billion.

How can you convince your clients that--market conditions aside--you are still worthy of their business and their trust?

At what may be just the right time in this turbulent economic climate, the CFP Board of Standards--keeper of the trademarked Certified Financial Planner designation--has put into effect its revised Code of Ethics, Rules of Conduct and Practice Standards. The updated code, nearly five years and several comment periods in the making, became effective on the first of this year. And while it applies only to CFP certificants, even wealth managers who don't hold the designation (which, of course, many do) may find it a valuable tool to convince clients of their probity.

"There's not a lot here that applies to an RIA who is already providing an ADV and adheres to the fiduciary standard, but the new code is clearer, organized on a practical basis with much less duplication and redundancy," says Dan Candura, a member of the CFP Board task force that developed the new standards of conduct and more recently, of the FPA Best Practices Task Force that created checklists of Best Practices Tools covering a half-dozen scenarios as well as a financial planning engagement guide.

The revised code actually went into effect on July 1, 2008, but in response to calls from practitioners, implementation was pushed back to Jan 1, "to give people a window, more time to set up systems if necessary," Candura explains. But the plea for extra time was the closest thing to a complaint the task force received.

And in truth, there is a lot of material to digest. "There are 40 rules at the heart of the changes that provide additional requirements when a certificant is doing financial planning," Candura points out. And he is doing his best to spread the word. His RIA, PennyTree Advisors--based in Braintree, Mass., outside of Boston--is also home to the Candura Group, which offers training and education to CFPs. The new code of ethics has been keeping him busy with Webinars, updating his own Web site and presenting some 25 ethics courses to certificants and FPA chapters. Candura was the presenter for a two-hour workshop on the code at the 2008 FPA Conference in Boston where he also teaches courses at Suffolk University's Sawyer School of Management.

"I enjoy giving back to the profession," Candura remarks. "And in the new code, the principles are outlined as aspirational statements, which makes it easier to implement. People look at it and say, 'Now I get it, and I feel comfortable with it,'" he adds.

In a recent phone interview with Wealth Manager, we asked Candura to elaborate.

What do you consider to be the code's most effective changes?

Those 40 rules at the heart of the changes are organized around seven principles a certificant is expected to represent to clients, colleagues and the community: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism and Diligence. The titles haven't been changed from the previous code. But the explanations are more aspirational and in language that is much clearer.

And the Best Practices Tools for FPA members has simple checklists to help certificants determine whether or not they are doing financial planning. It helps them recognize whether they need to meet the additional requirements for financial planning and to sort out what isn't financial planning because the CFP is not required for that, so neither is the code.

There are 46 pages to the new code. Can you point out where the most important changes occur?

The updated standards require a heightened duty of care to the client, additional disclosures to clients or prospective clients--some of which must be made in writing--and a written agreement outlining the financial planning services to be provided. The individual rules to look at are sections 1.2, 1.3, 1.4 and 2.2.

Rule 1.4 sets the baseline duty of care CFP certificants owe clients at all times to "place the interest of the client ahead of his or her own." And it sets forth a heightened standard--"the duty of care of a fiduciary" as defined by the CFP Board--when the client engagement is financial planning.

I noticed on the CFP Board Web site that in the side-by-side comparison of terminology for the old code and the new, there was previously no definition of fiduciary.

The previous standard of care was not "in the best interests of the client." The word fiduciary did not appear. The new standards make it clearer that certificants must act in the best interest of all clients at all times, make suitable recommendations when offering products, and use reasonable and prudent judgment.

What is the new code's definition of fiduciary?

"One who acts in utmost good faith in a manner he or she reasonably believes to be in the best interest of the client."

There are other applications for fiduciary, like those for trustees. This one is for the purposes of the CFP Board of Ethics which adjudicates disputes--which are numerous.

The fiduciary standard is definitely a step in the right direction. People need to know that their advisor will place their clients' interests ahead of their own, that we're here to help-- and we are different.

And the other rules?

Rule 1.2 describes information that the certificant must disclose to clients and prospects if the services to be provided include financial planning or elements of the financial planning process. These disclosures should cover any conflict of interest as well as compensation.

Rule 2.2 identifies the information that must be disclosed to clients and prospective clients regardless of whether they qualify as financial planning. And rule 1.3 requires that when services to be provided include financial planning or elements of the financial planning process, the certificant (or their employer) "shall enter into a written agreement with the client" governing those services. There are probably no special forms necessary if you have an ADV. If your ADV is well drafted, it includes most of this. Otherwise, the written agreement could even be an agreement letter; the new code doesn't require a lot of forms or additional paperwork.

I found the CFP Board of Standards Web site ( to be an incredibly informative source of information about the new code. It offers the 46-page document, a number of side-by-side comparisons of terminology and responsibilities between the old and new standards of conduct, and if that's not enough, 14 pages of FAQs!

It's important to refer people to the Web site, particularly the Frequently Asked Questions. A lot of effort went into providing clear answers. The goal is to avoid misinterpretation; it's a big improvement over the previous materials.

Advisors should know that this is a place where they can ask any further questions they might have. In fact the last question, #33, is an opportunity to ask a question that hasn't been addressed in the other 32.

Recently--and for the first time--the CFP Board, the FPA and NAPFA, calling themselves The Financial Planning Coalition, sent representatives to Congress with a statement regarding the importance of the profession. What's up?

Just lately they've started collaborating. Right now, anyone can call themselves a financial planner. If it was identified by the government as a separate profession, if there was a regulatory structure, that would be a big step in getting the public to recognize financial planning as a distinct entity.

A bachelor's degree is now required to earn the CFP, and after 2009, NAPFA will make the certification a requirement for membership. Do you think a degree in financial planning would increase recognition?

A couple of universities--Texas Tech is one--do award the degree, but the problem is there is still no clear path when you graduate. With 35% of financial planners over the age of 50, you'd think some of the larger firms would be recruiting young people. But we don't have a model like law and accounting do. This is partly because transition is a new problem; the profession is only 25 to 30 years old. Some of my Suffolk students say they are really interested in financial planning, but most job offers they get are in insurance or sales.

Finally, we can't help asking your professional opinion of Bernie Madoff. If he were subject to the new rules, would they have stopped him?

There were enough people raising enough red flags that you have to question why there wasn't action sooner. It wasn't as though they hadn't had an opportunity; it's hard to imagine that regulators read his ADV! The bigger you are, the easier it is to do what Madoff did. And by the way, he was not a CFP.

Nancy R. Mandell is managing editor of Wealth Manager.

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