More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- 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.
In case you missed it, financial planner Allan S. Roth told an interesting—and troubling—story about a CFP Board enforcement case in his Wall Street Journal blog “Total Return” on September 12. The piece was unfortunately titled “Is the Fiduciary Standard a Joke?” which apparently gave some readers (as evidenced by their comments) the impression that Mr. Roth thinks the standard is a joke, when in fact, he clearly was wondering whether the Board takes its own standard seriously, given the example he cites.
It seems that a new client (who had formerly been a client of another financial planner) came to Mr. Roth for a second opinion on his financial affairs. As a CFP, the client’s former advisor had held himself out as a “fiduciary.” Yet, in the client’s portfolio, Mr. Roth found an annuity upon which the other advisor had been “double dipping”: that is, charging a commission and an AUM fee, resulting in some 5.29% (yes, that’s right: 529 bps) in annual fees.
Once made aware of the situation, according to Roth, both the insurance company and BD involved made a generous settlement to the client. And both the client and Mr. Roth filed complaints with the CFP Board against the former advisor for having breached his fiduciary duty. “What was surprising was that not a word came from the CFP Board,” wrote Roth. “In following up with the Board, I was told they had lost the complaint that I had filed, and hadn’t yet gotten to the client’s complaint. Eventually, the client received a letter that no public action would be taken against this CFP.”
When contacted about Roth’s allegations, the CFP Board issued a written statement to me from CEO Kevin Keller that reads, in part:
Certified Financial Planner Board of Standards certainly doesn’t consider the fiduciary standard a joke. We take it very seriously; we believe that 67,000 CFP professionals do as well.
Unfortunately, Allan Roth, CFP, has used incorrect presumptions related to a case that he filed on behalf of a client to call into question CFP Board, our fiduciary standard and our enforcement process.
Mr. Roth is presuming that because there was no public sanction against a CFP professional – against whom he brought a breach of fiduciary duty claim – CFP Board’s enforcement process is flawed and we don’t uphold the fiduciary standard. What Mr. Roth fails to disclose (or perhaps understand) is that CFP Board did not require our CFP professionals to adhere to a fiduciary standard until July 1, 2008, which is about three years after the time of the alleged misconduct Mr. Roth wrote about. We also didn’t receive a complaint from either Mr. Roth or his client until November 2008.
Ah, the complaint, which Mr. Roth claimed the CFP Board lost. Let me remind you, this is the same CFP Board that purports to speak for the financial planning profession on the fiduciary debate—and during the writing of Dodd-Frank was angling to become the regulator for financial planners. Perhaps I’m uninformed, but I don’t ever remember hearing of even FINRA having the temerity to claim that they “lost” a client complaint.
According to Roth, he went on to talk to the Board’s managing director, Professional Standards & Legal, Michael Shaw, who said he couldn’t comment on specific cases, “but did note that while the CFP Board did not revoke or suspend the CFP’s license or even issue a public letter of admonition, it was possible that CFP received a private censure.” I’ll bet that really put his tail between his legs.
Then, according to Roth, Board CEO Kevin Keller invited him to serve as a volunteer panelist on the Board’s Disciplinary and Ethics Commission so he could “write about the process from the inside,” as sort of a “peace offering” (“bribe” would certainly be too strong, here). “But then I received an agreement to sign,” he wrote, “giving the CFP Board the right to review and approve the article I would write on the process before publication… … [which was] not open to negotiation. This agreement was acceptable to both the Wall Street Journal and me…”
Here’s how Mr. Keller responded to this assertion in his letter to me:
What’s also disappointing is that CFP Board, in a completely transparent effort to illustrate the strength of our enforcement process, extended an invitation to Mr. Roth to serve as a “panel volunteer” on our Disciplinary and Ethics Commission (DEC) and write about it—something which had never been done before.
Consistent with our standard procedures for all our DEC volunteers, we asked him to sign a confidentiality provision and—to ensure that no confidential information was unintentionally included—asked to review a draft of the article in advance. Yet, Mr. Roth declined to sign it and thus our offer was turned down. Contrary to his assertion, we never required “approval” of the author’s content.
Keller further responds to Roth’s claims and addresses the CFP Board’s role on a fiduciary standard for all advice-givers and its own fiduciary standard:
If Mr. Roth’s client brought a similar claim today—under our revised standard—the outcome would likely be very different. In fact, under our publicly available sanction guidelines, a breach of CFP Board’s fiduciary duty would generally result in a suspension to use the marks for one year and one day.
Contrary to Mr. Roth’s suggestions, CFP Board has been a leader in supporting the fiduciary standard. We required it more than two years before Dodd-Frank became the law of the land. Beyond the actions we took requiring it for certification and re-certification, we have been on the leading edge of an effort to create a uniform fiduciary standard of care with more than 10 submissions to the SEC and Capitol Hill advocating this important consumer protection reform.
In retrospect, Roth summed up his version of the case this way: “In my mind, this wasn’t a close call. How could it possibly have been determined that the CFP acted in the best interests of the client? The only difference between this case and a broker without fiduciary duty is that at least the broker never claimed to be working in the client’s best interests.” Which led him to ask the question about the CFP Board’s “fiduciary standard”: “Is it merely an advertising campaign, or is it real?”
Contrary to some of the comments found on Roth’s blog, this is not a story about an “isolated case” or vilifying CFPs: it’s about the CFP Board and its seriousness, not just about a fiduciary standard, but about actually regulating financial planners. Sure, this is just one case. But it’s a really bad one. Lost complaints, confidential rulings, private censures?
The only really salient point that Mr. Keller raises here is that the infraction in question took place before the Board adopted a fiduciary standard. Fair enough, as far as it goes. But that raises at least as many questions as it answers: Why didn't the Board simply tell that to Roth, who had conversations with both Michael Shaw and Kevin Keller (secrecy is one of the problems here)? I suspect he might have dropped the matter. Also, double dipping is unethical even for brokers, who aren't fiduciaries: so why would it be okay for a financial planner, who still had the duty to “put the client’s interest first” even before the fiduciary standard?
The sad truth, as revealed in the Dodd-Frank debates and in cases such as this one, is that the powers that be aren’t going to take financial planners seriously until they start taking themselves seriously: which has to start and end with the “self” in their SRO.