More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
Just as the election campaign is ending, a campaign that has been reported to even make children cry, the CFP Board is in the midst of a public discussion about what the CFP designation means. This discussion is extraordinarily important and has no easy solution. CFPs should be allowed to express their voice—to vote on what their CFP designation should mean to investors.
The particular issue prompting this discussion is whether CFPs should be deemed fiduciaries by the CFP Board, case by case depending on the facts and circumstances and the CFP's services rendered, as suggested by Kevin Keller in a blog posting last November on Financial Planning’s website, or at all times by virtue of the CFP Board holding CFPs out in general communications and advertising as trusted advisors, as suggested by Ron Rhoades in another blog posting. There are legal arguments on both sides.
Yet is this question only a matter of parsing the law and following the most compelling legal argument? Or are there other considerations? Are there compelling ethical arguments on both sides consistent with investors' best interests?
The ethical basis underlying Rhoades' argument seems straightforward enough. If Rhoades is correct that the Board plainly suggests in its advertising that all CFPs are fiduciaries at all times, then CFPs should, presumptively, be fiduciaries at all times.
The ethical basis for the CFP Board's position is not clear. It must reconcile its promise to investors that CFPs always serve clients' best interests and are always fiduciaries against its clear policy that states otherwise: i.e.: CFPs are not always required to be fiduciaries and put clients' interests first.
An example is the CFP Board's promise to investors, stated on its website:
Your needs will be at the heart of all your planner's recommendations. CFP® professionals have an ethical obligation to follow their financial planner duties and act in your best interest, putting your needs above their own.
Rhoades advocates that the Board should revise its policy to meet its promise. That is, that it simply require CFPs, as a criteria for holding the designation, to always conduct themselves as fiduciaries. There are other possible approaches. One is to revise its promise to meet its policy, and part of doing so might entail disclosure, such as the disclosure required by the SEC on brokerage accounts:
Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons' compensation may vary by product and over time.
This approach merely acknowledges in public and to the public what the industry knows very well in private: currently, CFPs, as a group, are sometime fiduciaries.
This approach has its own difficulties: Effective execution requires disclosure that actually works (academic research complements much experience of practitioners that underscores how most disclosure simply does not work), and this means clients truly understand the implications of advisors not putting their interersts first. This will not be easy.
The two positions represented here are fundamentally at odds, with no true middle ground available. Yet there may be no more important discussion in the advice profession than what is at the core of a CFP professional's advice. Or, to use Dr. Martin Luther King Jr.'s words, "The content of your character.”
The CFP Board affirms that it welcomes this dialogue. As such it should affirm its importance and welcome a referendum of its designees to determine its way forward.