More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
A reader who goes by the alias PPott wrote one of his typically insightful comments to my Dec. 5 blog “NAPFA’s CFP-Only Stand” about that organization’s recent decision to stop accepting full members who aren’t Certified Financial Planners. PPott’s cogent point (my emphasis added):
“NAPFA should be about the process and not the profession. I am relatively certain that it could be said that the press and other uninformed persons hold NAPFA in higher esteem than most of the ‘profession.’ NAPFA is a non-inclusionary organization and always has been. It represents one model—the RIA—even if not registered—so why do you think that they should represent the ‘profession?’"
Well, PPott, I’m glad you asked. To my “uninformed” mind, your question gets right to the heart not only of NAPFA’s recent decision, but of the continuing debate over the Dodd-Frank reregulation of brokers and RIAs, and of my ongoing issue with the CFP Board: The nature of—and the need for—a financial advisory profession. This may be putting the burrito cart before the donkey, but let’s start with why people in general, and retail investors in specific, need professionals.
At the risk of oversimplifying the issue, we basically need professionals because some people have attained rare expert knowledge and skills in areas that are so vital to our lives that it gives them a troubling advantage over the rest of us. How much could a brain surgeon charge you to remove a loved-one’s brain tumor? Or a lawyer to defend you in a capital case? Or a priest, minister, rabbi, or lama to help you get into heaven or attain enlightenment?
The simple answer is: a lot. In each of these cases, it’s clear that the business standard of “caveat emptor” which assumes an equality between the parties in a transaction would not result in a fair outcome.
The solution, of course, is that in the interest of fairness, for the good of society as a whole, and of the clients/patients/parishioners individually, most people with such expert knowledge agree to use it in people’s best interests rather than to their disadvantage. To sort out exactly what this means in each area of expertise, they form professional societies, which determine the standards by which their particular profession can provide the greatest benefit to their clients, patients, etc.
If you do a little research, you’ll find that there is a surprising agreement about professional standards from accountants and nurses to civil engineers. In general, professions require their members to attain an institutionalized education, learn a formal body of knowledge, get a license, adhere to professional ethics (which include working for the benefit of their clients, etc., and not in their own self-interest) and working together to regulate each other to meet these standards.
It doesn’t take much imagination to see why today’s investing public needs professional financial advisors. Historically, only wealthy people had finances so complex that they needed help to sort them out. It’s no coincidence that the experts they turned to—bankers, lawyers and accountants—are all professionals guided by professional standards. In our modern financial world, practically everyone can benefit greatly from advice about how to invest for retirement, send their kids to college, buy a home and finance their medical costs. Most of them need a professional: that is, a professional who has vowed to use their expert knowledge to their clients’ benefit, not their own.
Which brings us to PPott’s comment about NAPFA being exclusionary and not representing “the profession.” As described above, professions are by their very nature “exclusionary.” They are only for folks who meet their (hopefully) high standards, and not for folks who can’t or won’t. Unfortunately, many folks who call themselves financial advisors or financial planners today don’t meet the criteria for being a “professional,” starting with putting the interest of their clients first. That’s first all the time; not part of the time. For a professional there are only two kinds of people: those who are their clients/patients, and those who aren’t: not sometimes a client, but at other times, not. Finally, professionals represent only their clients, without a loyalty conflict.
By focusing on “the process” as PPott suggests, a group becomes a trade organization, rather than profession, open to anyone who uses a particular process. A case in point: the CFP Board, which by attempting to exclude as few “advisors” as possible has focused on the use of the “six-step process” and come up with standards that, at least by my reading, fall far short of the above description of a profession.
At the other end of the spectrum, NAPFA’s standards, which include independence, a fiduciary duty and fees paid directly by the clients, appear pretty darn professional. Which makes it all the more ironic that the designation which NAPFA has decided not to accept—the AICPA’s Personal Financial Planning designation, or PFP— is the only such designation in retail financial advice which is, if anything, more professional than NAPFA’s own.