For life insurance professionals who hold or desire the certified financial planner mark, the standard of client care required of a CFP designee has been being ratcheted up a notch. A new fiduciary standard that took effect on July 1, and that the Washington, D.C.-based CFP Board of Standards will begin to enforce on Jan. 1, 2009, mandates that CFP certificants put the client’s interests before their own in client engagements.
The fiduciary standard–the highest a financial professional can be held to–flows from Rule 1.4 of the CFP Board’s new Rules of Conduct, which states in part that “a certificant shall at all times place the interests of the client ahead of his or her own when the certificant provides financial planning or material elements of the financial planning process.” The new standard replaces old requirements that called on CFP designees to “act in the interests of the client,” exercise “reasonable and prudent professional judgment” and “provide services diligently.”
How great will the impact of the fiduciary standard be on CFP practitioners? Most advisors interviewed by National Underwriter say the rule revision will not change how they operate because they already hold themselves to a fiduciary standard.
“Does it change my practice? Dear God, I hope not,” says Herb Daroff, a CFP and partner at Baystate Financial Partners, Boston, Mass. “I should think that for the past 35 years, I’ve been keeping my client’s interests paramount. That’s what we do for a living.”
Adds Sandy Wiggens, a CFP and principal of The Actuarial Consulting Group, Richmond, Va.: “We’ve always put the client’s interest first. We’re still interpreting the new standard, but I think any adjustments will be minor.”
Indeed, sources point out, most CFP certificants are also registered investment advisors (at the firm level) or investment advisor representatives, which permit them to sell securities; in either case, the certificant is subject to the Investment Advisors Act of 1940, which, observers say, makes them a “per se fiduciary.” Sources note that fiduciary language now included in Financial Planning Association-recommended forms dealing with the financial planning engagement and disclosures are already part and parcel of an ADV form required of registered investment advisors and investment advisor reps.
“One rationale behind the CFP Board’s push to codify the [fiduciary] standard was to bring financial planning in line with investment advisory standards,” says Guy Cumbie, a CFP and president of Cumbie Advisory Services Inc., Fort Worth, Tex. “But in practical terms, you can’t be a financial planner without being an RIA or IAR and, thus, a per se fiduciary.”
If investment advisors are sanguine about the CFP Board rule change, the same cannot necessarily be said about career life insurance agents who have or are pursuing the CFP mark. Walt Woerheide, a vice president of academic affairs at The American College, Bryn Mawr, Pa., views the standard as potentially “problematic” for such agents, most of whom maintain a primary or exclusive relationship with a particular carrier. To put the client’s interest first might entail recommending a product from a different carrier, thus putting the primary carrier relationship at risk.
There is, too, the question as to when the fiduciary standard applies, an issue that hinges on a determination about whether the CFP certificant is practicing financial planning. The six-step process, which goes by the acronym EGADIM, requires the advisor to establish a relationship, determine goals, gather and analyze data, make a recommendation, then implement and monitor the plan. Though the CFP Board and the Financial Planning Association assert that agents who don’t practice financial planning are not bound by the fiduciary standard, Woerheide asks whether a court would come to the same opinion. One could argue that insurance planning, however limited in scope, subjects the agent to the standard.
“I commend [CFP] Board for tightening up the CFP marks, but the rule change has really opened a can of worms in terms of making distinctions among the different ways financial professionals deliver services,” says Woerheide. “This new standard radically changes the nature of the playing field.”
And potentially increases the liability risk of advisors and their broker-dealers. Michael Kickham, a CFP and principal of Porter Kickham, Inc., Chesterfield, Mo., says that added liability exposure might prompt a rise in rates for errors and omissions insurance or else force a policy upgrade for advisors who already carry E&O coverage. The heightened risk, Kickham adds, could also spur planners to restrict their services to high net worth individuals who can pay the larger fees and commissions needed to offset the greater liability risk.
Cumbie notes also that some B-Ds might not allow affiliated producers to put the CFP marks on their business cards because the B-Ds don’t want them unnecessarily “donning the fiduciary mantle.”
Such B-Ds might think twice before taking such draconian measures. Kickham observes the rule change is really an effort to ensure full disclosure of compensation and potential conflicts of interest to the client. If, for example, a career agent who is a CFP can only sell policies from a single carrier, then the prospect has the right to know that. Ditto, says Kickham, as regards whether the agent gets paid through commissions, a fee or fee plus commission.
Kickham acknowledges, however, that a conflict may exist between the fiduciary standard and the product suitability test of FINRA (formerly the NASD). He observes that a fiduciary standard of care might require the expertise of a psychiatrist–something that few if any financial professionals possess–to determine a client’s risk tolerance for a particular asset allocation of their investment portfolio. A greater concern among market-watchers is the reverse: that advisors will satisfy the suitability test but not meet the higher fiduciary standard.
“CFPs and other financial planning practitioners do have legitimate concerns about potential conflicts in standards,” says Kickham. “But I expect that, over time, dialogue among the CFP Board, the FPA and various regulatory bodies will resolve these differences.”
Not everyone is so optimistic. And the concerns go beyond rules of conduct. The increasingly onerous paperwork needed to comply with the professional and regulatory requirements governing the myriad of financial services designations–CFP, RIA, IAR, registered rep, ChFC, CLU, licensed life agent, among others–is increasing the cost and complexity of doing business.
Kickham says he now spends on average 90 minutes preparing forms for a single transaction. In a recent case, he says, he had to fill in 193 fields of a software application–all to complete the purchase of a variable annuity.
Cumbie says his compliance costs have “increased dramatically” in recent years. To keep up, he’s invested in IT systems and redirected staff resources.
“The number of forms that clients have to sign to execute a transaction makes them feel like they’re going through a mortgage closing,” says Cumbie. “Advisors are doing more paperwork because the regulators keep placing new demands on the carriers and broker-dealers, who then overreact. Of late, it’s been a top-down reign of terror.”
Relief from the growing paperwork will likely hinge on closer collaboration among the various professional and regulatory organizations. One place to start: continuing education. Sources say greater uniformity in CE credits is needed, so that coursework or seminar attendance required to maintain one designation can also fulfill a second.
More substantively, says Cumbie, regulators can more narrowly circumscribe “the functional areas” they oversee. Thus FINRA and the SEC should not seek to regulate financial planning, limiting their purview to securities transactions and investment advisory activities, respectively.
Unless and until the regulatory pendulum swings back to a less onerous regime, he adds, compliance costs will continue to mount. And consumers–not least among them those in the middle market–will pay the price in the form of higher commissions and fees.
“The financial planning profession has gone out of its way to preach and encourage the development of business models to bring our services downstream to serve Middle America,” says Cumbie. “But despite the profession’s best efforts, overzealous regulation is pushing things the other way, to the point where the middle market will be left in a transaction-only world.”
Daroff, however, sees the growing regulatory demands as necessary.
“Clients respect what the professional designations represent,” he says. “And so they should expect a higher degree of care from people who carry the designations. Yes, the compliance requirements are burdensome and difficult. But the goal is to put the client’s interest first and to protect the client.”