The head of an association serving the nation’s 50,000 licensed certified financial planners is expressing concerns about proposed revisions to the CFP Board’s Standards of Professional Conduct. While commending certain recommendations, Financial Planning Association President Daniel Moisand finds others “troubling,” in particular provisions that lessen the requirements for CFP practitioners.
“The proposed changes appear to make less clear what the client should expect in a [financial planning] engagement,” says Moisand. “The CFP Board anticipates replacing much of what is now in the Practice Standards with new best practices. But there are a lot of holes in these guidelines.”
On July 24, the CFP Board released Exposure Draft Revisions to each of two sections of the Standards of Professional Conduct: the Code of Ethics and Professional Responsibility; and the Financial Planning Practice Standards. The Code contains principles and rules that govern CFP certificants. The Practice Standards supplement the Code’s provisions, establishing a level of professional practice expected of certificants engaged in financial planning.
The Exposure Draft revises the Code of Ethics and replaces the Practice Standards with Rules of Conduct. “Activity-specific” portions of the Practice Standards will be incorporated at a later date into a series of “Best Practices” or guidelines.
The FPA Professional Issues Committee, a volunteer committee of experienced planners, will analyze the Exposure Draft, and the FPA will provide a comprehensive response to the CFP Board during a public comment period, which ends Sept. 25. The CFP Board will consider the input at a public hearing on Aug. 5 and, absent a recommendation for further revisions, issue a final ruling during its Oct. 24 meeting.
“Nobody has changed anything,” says CFP Board of Governors Chair Bart Francis. “All we’re doing is putting out for comment some things that we’re looking at and thinking about. This is not a done deal but the first step in a conversation.
“We’re pleased that the FPA is taking a good look at [the proposed revisions] and asking for feedback from members,” he adds. “That will be helpful to us as we move forward.”
If approved, the new document would be binding on all CFP certificants, regardless of their position, employment or method of compensation.
A chief concern of Moisand is the proposed standard regarding fiduciary duty, Rule 1.0, which allows certificants to establish a lower duty of care to clients. The rule requires a written agreement between the certificant and client that specifies whether the certificant will be held to a fiduciary duty of care. The parties are permitted to specify a lower standard in the agreement; if they don’t, then the fiduciary standard applies.
“The new Code [of Ethics] gives practicing licensees the ability to opt out of a standard the certificant reasonably believes to be in the best interest of the client,” says Moisand. “It’s good that the standard clarifies what is meant by fiduciary, but making that duty of care optional could undermine the integrity of the CFP mark.”
Moisand is not alone in that sentiment. According to a survey released by the FPA in June, most certified financial planners believe that holders of the CFP marks should be held to a fiduciary standard in client engagements.
An overwhelming majority of respondents (95%) also said that a CFP certificant providing a subset of financial planning services should be held to the same ethical standards that apply to a CFP certificant in a general financial planning engagement. Most respondents (79%) additionally said that a fiduciary duty should govern other professional services provided by a CFP certificant.
Francis begs to differ. “There are certificants who do not do one-on-one financial planning,” he says. “So, holding them to a standard of a fiduciary doesn’t make sense. [The proposed standard] was crafted with that intent. If the language isn’t clear, then that’s a whole different issue.
“Secondly,” he adds, “there is no opt-in or opt-out option. The federal and state rules, at least with respect to investment advisory services, are crystal clear as to what the [certificants'] obligations are and whether they must act as a fiduciary.”
Moisand also takes issue with the proposed standard for Rule 603, which would no longer require certificants to notify the CFP Board or other entities of potential rule violations by CFP certificants. The current standard requires such notification by certificants who have “knowledge of fraudulent, unprofessional or illegal conduct.”
“I have never heard of a licensee finding this rule to be burdensome,” says Moisand. “Eliminating this provision strikes me as odd. I don’t think a policy that mandates self-policing creates vigilantes or is somehow excessive.”
Another proposed disclosure standard, Rule 2.2, requires a written description of compensation arrangements, including information relating to costs to the client and compensation to the firm. The description must also detail the terms of compensation from other sources and conflicts of interest. The new rule, however, eliminates a provision requiring a certificant to inform clients of their right to ask for information about the certificant’s compensation.
Moisand says that some of the standard’s language “makes sense,” including the requirement for disclosing information that might “materially affect” the client engagement. But he believes that dropping the requirement for ongoing disclosures (e.g., with respect to changes in the engagement) is inadvisable.
Also meriting further scrutiny is a proposed rule that redefines “financial planning engagement.” In contrast with the old standard, the new one specifies that an engagement will only exist when: (1) the client signs a binding, written agreement for financial planning services; and (2) the certificant renders professional services in exchange for compensation.
“According to the new provision, doing a free financial plan does not constitute an engagement,” says Moisand. “The FPA has been a very strong [proponent] of pro bono programs for people in need. But we don’t believe that practitioners should be able to perform pro bono services in a substandard manner.”
Additionally eliminated from the proposed standards is a requirement that a certificant without the requisite expertise refer the client to another professional. The draft revisions stipulate only that certificants disclose their areas of expertise in helping the client decide to proceed with an engagement. Moisand says he disagrees with this “passive position.”
At press time, calls to the CFP Board were not returned.