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Why Aren’t CFPs Always Subject to a Fiduciary Standard?

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Ron Rhoades recently wrote some riveting reading (sorry, I couldn’t resist) that takes the discussion about the CFP Board, the FPA, and the “profession” of financial planning to a new level. (See my blogs: Why the FPA Can’t Win in the Broker Market, and “How Fiduciary Advisors Can Change Wall Street—Again. ) 

In his November 6 blog, “Should We Rally Around the CFP Board’s Rules of Conduct?, Rhoades agrees with the views of Bob Veres, Knut Rostad, myself and many others that further advancements of a client-centered fiduciary standard will come from “a marketplace solution,” rather than a regulatory one. He then explores the question of whether (as many people have recently suggested) the CFP Board might be the organization to effect such a solution. His reasoning provides insight into both the Board’s approach to a fiduciary standard for CFPs and the difficulties in distinguishing between sales and advisory relationships.

As the accrediting organization for more than 70,000 financial planners, and which embraced a fiduciary standard for CFPs back in 2006, one might think that the CFP Board would be an ideal candidate to create a much-needed profession of financial advisors. Yet many folks, including Ron Rhoades, aren’t so sure. He gets right to the heart of the matter when he asks: “Are the CFP Board’s Rules of Conduct a true, bona fide fiduciary standard? And are the CFP Board’s conduct standards applied at all times when personalized investment or financial planning advice is delivered?”  

The CFP Board’s rules on the matter are rather hard to discern owing in no small part to essential details appearing separately in its Rules of Conduct, definitions and FAQs. Yet as Rhoades points out, the most important element is found in Rules of Conduct, section 1.4, which reads: “A [CFP] certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.”

One can immediately see the confusion.

While the first sentence says a CFP should place clients’ interests first “at all times,” the second sentence limits a CFP’s “fiduciary duty” only to when a CFP provides “financial planning.” Here’s what Rhoades had to say about it: “While, to its credit, the CFP Board takes the position that once fiduciary status is assumed the certificant remains a fiduciary throughout the financial planning relationship, there still appear to be instances in which the definition of “financial planning” is construed quite narrowly…I’m trained as a lawyer, a compliance officer, and I’m an academic – yet I cannot understand the fine lines which the CFP Board attempts to draw (or, perhaps, not draw)…”

Of course, for retail investors—and those who believe that a profession of truly fiduciary advisors is the best way to help them—the real problem here is that it sounds as if someone calling themselves a CFP might not have a fiduciary duty to a client if they don’t provide defined “financial planning” to them. This is a major problem for Rhoades: “Should not the use of the term “Certified Financial Planner” automatically result in fiduciary status, at all times when providing any financial advice?” he asks. “Otherwise, as others have written, does not the use of a term or title which denotes a relationship of trust and confidence, when none exists, result in a ‘bait-and-switch’ and become tantamount to fraud?”

Put another way, when challenged for not acting as fiduciaries, can CFPs simply claim they weren’t acting as financial planners for the client(s) in question?

In Rhoades view, the discussions resulting from the 2010 Dodd-Frank Act have done more than raise public awareness about the advisory fiduciary standard. “In large part due to the ongoing legislative and regulatory debates about whether to apply the fiduciary standard to brokers who provide personalized investment advice,” he wrote, “we now possess a much greater understanding of what the fiduciary standard is all about, and what it requires.”

And, in the light of this new understanding, he argues, the CFP Board’s standards have begun to pale. “The CFP Board’s Rules of Conduct,” he wrote, “though progressive at the time they were re-proposed in 2006 and adopted in 2007, [now] appear strikingly bare in describing the parameters of the fiduciary duties of the certificant. This leaves the door wide open for various misinterpretations.”

It’s this open door which leads Rhoades to conclude that the CFP Board’s Rules of Professional Conduct, “as written and as applied and as enforced,” [do not] “constitute a bona fide fiduciary standard, thereby entitling consumers to look toward all CFP Board’s certificants as THE source of trusted, objective, expert (and fiduciary) advice.” And therefore, writes, “I cannot at this time bring myself to [the conclusion that] the CFP Board is the solution around which we should all rally.”

In response to Ron Rhoades’ blog, Marilyn Mohrman-Gillis, Managing Director of Public Policy and Communications, issued the following statement: “CFP Board has been a consistent and ardent supporter of a strong uniform fiduciary standard of care that applies to the delivery of all personalized investment advice to consumers…CFP Board led the industry with the adoption of its fiduciary rule in 2007, under which CFP® professionals shall provide financial planning services under the duty of care of a fiduciary. This duty cannot be met by disclosure alone and does not allow a CFP® professional to ‘switch hats’ between a fiduciary duty and any other standard. CFP Board continues to examine its fiduciary rule in the context of potential policy reform both within the SEC and the DOL.”

Despite the Board’s continued insistence on its support for a “strong” fiduciary standard, as Rhoades intimated when he suggested that Board may not be interested in drawing the fine distinctions of when a CFP is acting as a financial planner, what we’re really talking about here is the Board’s attempt to avoid making a distinction between professional advisory activities (which require a fiduciary standard) and sales activities (which do not).

Not that there’s anything wrong with sales activities, as long as clients understand that they’re being sold to, rather than advised. And there’s the rub. By failing to require CFPs to act as fiduciaries for all clients, at all times, the Board leaves the door open for “non-fiduciary” CFPs, which only serves to increase investor confusion, rather than eliminate it, as a truly professional organization would do. 


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