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Is State Regulation the Future of Financial Planning?

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Are you troubled by the lack of action by Congress and the SEC on the Dodd-Frank mandate to better protect financial consumers? If so, you’re not alone.

There seems to be a growing number of independent advisors who have lost faith in Federal financial regulation. One of them is Tampa, Florida financial planner Michael Zmistowski, who recently concluded his chairmanship of the Florida Council of the FPA, and he believes that he has the solution: state licensing of financial planners. “The public’s intuition to trust professionals is enhanced by the state’s ability to regulate them,” he wrote last fall in his Chairman’s Blog “Building the Profession of Financial Planning. “No other licensing, degree, designation, trademarks or initials after your name has the same high impact on the public’s trust of financial planners than state licensing. “ 

When the CFP Board of Standards was created back in 1985, I was a senior editor at Financial Planning magazine, which extensively covered the event. There was considerable discussion at the time about whether financial planners should be regulated by each state or by the newly created national Board. The “party line” coming from the committee that facilitated the Board’s formation (made up of representatives of the ICFP and the IAFP, forerunners of the FPA, NAPFA, and the College of Financial Planning) was that “having to be licensed in every state in which a CFP had clients would be overly burdensome, without offering any advantages.”

As this argument appeared to make sense, there was virtually no opposition to transferring the “ownership” of the CFP mark from the College to the new CFP Board, with expectation that the Board would eventually become theregulator of financial planners. 

One of the sobering things about getting older is the haunting realization of how much more clear things become in hindsight, and the decision against state regulation of financial planners is one of them. The many problems at the CFP Board in recent years—most notably, heavy-handed and inconsistent discipline of CFPs, the conflicts inherent in expanding its “market” to include “part-time fiduciary” wirehouse brokers, and the unclear motives behind its multi-million-dollar “public awareness campaign”—certainly raise questions about the wisdom of the decision to forgo state licensing. According to Zmistowski, it would solve all these problems and provide better consumer protections as well. 

“Of the three requirements [of a profession], licensing, university degrees, and a body of knowledge,” Michael wrote, “the one that encourages the public’s trust is government licensing… … The public’s intuition to trust professionals is enhanced by the state’s ability to regulate them.  No other licensing, degree, designation, trademarks or initials after your name has the same high impact on the public’s trust of Financial Planners than state licensing.”

Of course, getting states to regulate a “new” profession such as financial planning isn’t a slam dunk. But according to Zmistowski, it does offer two advantages over the Feds: due to their often overworked small staffs, state regulators are much easier to approach, and there are usually far less politics involved. To approach Florida’s securities regulators with some professional credibility, he first had to organize the state’s local FPA chapters into the Florida FPA Council. (According to the FPA’s director of advocacy, Karen Nystrom, only Florida and California currently have state FPA councils. However, by my count on, there are also 17 one-FPA-chapter states.) 

“State regulation is a better way to create a profession because we can, and have, built good relationships with the regulators, and sometimes with the legislators,” he said. “And state legislation is usually driven by the regulators. Also, at least in Florida, most of the consumer protecting regulation already exists: it just needs to be tweaked to include financial planners.” 

While Michael and the Florida FPA Council haven’t yet succeeded in getting state regulation for Florida financial planners, they have been able to solve another problem that has plagued financial planners for decades: legally providing the insurance review part of a comprehensive plan if they aren’t insurance licensed. “The consumer protection laws were in place,” said Zmistowski. “We just worked with regulators and legislators to make a slight tweak of existing statute, to create an ‘affiliated insurance license,’ that all CFPs qualify for.” He also has high hopes that the existing Florida statute which confers a fiduciary duty on financial advisors working with elderly clients can also be “tweaked” to include all advisory clients.

And Zmistowski has little doubt that financial planners will be state regulated, at least in Florida, to the benefit of both financial consumers and the financial planning profession. “We’re working toward the consumer protections of requiring anyone holding themselves out as a financial planner to have a minimum amount of education (Comprehensive Exam), a dependable amount of CE (40 hours/year, like a CPA), and be subject to administrative discipline by our state’s regulations (fines and penalties including felonies resulting from Administrative Complaints)” he told me. “I believe that when Florida licenses ‘financial planners,’ it will be the single biggest public awareness boon to the business of financial planning since its creation in the 1970s. Consumers will be protected like never before; and financial planners will have revenues from new clients like never before.”

Of course, state licensing of financial planners isn’t a done deal, even in Florida. What’s more, according to Karen Nystrom, it’s not yet clear that the FPA will support it. Nystrom, director of advocacy for the FPA, said that “The main reason for the FPA joining the Financial Planning Coalition [which also includes NAPFA and the CFP Board] in 2009 was to work toward the regulation of financial planning. The FPA doesn’t have any pathway that we have decided on right now, but the state licensing of financial planning is one path that we are looking at.” 

While Nystrom was reluctant to discuss the subject, I think it’s been clear at least since its bid to be named financial planning Czar in the Dodd-Frank Act that the CFP Board is angling to fulfill its original destiny and become the national regulator of all financial planners.

The question on the table is whether that would be in the best interests of either financial consumers or financial planners. On that score, the Board certainly hasn’t done itself any favors of late, although I suspect many CFPs haven’t yet made a final judgment. But, Michael Zmistowski and the Florida FPA Council have given financial planners the first serious alternative to regulation by the CFP Board.

Should they succeed in getting licensing for financial planners in the Sunshine State, it will make a powerful case for a new direction for the financial planning profession. 


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