In an episode of the now defunct TV series “Scrubs” (one of my all-time favorite sitcoms), a surgeon refused to perform a heart operation on an alcoholic who desperately needed it, because his low chances of success threatened to adversely affect her “success ratio.”

Now, I don’t know whether this kind of thinking is prevalent among surgeons—or whether it even occurs at all—but it is a nice example of how conflicts of interest can affect a professional’s commitment to client/patient care; and why professionals need standards of ethical conduct that address the proper handling of such conflicts. 

Today’s debate over a fiduciary standard for brokers and the DOL’s new “best interest” rules are about just such professional standards for retail financial advisors. It is a discussion that involves all financial advisors, including financial planners, as evidenced by the CFP Board/Aite Group’s recent study “Building a Wealth Management Practice: Measuring CFP Professionals’Contribution” (see my column, A Category Is Born: CFP Professional Practices, in the May issue of Investment Advisor magazine), about how adding financial planners can help brokerage firms cope with the new standards.

In response to that column, a veteran financial planner (who wished to remain anonymous) sent an email with a number of thoughtful comments, based on her/his experience: They address important issues regarding the CFP Board and the role of the financial planning as a profession for financial advisors.

“First, regarding your point #1 (“unlike RIAs, CFPs are not held by the CFP Board or anyone else to be client fiduciaries at all times”) and your point #2 (“The only time that CFPs are held to the Board’s fiduciary standard is when they are doing ‘financial planning’”); I will agree that the [the CFP Board’s] rule as written does contain some gray area,” he/she wrote. “However, if the client is engaging with the CFP for any type of planning it does clearly require a fiduciary relationship. This applies to modular planning so any type of investment planning would be covered. For example in providing such services, recommending a Variable Annuity in an IRA accumulation account for instance could be scrutinized as not in the client’s best interest.” 

This point that a fiduciary standard which only applies to “financial plans” still has some value is a good one. And the case of a variable annuity in a retirement account is an excellent example. We could come up with long list of other such “planning” violations: recommending life insurance to a bachelor with no close relatives or charitable intentions; or estate planning trusts for a couple who fall well within the unified exemption, or high-risk investments for a wealthy elderly couple, etc.  

With that said, I still don’t see how we can ignore the harm or potential harm to clients when financial planners hold themselves out to be “fiduciaries” while, in fact, their fiduciary duties apply only to a plan’s broad recommendations (such as annuities, or mutual funds, etc.), and not to the specific “product” recommendations. Those recommendations could include proprietary funds, “approved funds,” “recommended” funds, “promoted” funds or insurance products for which they and/or their firms get additionally compensated to “recommend” and which cost their clients more money while not violating their “fiduciary duty” as financial planners. 

Then the veteran planner expanded on his/her experience with the CFP Board.

“I spent a term on the CFP Board Discipline & Ethics Committee. My biggest takeaway from serving there was how few really egregious cases of client malfeasance there are among the [CFP] community. Yes, it is a big tent and there are all kinds of practice models, some with larger conflicts of interest for sure, but at the end of the day, there were only about 50 annual cases where clients were harmed out of over 70,000 licensees. That’s an amazing ratio of honesty and integrity in the financial industry. I also serve as a FINRA Arbitrator and I can tell you the contrast with that group is night and day.”

I have to admit that I found his/her experience on the DEC even more interesting: especially the contrast that he/she found between FINRA arbitration and the Board’s cases.

As I understand it, the Board has essentially two sources for the “ethics” cases it hears: enforcement actions by other regulators, and complaints brought by clients of CFPs or CFPs themselves (for instance, I believe the Board maintains that its actions against Jeff and Kim Camarda, were initiated by a local CFP.) What’s more, it’s also my understanding that actions by the CFP Board are “disciplinary” only; they do not, in any way, address or compensate the clients for any harm their planners’ actions may have caused.

Perhaps you can see where I’m going with this.

For all its faults, FINRA does actively monitor broker behavior (through compliance departments at broker-dealers), and often fines BDs for failure to uncover and report violations that otherwise come to light. What’s more, BD clients initiate arbitration cases with the intent of recovering their claimed damages at the hands of their brokers. Consequently, there are incentives for clients to file FINRA claims, and for BDs to report broker malfeasance, while virtually no incentives exist for clients to file claims against financial planners, nor any demonstrated willingness on the part of the Board (as far as I can tell) to monitor or seek out planner malfeasance.

So while I’m not surprised that there were “only 50 cases where clients were harmed” by CFPs during his/her year-long tenure, that figure seems to me to be more of function of Board’s conscious lack of active enforcement, rather of the relative “honesty and integrity” of financial planners.

To support this skepticism, I would also point out that, although the Board is silent on the professional demographics of CFPs, as far as I can tell, the vast majority of CFPs these days are brokers; mostly with the large wirehouses. That means they are many of the same folks who also wind up in those FINRA arbitration cases. 

To my mind, the CFP Board’s “fiduciary” standard and the legal fiduciary standard for brokers is essentially the same: a part-time standard that requires the advisor to act in the best interests of clients only part of the time. And the likelihood that even one client out of 1,000 will understand when this duty starts and stops is virtually non-existent. Which means it’s not a professional standard at all. Is there any question that our doctor or lawyer has a duty to advise in our best interest?

And when a doctor violates that duty—say, to keep up their stats—it’s pretty darn clear, isn’t it?