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.