Conflicts of Interest and Advisor Credentials: Then and Now

In response to my September 21 blog, History Provides Hope for Institute for the Fiduciary Standard’s New Best Practices, Wally Pips wrote the following comment about the gathering of mutual funds salesmen that led to the creation of the financial planning profession:

“The analogy to the meeting at the Chicago O’Hare airport brings to mind clichés such as putting lipstick on a pig, silk purse from a cow’s ear and a few other tidbits. The [Institute for the Fiduciary Standard’s recently] proposed standards do look nice and in some ways, I am sure many people feel that they dealing with advisors who are already adhering to them. I wish though, that it was not a pay to play scheme and that the IFFS had some accountability.”

Wally raises an important point about accrediting organizations, and their impact on the financial advisory ‘profession,’ but before I get to that, a word or two about porcine makeup. It’s a fact that the salesmen came together in Chicago in 1971 and created comprehensive ‘financial planning’ as a more effective way to sell mutual funds. It’s also a fact that in the intervening 45 years, financial planning has been used as a tool to sell mutual funds, limited partnerships, tax shelters, annuities, mutual funds (again), variable annuities, asset management and retirement accounts.

But a funny thing happened along the way. Starting with the founding of the National Association of Professional Financial Advisors (NAPFA) which pioneered ‘fee-only’ financial advice in the early 1980s, financial planners began to see themselves more as ‘professionals’ and less as ‘salespeople.’ Gradually, that tail started wagging the pig. In 1985, Dr. Bill Anthes, who owned both the College for Financial Planning and the CFP mark, was convinced to transfer ownership of the mark to the newly formed CFP Board of Standards—and the profession took another leap forward. 

Still, as one prominent financial planner wrote in a 1986 story in Financial Planning magazine titled ‘The Dirty Little Secret of Financial Planning,’ financial planners were still almost always paid for selling products rather than for creating financial plans. But ironically, by then things had begun to change. The bull stock market of the 1980s had renewed investor interest in mutual funds, and Schwab Financial Advisor Services enabled asset management fees to be deducted directly from client accounts: creating a fiduciary duty for most independent financial planners, and with NAPFA’s efforts to publicize this difference, within 10 years, changing the entire financial services industry. 

So while financial planning started out as a sales tool, it became the catalyst for the rise of client-centered advice which culminated in both the Dodd-Frank Act and Department of Labor attempts to extend a fiduciary standard to all retail financial advisors.

Just as it did with asset management fees back in the 1990s, the retail financial services industry is resisting the transition to a fiduciary standard. That has resulted in a watered-down fiduciary standard from the DOL, and a stalled fiduciary standard for brokers at the SEC.

Which brings us to Wally’s second point about the Institute for the Fiduciary Standard’s ‘Best Practices for Fiduciary Advisors’: “I wish though, that it was not a pay to play scheme, and that the IFFS had some accountability.”

It’s true that some of the least-talked-about conflicts of interest in the financial advisory world are those of the ‘accrediting’ organizations.