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Conflicts of Interest and Advisor Credentials: Then and Now

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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.

One of the hallmarks of ‘professions’ is that they are exclusive, rather then inclusive. That is, rather than trying to attract as many people as possible into their ranks, they set high standards of professional conduct—largely to protect the public—and then accept only those who meet, and make a commitment to continue to meet, those standards.  And they protect the integrity of the profession by aggressively upholding those standards.

Accrediting organizations such as those in the financial advisory world have other incentives. Although they are usually nonprofit organizations, the number of people who pay annual fees to receive and maintain their designations can matter a great deal to the people who run and work at these organizations: their compensation often depends upon the size of their revenues (as do their prospects for getting better jobs with other organizations).

What’s more, the number of ‘members’ can greatly influence the prestige and credibility these organizations have with lawmakers, regulators and others within their industries. 

Consequently, it’s not unheard of within the advisory world for such organizations to lower their standards to increase ‘membership,’ and even pander to large financial services companies (such as brokerage firms) that might be willing to encourage—and even underwrite—large numbers of ‘memberships’ for their ‘advisors.’ I suspect these valid concerns were behind Pips’ concerns. 

So I asked Knut Rostad, president and founder of the IFFS, if he’d like to respond. He did:

“We’re a small group of advisors, industry leaders and firms who believe individual investors require a rigorous fiduciary standard. Our goal is to reinvigorate fiduciary by setting out in plain language that investors can understand what this funny word, fiduciary, means. We will increase public, media and industry awareness as to why advisors subscribing to the Institute’s Best Practices meet a higher standard and are better able to deliver greater value to clients. The Fiduciary Best Practices and the Registry of Fiduciary Advisors help the public and the media to understand the important advantages of Best Practices advice. Yes, we charge participating firms a modest fee to cover our overhead, but ours is not a numbers game. We believe even a small number of dedicated fiduciary advisors can have a major impact on how the financial services industry does business.”  

As for accountability, it’s seems to me that fiduciary advisors have the last say: If they believe that the IFFS’s standard are fair, reasonable and a good way for investors to recognize fiduciary advisors, they’ll participate. If they don’t, they won’t.

And if enough of them do, perhaps they’ll force the industry and the SEC to get serious about a bona fide fiduciary standard for all retail advisors. 


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