Financial Planning > Tax Planning

Crunch Time: New Standards Will Define the Future of CFPs

Your article was successfully shared with the contacts you provided.

Back in December 2015, the CFP Board of Standards announced the creation of a Commission on Standards to “review and recommend to the CFP Board’s Board of Directors proposed changes to CFP Board’s Standards of Professional Conduct.” The Board’s then chairman Rich Rojeck said at the time: “This review by the Commission, … finalized only after stakeholders have had an ample opportunity to comment the proposed changes, will ensure that the CFP Board’s standards continue to be the benchmark for excellence in financial planning.”

Setting aside for the moment the fact that I’d hope the CFP Board’s standards would be the “benchmark for excellence” for all retail financial advice, I’m beginning to hear rumors that its Commission on Standards may soon (within the next month or so) release its recommendations and open them up for public comment. Now, I’m not trying to upstage the Board here (as if), but it occurs to me that it might be helpful to set the stage for thinking about the Commission’s recommendations by starting a discussion of the issues that the Commissions should be trying to address.

(Related: The 5 Levels of Fiduciary)

For help with both research on and analysis of the Board’s current “Standards of Professional Conduct,” I turned to Knut Rostad, president and founder of the Institute for the Fiduciary Standard. Based on Knut’s files and my own research over the years, my assessment of the problems with the Board’s current standards for CFPs are two-fold: First, they are far weaker than current fiduciary law that applies to investment advisors; and second, the Board’s standards only apply to CFPs when they are deemed by CFP Board to be doing financial planning for clients — not for the entire scope of the client engagement.

First, let’s look at the difference between the Board’s standards and the law. Despite Board claims that all CFPs are held to “the highest of standards,” its rules do not include requirements to: disclose fees in dollars or percent of AUM, or control fees and expenses; disclose conflicts of interest in writing, manage or avoid conflicts; obtain written client consent to conflicts; or to “provide sufficiently specific facts so the client is able to understand the conflicts and provide informed consent or reject them,” as is required of RIAs.

What’s more, the Board’s standards go to great lengths to differentiate between when a CFP is “acting as a financial planner” (and would therefore fall under its fiduciary standard) and when she or he is not. For instance, in Question 1-8 of its Frequently Asked Questions the Board states: “The primary factors on which CFP Board relies for determining whether ‘material elements’ [of financial planning] exist are: the client’s understanding and intent in engaging the CFP professional; the degree to which multiple financial planning subject areas are involved; the comprehensiveness of data gathering; the breadth and depth of recommendations.”

Question 1-10 brings it all to a fine point: “The question of whether a client relationship involves financial planning is one that CFP Board determines on a case-by-case basis.”

One would think — and I suspect most clients do — that when one goes to a CFP, the professional standards of all CFPs would apply to one’s relationship. Clearly, that is not the case. Here’s how Rostad puts it: “Determining when ‘advice’ meets the CFPBOS fiduciary definition is often difficult and not just for investors, but also for attorneys and compliance officers and CFPs. Industry expert [CFP and former NAPFA Chairman] Ron Rhoades explains in a November 2014 column that he has listened several times to CFPB webinars on when financial planning exists [and therefore the Board’s fiduciary duty]. Rhoades concludes: ‘I come away each time befuddled. I’m trained as a lawyer, a compliance officer, and I am an academic [and a CFP]. Yet I cannot understand the fine lines which the CFP Board attempts to draw … nor can I discern how they are founded in established principles of law.’”

A skeptical mind might conclude that this ambiguity (which befuddles even professionals) might in fact be meant to confuse financial planning clients as well. In fact, I wrote about a passage from a January 2016 paper sponsored by the CFP Board and written by the Boston Based Aite Group that suggested just that. (See “A Category Is Born: CFP Professional Practices” from the May 2016 issue of Investment Advisor.)

In that paper, under a section titled “The Legal Impact of CFP Certification,” the authors talk about how brokers and their firms can manage the CFP Board’s fiduciary standard: “CFP professionals are held to a fiduciary standard of care when providing financial planning. … Clients may believe they are receiving a financial planning service that meets CFP Board’s definition when they are instead receiving a service that is narrow in scope and incidental to the transaction. [Emphasis added.]

As bad as this sounds, in a CFPB-sponsored paper no less, I’m willing to concede that it’s possible the Board didn’t mean it that way — and that the Board’s uber-confusing standards that create a seemingly part-time fiduciary standard for CFPs are simply the result of poorly chosen language in its standards of professional practice.

The good news is that, apparently, we won’t have to wonder about the CFP Board’s intent much longer: When the Commission on Standards releases its recommendations (hopefully soon), they will either present solutions to close these loop-holes and end the confusion about the fiduciary status of CFPs — or they won’t. Either way, it will be a defining moment for the CFP mark and what it stands for.

— Read CFPs Can Now Earn CE Credits Under IRS Tax Prep Programs on ThinkAdvisor.